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[February 04, 2014]
VITESSE SEMICONDUCTOR CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Statement You should read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report, as well as in our Annual Report on Form 10-K for the year ended September 30, 2013 ("Annual Report") and in our other filings with the SEC, which discuss our business in greater detail.
This Quarterly Report contains forward-looking statements that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statements that do not directly relate to historical or current fact. We use words such as "anticipates," "believes," "plans," "expects," "future," "intends," "may," "should," "estimates," "predicts," "potential," "continue," "becoming," "transitioning," and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures, interest income, cash commitments, and expenses. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those referenced in the subsection entitled "Risk Factors" in Part II, Item 1A of this Report and Part I, Item 1A of our Annual Report, and similar discussions in our other SEC filings. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview We are a leading supplier of high-performance ICs that are used primarily by manufacturers of networking systems for Carrier and Enterprise networking applications. We design, develop and market a diverse portfolio of high-performance, low-power and cost-competitive networking and connectivity IC solutions. For more than 30 years, we have been a leader in the adoption of new technologies in Carrier and Enterprise networking.
Both bandwidth demands and complexity, driven by the introduction of new content-rich services, the convergence of voice, video and data, and enhanced 4G/LTE mobile networks, have risen dramatically in Carrier and Enterprise networks . Media-rich devices, such as smartphones and game consoles, require increased bandwidth. New Enterprise deployment options, such as Cloud-based services and social media and telepresence, also spur demand. More recently, there is a trend for increased Ethernet deployment within networks used in Industrial and Military networking, automotive transport, and future Smart Grid applications, collectively referred to as the Internet of Things ("IoT").
As a result, Carrier, Enterprise, and increasingly, IoT networks are transitioning to all-IP and packet-based Ethernet networks that can scale in terms of services, bandwidth and capability, while lowering power consumption and acquisition and operations costs. These networks are based on technology that is significantly more sophisticated, service-aware, secure and reliable than traditional Enterprise-grade Ethernet LAN technology. Such networks are built on new technology that is often referred to as "Carrier Ethernet" in Carrier networks and "Converged Enhanced Ethernet" in Enterprise networks.
Realization of Our Transition Strategy Several years ago, we embarked on the strategic mission of re-inventing Vitesse to take advantage of the dramatic ongoing transformation of our target networking markets. Our objective is to be the leading supplier of high-performance ICs for the global communications infrastructure markets. In an effort to diversify ourselves and provide new opportunities for growth, we re-positioned our R&D teams and invested heavily to enter new markets, develop new products, and penetrate new customers. Over the last three years we have seen consistent growth in this new product portfolio, which reached 33% of our total product revenues by the end of fiscal 2013.
To continue to grow our new product revenue, we must win market share in high-growth communications market segments. In 2013, we expanded our market focus to include elements of the IoT market, which provides substantial new growth opportunities for the company.
23 -------------------------------------------------------------------------------- Table of Contents We believe we have effectively and efficiently targeted these high-growth infrastructure markets with substantial R&D investments over the last five years. To optimize our R&D efficiency, we chose to serve large, growing, independent markets which rely increasingly on Ethernet technology: Carrier and Enterprise networks. As we are now three years into the deployment of these new products, we can see that our target markets and products were well chosen.
Increasingly, we also now see opportunities for our products and technology within the IoT, where Gigabit Ethernet-based networks are emerging. There is tremendous synergy and cost savings in terms of R&D effort to provide Ethernet switch and PHY products into this emerging adjacent market.
In bringing our new products to market, our customer engagements and number of design opportunities identified by our sales team have consistently increased since 2010. Early customer adoption of our new products has exceeded our goals.
