plx_body8k100110.htm

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GC50kYI62wdMiU+VwXswVISRPrHKOgXry/C0iYn2yEQ09HoVbQS3ndjpT+J4tz/v u0naIkmF2D5SsP4tLc75aQ== 0000850579-10-000088.txt : 20101217 0000850579-10-000088.hdr.sgml : 20101217 20101217131546 ACCESSION NUMBER: 0000850579-10-000088 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20101001 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20101217 DATE AS OF CHANGE: 20101217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLX TECHNOLOGY INC CENTRAL INDEX KEY: 0000850579 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 943008334 STATE OF INCORPORATION: DE FISCAL YEAR END: 1213 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-25699 FILM NUMBER: 101259245 BUSINESS ADDRESS: STREET 1: 870 MAUDE AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94085 BUSINESS PHONE: 4087749060 MAIL ADDRESS: STREET 1: 870 MAUDE AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94085 8-K/A 1 plx_body8k100110.htm PLX TECHNOLOGY, INC. FORM 8-KA plx_body8k100110.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K/A

(Amendment No. 1)

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): October 1, 2010

PLX TECHNOLOGY, INC.

------------------------------------------------

(Exact Name of Registrant as Specified in its Charter)

DELAWARE

-----------------------------------------

(State or Other Jurisdiction of Incorporation)

000-25699 94-3008334

------------------------ ---------------------------

(Commission File Number) (I.R.S. Employer Identification No.)

870 W. Maude Avenue, Sunnyvale, California 94085

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(Address of Principal Executive Offices) (Zip Code)

(408) 774-9060

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(Registrant's telephone number, including area code)

Not Applicable

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(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Explanatory Note

On October 4, 2010, PLX Technology, Inc. (“PLX” or the “Company”) filed a Current Report on Form 8-K (the “Initial Form 8-K”) reporting the completion of its previously announced acquisition of Teranetics, Inc. (“Teranetics”). This amendment to the Initial Form 8-K amends and supplements the Initial Form 8-K to provide the required financial statements and pro forma financial information that were not filed with the Initial Form 8-K and that are permitted to be filed by this amendment.

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired

The Audited Financial Statements of Teranetics as of September 30, 2010 and December 31, 2009, and for the nine months ended September 30, 2010 and for the year ended December 31, 2009 and accompanying notes are included as Exhibit 99.1 to this Current Report on Form 8-K/A.

(b) Pro Forma Financial Information

The following Unaudited Pro Forma Condensed Combined Financial Statements of PLX are included as Exhibit 99.2 to this Current Report on Form 8-K/A and incorporated herein by reference:

i.	Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2010

ii.	Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2009

iii.	Unaudited Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 2010

iv.	Notes to the Unaudited Pro Forma Condensed Combined Financial Statements

(d) Exhibits

The following exhibits are being filed with this Current Report on Form 8-K/A:

Exhibit No.

Description

2.1

Agreement and Plan of Merger dated as of September 23, 2010, by and among PLX Technology, Inc., Tunisia Acquisition Sub, Inc., Teranetics, Inc., and Nersi Nazari in his capacity as the representative of the Securityholders, which was filed as exhibit 2.1 to PLX’s Form 8-K, filed on September 27, 2010, and is incorporated by reference herein. The schedules to the agreement, as set forth in the agreement, have not been filed herewith pursuant to Item 601(b)(2) of Regulation S-K. PLX agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.

23.1

Consent of Independent Auditors

99.1

Audited Consolidated Financial Statements of Teranetics, Inc. as of September 30, 2010 and December 31, 2009, and for the nine months ended September 30, 2010 and for the year ended December 31, 2009.

99.2

Unaudited Pro Forma Combined Condensed Financial Statements of PLX as of and for the nine months ended September 30, 2010 and for the year ended December 31, 2009.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.

	PLX TECHNOLOGY, INC.

Dated: December 17, 2010	By:	/s/ Arthur O. Whipple
		Arthur O. Whipple
		Chief Financial Officer

EXHIBIT INDEX

Exhibit No.

Description

2.1

23.1

Consent of Independent Auditors

99.1

99.2

Unaudited Pro Forma Combined Condensed Financial Statements of PLX as of and for the nine months ended September 30, 2010 and for the year ended December 31, 2009.