In 2013, design wins for our new products increased by approximately 40% from 2012. Our new products have captured design wins at over 200 customers, including market leaders such as Alcatel-Lucent, Cisco, Ericsson, Hewlett Packard, Huawei, Juniper, Samsung, and ZTE. While many of these wins represented additional business at our most important customers, what we call "same-store-sales," many others are wins at new customers, and reflect our growing market share. Because our products our highly complex, it takes our customers 12 to 36 months to go from sample availability to first customer shipment as customers do the necessary development work to complete and qualify their systems in the network. Since it typically takes an additional 12 to 24 months to ramp into full production, we believe design wins represent a good leading indicator of potential future revenues.
In 2013, we introduced the third-generation of both our switch engine and PHY products. These new products allowed us to significantly increase our served markets in both Carrier, Enterprise, and IoT networking. We have become the clear choice for meeting our customers' needs for service delivery, synchronization, security, and signal integrity.
We augment our product revenues by leveraging our substantial intellectual property portfolio to generate revenues. Our primary focus for intellectual property licensing has been our Gigabit Ethernet CuPHY and switch cores and eFEC technology. We license to non-competing third-parties in adjacent or similar markets.
Our accounting policy generally uses the "sell-through" model for sales to our distributors. The "sell-through" model recognizes revenue only upon shipment of the merchandise from our distributor to the final customer. As such, we may have variability in our revenue from quarter-to-quarter as customers have substantial flexibility to reschedule backlog with of our distribution partners as part of the terms and conditions of sale. Our distributor sales were 52.7% , 51.6% and 44.6% of product revenue in fiscal 2013, 2012 and 2011, respectively.
In the normal course of business, we regularly assess our product portfolio to ensure it aligns with our strategy. At such time, we may determine to phase-out products and put them through "end-of-life", or EOL. When we EOL a product, we typically provide up to six months notice for our customers to make a last-time-buy of product and six additional months to take receipt of that product. The EOL announcement can result in near-term increases in our revenues as customers typically respond to these announcements by making last-time-buys to ensure that they have adequate stock on hand to support their production forecast.
During the last three years, we accelerated our comprehensive efforts to increase our product gross margins and operating margins, which together have substantially increased our operating leverage. Our efforts in operations include reduction in materials costs and cycle times, improved product yields, implementation of programs such as lean manufacturing, and an enhanced customer-centric focus. As a fabless semiconductor company, we outsource the majority of our manufacturing. Our successful management of our supply chain has provided us with competitive materials pricing and effective lead times for the materials we purchase. We have sizable advantages due to lower fixed costs, reduced cycle times, and lower inventory resulting from our outsourcing of almost all of our wafer fabrication and assembly. During periods of strong demand, we could experience longer lead times, difficulties in obtaining capacity, and/or difficulty in meeting commitments for our required deliveries during periods of strong demand. Average margins vary widely within the markets we serve, with the Carrier networking market having the highest average margins and the Enterprise networking market having the lowest average margins. We endeavor to increase margins by providing products that have significant added value relative to our competition.
We have also streamlined our R&D and SG&A organizations, reducing expenses almost 25% over the past three fiscal years. We leverage top-level consultants to help us achieve short-term design goals while ensuring we maintain our in-house engineering talent to drive our overall corporate objectives.
Critical Accounting Policies and Estimates 24 -------------------------------------------------------------------------------- Table of Contents Our accounting policies are more fully described in Note 1 of the unaudited consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We base our estimates on historical experience and on various other assumptions that we believe are reasonable in the circumstances. We regularly discuss with our audit committee the basis of our estimates. These estimates could change under different assumptions or conditions.
We believe that our critical accounting policies and estimates, as described in our Annual Report on Form 10-K for the year ended September 30, 2013, are our most critical accounting policies and are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments. There have been no significant changes to these policies during the three months ended December 31, 2013.
Impact of Recent Accounting Pronouncements For information with respect to recent accounting pronouncements and the impact of these pronouncements see "The Company and Its Significant Accounting Policies" footnote in the accompanying notes to the unaudited consolidated financial statements.
Results of Operations for the three months ended December 31, 2013, as compared to the three months ended December 31, 2012 The following table sets forth certain Unaudited Consolidated Statements of Operations data for the periods indicated.
The percentages in the table are based on net revenues.
Three Months Ended December 31, 2013 2012 $ % $ % (in thousands, except for percentages) Net revenues: Product revenues $ 24,863 91.8 % $ 23,905 92.9 % Intellectual property revenues 2,220 8.2 % 1,822 7.1 % Net revenues 27,083 100.0 % 25,727 100.0 % Costs and expenses: Cost of product revenues 10,676 39.4 % 10,975 42.7 % Engineering, research and development 10,679 39.4 % 10,504 40.8 % Selling, general and administrative 7,854 29.0 % 7,970 30.9 % Amortization of intangible assets 88 0.3 % 97 0.4 % Costs and expenses 29,297 108.1 % 29,546 114.8 % Loss from operations (2,214 ) (8.1 )% (3,819 ) (14.8 )% Other expense (income): Interest expense, net 1,704 6.3 % 1,970 7.7 % Gain on compound embedded derivative - - % (803 ) (3.1 )% Loss on extinguishment of debt 1,594 5.9 % - - % Other expense (income), net 61 0.2 % (31 ) (0.1 )% Other expense, net 3,359 12.4 % 1,136 4.5 % Loss before income tax (benefit) provision (5,573 ) (20.5 )% (4,955 ) (19.3 )% Income tax (benefit) provision (202 ) (0.7 )% 77 0.3 % Net loss $ (5,371 ) (19.8 )% $ (5,032 ) (19.6 )% Product Revenues 25-------------------------------------------------------------------------------- Table of Contents We sell our products into the following markets: (i) Carrier networking; (ii) Enterprise networking; and (iii) Non-core. The Carrier networking market includes core, metro, edge, and access equipment used for transport, switching, routing, mobile access, and backhaul in service provider networks. The Enterprise networking market covers Ethernet switching and routing equipment used within LANs in SME and SMB networks and Cloud Access services. The Non-core market is comprised of products that have not received additional investment over the last five years and, as a result, have generally been in decline.
The demand for our products is affected by various factors, including our development and introduction of new products, availability and pricing of competing products, capacity constraints at our suppliers, EOL product decisions, and general economic conditions. Therefore, our revenues for the three months ended December 31, 2013 may not necessarily be indicative of future revenues.
Product revenues by market are as follows: Three Months Ended December 31, 2013 2012 % of Product % of Product % Amount Revenues Amount Revenues Change Change (in thousands, except percentages) Carrier networking $ 12,939 52.1 % $ 13,978 58.5 % $ (1,039 ) (7.4 )% Enterprise networking 11,767 47.3 % 9,659 40.4 % 2,108 21.8 % Non-core 157 0.6 % 268 1.1 % (111 ) (41.4 )% Product revenues $ 24,863 100.0 % $ 23,905 100.0 % $ 958 4.0 % The lower Carrier networking revenues is largely attributable to a decrease in sales of some of our mature crosspoint switches and SONET framers, which went through EOL in the prior period. Partially offsetting the decreases is an increase in sales of our new Connectivity products, which more than doubled.
The higher Enterprise networking revenues is primarily due to increases in sales of our new switches and a five-fold increase in sales of our new 10G Ethernet PHYs.
In fiscal 2012, a number of older products went through EOL. Revenues from these EOL products totaled $3.4 million and $4.5 million in the three months ended December 31, 2013 and 2012, respectively.
We also classify our product revenues based on our three product lines: (i) Connectivity; (ii) Ethernet switching; and (iii) Transport processing.
Product revenues by product line are as follows: Three Months Ended December 31, 2013 2012 % of Product % of Product % Amount Revenues Amount Revenues Change Change (in thousands, except percentages) Connectivity $ 8,949 36.0 % $ 10,138 42.5 % $ (1,189 ) (11.7 )% Ethernet switching 11,336 45.6 % 8,306 34.7 % 3,030 36.5 % Transport processing 4,578 18.4 % 5,461 22.8 % (883 ) (16.2 )% Product revenues $ 24,863 100.0 % $ 23,905 100.0 % $ 958 4.0 % The lower Connectivity revenues is largely attributable to a decrease in some of our mature crosspoint switches, partially offset by a five-fold increase in sales of our new 10G Ethernet PHYs.
The higher Ethernet switching revenues is largely attributable to an increase in sales of our new switches and new and mature 1GbE copper PHYs.
26 -------------------------------------------------------------------------------- Table of Contents The lower Transport processing revenues is largely attributable to decreased sales of SONET framers that went through EOL in the prior period. This decrease is partially offset by growth in our OTN mappers.
Intellectual Property Revenues Three Months Ended December 31, 2013 2012 % of Net % of Net % Amount Revenues Amount Revenues Change Change (in thousands, except percentages) Intellectual property revenues $ 2,220 8.2 % $ 1,822 7.1 % $ 398 21.8 % Intellectual property revenues include licenses, royalties, and sales of patents. The higher intellectual property revenues is due to increased deliveries of intellectual property. The timing and amounts of intellectual property revenues fluctuate. Expenses associated with the sale of intellectual property are included in SG&A.
Net revenues from customers that were equal to or greater than 10% of total net revenues are as follows: Three Months Ended December 31, 2013 2012 WPG Holdings** 18.4 % 13.2 % Nu Horizons Electronics** * 12.3 % Huawei * 11.0 % ______________________________________ * Less than 10% of total net revenues for period indicated.
** Distributors Net revenues by geographic area are as follows: Three Months Ended December 31, 2013 2012 % of Net % of Net % Amount Revenues Amount Revenues Change Change (in thousands, except percentages) United States $ 6,559 24.2 % $ 10,905 42.4 % $ (4,346 ) (39.9 )% Asia Pacific 16,786 62.0 % 12,064 46.9 % 4,722 39.1 % Europe, Middle East and Africa 3,738 13.8 % 2,758 10.7 % 980 35.5 % Net revenues $ 27,083 100.0 % $ 25,727 100.0 % $ 1,356 5.3 % Revenues by geographic area are based upon the country of billing. The geographic location of distributors and third-party manufacturing service providers may be different from the geographic location of the ultimate end users. We believe a substantial portion of the products billed to OEMs and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.
Cost of Product Revenues Three Months Ended December 31, 2013 2012 % of Product % of Product % Amount Revenues Amount Revenues Change Change (in thousands, except percentages) Cost of product revenues $ 10,676 42.9 % $ 10,975 45.9 % $ (299 ) (2.7 )% 27-------------------------------------------------------------------------------- Table of Contents We use third-parties for wafer fabrication and assembly services. Cost of product revenues consists predominantly of: (i) purchased finished wafers; (ii) assembly services; (iii) test services; and (iv) labor and overhead costs associated with product procurement, planning and quality assurance.
Our cost of product revenues is affected by various factors, including product mix, volume, and provisions for excess and obsolete inventories, material costs, manufacturing efficiencies, and the position of our products within their life-cycles. Our cost of product revenues as a percentage of net product revenues is affected by these factors, as well as customer mix, volume, pricing, and competitive pricing programs.
The decrease in cost of product revenues as a percentage of product revenues resulted from an increase in switching products sales that have a lower unit cost as a percentage of revenues as compared to the prior period.
Engineering, Research and Development Three Months Ended December 31, 2013 2012 % of Net % of Net % Amount Revenues Amount Revenues Change Change (in thousands, except percentages) Engineering, research and development $ 10,679 39.4 % $ 10,504 40.8 % $ 175 1.7 % R&D expenses consist primarily of compensation expenses for employees and contractors engaged in research, design and development activities. R&D also includes costs of mask tooling, which we fully expense in the period, and electronic design automation tools, software licensing contracts, subcontracting and fabrication costs, depreciation and amortization, and overhead including facilities expenses.
The level of R&D expenses will vary from period-to-period, depending on timing of development projects and the purchase of masks aligned to those projects. The level of R&D expenses as a percentage of net revenues will vary, depending, in part, on the level of net revenues. Our R&D efforts are critical to maintaining a high level of new product introductions and are critical to our plans for future growth.
R&D spending for the three months ended December 31, 2013 is consistent with spending in the prior year period.
Selling, General and Administrative Three Months Ended December 31, 2013 2012 % of Net % of Net % Amount Revenues Amount Revenues Change Change (in thousands, except percentages) Selling, general and administrative $ 7,854 29.0 % $ 7,970 30.9 % $ (116 ) (1.5 )% SG&A expenses consist primarily of compensation expense, legal and other professional fees, facilities expenses, outside labor, and communication expenses.
The decrease in SG&A expenses is due to a $0.7 million decrease in asset retirement expenses incurred in 2012 resulting from moving from our primary Camarillo facility to an adjacent building, partially offset by increased spending to move our primary test operation from Singapore to Taiwan in 2013.
28 -------------------------------------------------------------------------------- Table of Contents Interest Expense, Net Three Months Ended December 31, 2013 2012 % of Net % of Net % Amount Revenues Amount Revenues Change Change (in thousands, except percentages)Interest expense, net $ 1,704 6.3 % $ 1,970 7.7 % $ (266 ) (13.5 )% Interest expense, net is comprised of cash interest expense, amortization of debt discount, premium, and debt issuance cost, net of interest income. Interest expense, net decreased primarily due to the repurchase in November 2013 of $13.7 million principal amount of our 2014 Debentures.
Gain on Compound Embedded Derivative Three Months Ended December 31, 2013 2012 % of Net % of Net % Amount Revenues Amount Revenues Change Change (in thousands, except percentages) Gain on compound embedded derivative $ - - % $ (803 ) (3.1 )% $ 803 (100.0 )% The compound embedded derivative included in our 2014 Debentures required bifurcation and accounting at fair value because the economic and contractual characteristics of the compound embedded derivative met the criteria for bifurcation and separate accounting due to the conversion price not being indexed to our own stock. The compound embedded derivative is comprised of the conversion option and a make-whole payment for foregone interest if the holder converts the debenture early. The make-whole payment for foregone interest expired October 30, 2012, and upon its expiration, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature were indexed to our own stock. A final valuation was completed on October 30, 2012, resulting in gain of $0.8 million due to the change in fair value.
Loss on Extinguishment of Debt Three Months Ended December 31, 2013 2012 % of Net % of Net % Amount Revenues Amount Revenues Change Change (in thousands, except percentages) Loss on extinguishment of debt $ 1,594 5.9 % $ - - % $ 1,594 100.0 % The loss on extinguishment of debt is due to the repurchase in November 2013 of $13.7 million principal amount of our 2014 Debentures at 107% of the principal amount thereof.
29-------------------------------------------------------------------------------- Table of Contents Income Tax Benefit Three Months Ended December 31, 2013 2012 % of Net % of Net % Amount Revenues Amount Revenues Change Change (in thousands, except percentages) Income tax (benefit) provision $ (202 ) (0.7 )% $ 77 0.3 % $ (279 ) (362.3 )% Our effective tax rate is primarily impacted by certain foreign taxes, certain nondeductible interest and share based expenses and the release of a portion of the evaluation allowance related to certain foreign jurisdictions' deferred tax assets as such balance were more likely than not realizable within the applicable carryforward period. Our effective tax rate for the three months ended December 31, 2013 was (3.6)% which was lower than the federal and state statutory rate due to the projected federal and state losses for the fiscal year as well as the related valuation allowances.
Financial Condition and Liquidity Cash Flow Analysis Cash decreased to $48.4 million at December 31, 2013, from $68.9 million at September 30, 2013. Our cash flows from operating, investing and financing activities are summarized as follows: Three Months Ended December 31, 2013 2012 (in thousands) Net cash used in operating activities $ (4,523 ) $ (3,608 ) Net cash used in investing activities (788 ) (161 ) Net cash (used in) provided by financing activities (15,197 ) 16,956 Net (decrease) increase in cash (20,508 ) 13,187 Cash at beginning of period 68,863 23,891 Cash at end of period $ 48,355 $ 37,078 Net Cash Used In Operating Activities During the three months ended December 31, 2013, cash used in operations totaled $4.5 million. Excluding changes in working capital, we used $1.6 million to fund the cash portion of our net loss. We used cash to fund increases in accounts receivable, inventory and prepaid expenses and other assets totaling $4.6 million. We also used cash to paydown accrued expenses and other liabilities of $0.9 million. These uses were offset by higher accounts payable and deferred revenue totaling $2.5 million.
Accounts receivable increased $1.6 million from $9.8 million at September 30, 2013, to $11.4 million at December 31, 2013, primarily due to the timing of sales during the quarter ended December 31, 2013. Inventory levels were increased $1.9 million to $12.5 million at December 31, 2013, from $10.7 million at September 30, 2013 to meet increased demand. Accounts payable, accrued expenses and other liabilities increased by $1.1 million, from $20.1 million at September 30, 2013, to $21.2 million at December 31, 2013, due to the timing of obligations and/or payments to our vendors and other service providers. Deferred revenue increased $0.5 million from $2.2 million at September 30, 2013, to $2.7 million at December 31, 2013, due to the timing of payments from distributors.
During the three months ended December 31, 2012, cash used in operations totaled $3.6 million. Excluding changes in working capital, we used $3.3 million to fund the cash portion of our net loss. We also used cash to fund increases in accounts receivable, inventory, and prepaid expenses totaling $1.6 million.
These uses were offset by higher deferred revenues, accounts payable and accrued expense liabilities totaling $1.3 million.
Inventory increased $0.5 million from $12.1 million at September 30, 2012 to $12.6 million at December 31, 2012 primarily due to increased inventories held by distributors. Accounts payable, accrued expenses and other liabilities increased by $0.9 million from $18.5 million at September 30, 2012 to $19.4 million at December 31, 2012 due to the timing of obligations and/ 30 -------------------------------------------------------------------------------- Table of Contents or payments to our vendors and other service providers. Deferred revenue increased $0.4 million from $0.9 million at September 30, 2012 to $1.3 million at December 31, 2012 due to increased shipments to distributors.
Net Cash Used In Investing Activities Investing activities used cash in the three months ended December 31, 2013 for capital expenditures of $0.9 million and payments under licensing agreements of $0.1 million. Expenditures were partially offset by cash provided by the sale of capital assets of $0.2 million. Investing activities used cash in the three months ended December 31, 2012, for capital expenditures of $0.2 million.
Net Cash (Used in) Provided By Financing Activities Net cash used in financing activities during the three months ended December 31, 2013, totaled $15.2 million. Cash used for the repurchase of our 2014 Debentures totaled $14.6 million. We also used cash to pay a consent fee of $0.3 million related to the November 2013 amendment of our credit agreement. Cash used for the repurchase of restricted stock units for payroll taxes on behalf of employees was $0.3 million. Net cash provided by financing activities during the three months ended December 31, 2012 totaled $17.0 million. Cash from the sale of common stock totaled $17.2 million, net of approximately $1.4 million in expenses, from the registered underwritten sale of 10,651,280 shares of common stock at $1.75 per share, based on a negotiated discount to market. Offering costs of $0.1 million were incurred, but unpaid as of December 31, 2012.
Proceeds were offset by $0.3 million in cash used for the repurchase of restricted stock units for payroll taxes paid on behalf of employees.
Capital Resources, Including Debt, Contingent Liabilities and Operating Leases Prospective Capital Needs Our principal sources of liquidity are our existing cash, cash generated from product sales, and cash generated from the sales or licensing of our intellectual property. Our cash totaled $48.4 million at December 31, 2013. Our working capital at December 31, 2013, was $20.0 million.
In order to achieve sustained profitability and positive cash flows from operations, we may need to further reduce operating expenses and/or increase revenues. We have completed a series of cost reduction actions that have improved our operating expense structure. We will continue to perform additional actions, as necessary. Our ability to maintain, or increase, current revenue levels to sustain profitability will depend, in part, on demand for our products.
Our current debt is comprised of our convertible subordinated debentures ("2014 Debentures"), of which the total principal amount of $32.8 million is due in October 2014. Our long-term debt is comprised of our senior term loans (the "Term A Loan" and "Term B Loan", which we collectively refer to as our "Term A and B Loans") which have a total principal amount of $17.2 million due on August 31, 2016. We intend to use our existing cash to repay our 2014 Debentures on or before their maturity in October 2014, which will achieve our objective of reducing our outstanding indebtedness but will also reduce our cash balances.
While we believe that our existing sources of liquidity, along with cash expected to be generated from revenues, will be sufficient to fund our operations for at least the next 12 months after repayment of the 2014 Debentures, this ultimately may not be the case. If we incur operating losses and negative cash flows in the future, we may need to further reduce our operating costs or obtain alternate sources of financing, or both. We may need additional capital in the future and may not have access to additional sources of capital on favorable terms or at all. If we raise additional funds through the issuance of equity or debt securities, such securities may have rights, preferences or privileges senior to those of our common stock and our stockholders may experience dilution of their ownership interests. There can be no assurance, however, that our efforts will be successful.
We have a Form S-3 universal shelf registration statement on file with the SEC.
The universal shelf registration statement on Form S-3 permits Vitesse to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to $75.0 million. The Form S-3 will expire in January 2017. To date, no securities have been issued pursuant to the registration statement.
31 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations Payment Obligations by Fiscal Year Remaining in 2014 2015 2016 2017 2018 2019 and Thereafter Total (in thousands) Convertible subordinated debt (1) $ - $ 32,843 $ - $ - $ - $ - $ 32,843 Term A Loan (2) - - 7,857 - - - 7,857 Term B Loan (3) - - 9,342 - - - 9,342 Loan interest (4) 2,489 3,102 1,776 - - - 7,367 Operating leases (5) 1,639 1,568 343 - - - 3,550 Software licenses (6) 5,346 6,736 2,847 2,800 2,800 - 20,529 Inventory and related purchase obligations (7) 5,560 1,233 60 60 - - 6,913 Total $ 15,034 $ 45,482 $ 22,225 $ 2,860 $ 2,800 $ - $ 88,401 _________________________________________________ (1) Convertible subordinated debt represents amounts due for our 8.0% convertible debentures due October 2014.
(2) Term A Loan represents amounts due for our 9.0% fixed rate senior notes due August 31, 2016.
(3) Term B Loan represents amounts due for our 9.0% fixed rate senior notes due August 31, 2016.
(4) Interest payable for 2014 Debentures through 2015 and Term A and B Loans through 2016.
(5) We lease facilities under non-cancellable operating lease agreements that expire at various dates through 2016.
(6) Software license commitments represent non-cancellable licenses of technology from third-parties used in the development of our products.
(7) Inventory and other purchase obligations represent non-cancellable purchase commitments. For purposes of the table above, inventory and other purchase obligations are defined as agreements that are enforceable and legally binding and that specify all significant terms. Our purchase orders are based on our current manufacturing needs and are typically fulfilled by our vendors within a relatively short time. Other purchase commitments may be for longer periods and are dictated by contractual terms.
Off-Balance Sheet Arrangements At December 31, 2013, we had no material off-balance sheet arrangements, other than operating leases.
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