EX-23.1 2 plx_exhibit231-100110.htm PLX TECHNOLOGY, INC. EXHIBIT 23.1 plx_exhibit231-100110.htm

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-170212, 333-166014, 333-159668, 333-156760, 333-40722, 333-105745 and 333-116702) and on Form S-8 (Nos. 333-170213, 333-160026, 333-153392, 333-88259, 333-38992, 333-38990, 333-67026, 333-97741, 333-105748, 333-116704 and 333-135811) of PLX Technology, Inc., of our report dated December 9, 2010, relating to the consolidated financial statements of Teranetics, Inc., which appears in this Amendment No. 1 to the Current Report on Form 8-K/A of PLX Technology, Inc.

/s/ Mohler Nixon & Williams

MOHLER, NIXON & WILLIAMS

Accountancy Corporation

Campbell, California

December 17, 2010

EX-99.1 3 plx_exhibit991-100110.htm PLX TECHNOLOGY, INC. EXHIBIT 99.1 plx_exhibit991-100110.htm

Exhibit 99.1

Teranetics, Inc.

Consolidated Financial Statements

September 30, 2010 and December 31, 2009

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors

and Stockholders of

Teranetics, Inc.

We have audited the accompanying consolidated balance sheets of Teranetics, Inc. (the Company) as of September 30, 2010 and December 31, 2009, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the nine-month period ended September 30, 2010 and for the year ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Teranetics, Inc. as of September 30, 2010 and December 31, 2009, and the results of its consolidated operations and cash flows for the nine-month period ended September 30, 2010 and for the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

On September 23, 2010, the Company signed a definitive merger agreement with PLX Technology (PLX). The merger was completed on October 1, 2010.

/s/ Mohler, Nixon & Williams

MOHLER, NIXON & WILLIAMS

Accountancy Corporation

Campbell, California

December 9, 2010

TERANETICS, INC.

Consolidated balance sheets
(in thousands, except share and per share amounts)

	September 30,			December 31,
	2010			2009


Assets

Cash and cash equivalents	$	113		$	6,571
Accounts receivable		442			404
Inventory		444			816
Prepaid expenses and other current assets		510			832

Total current assets		1,509			8,623

Property and equipment, net		673			870
Other assets		42			42

Total assets	$	2,224		$	9,535

Liabilities and stockholders’ equity (deficit)

Current portion of long-term debt, net of discount	$	2,262		$	2,212
Convertible promissory notes, current portion		8,728			-
Accounts payable		2,890			858
Accrued interest		1,204			182
Accrued liabilities		9,054			1,229
Deferred rent		146			130
Deferred revenue		500			500

Total current liabilities		24,784			5,111

Long-term debt, less current portion		-			688
Convertible promissory notes, net of current portion and discount		-			3,012

Total liabilities		24,784			8,811

Commitments (Note 8)

Stockholders’ equity (deficit):
Convertible preferred stock, $0.001 par value;
80,795,330 shares authorized: 35,509,539 and 51,725,531 shares issued
and outstanding at September 30, 2010 and December 31, 2009, respectively
(aggregate liquidation preference of $62,868,000)		62,047			84,277
Common stock, $0.001 par value; 160,000,000 shares authorized:
26,321,522 and 3,495,495 shares issued and outstanding at
September 30, 2010 and December 31, 2009, respectively		27			3
Additional paid-in capital		32,565			2,244
Accumulated deficit		(117,199	)		(85,800	)

Total stockholders’ equity (deficit)		(22,560	)		724

Total liabilities and stockholders’ equity (deficit)	$	2,224		$	9,535

See accompanying notes to consolidated financial statements.

TERANETICS, INC.

Consolidated statements of operations
(in thousands)

	Nine-month
	period ended			Year ended
	September 30,			December 31,
	2010			2009


Revenue	$	2,638		$	3,454
Cost of revenue		1,905			2,495

Gross profit		733			959

Operating expenses:
Research and development		17,931			14,039
Sales and marketing		871			1,022
General and administrative		6,393			2,606

Total operating expenses		25,195			17,667

Loss from operations		(24,462	)		(16,708	)

Interest and income		2			58
Interest and other expenses		(6,939	)		(1,139	)

Net loss	$	(31,399	)	$	(17,789	)

See accompanying notes to consolidated financial statements.

TERANETICS, INC.

Consolidated statements of cash flows
(in thousands)

	Nine-month
	period ended			Year ended
	September 30,			December 31,
	2010			2009


Cash flows from operating activities:
Net loss	$	(31,399	)	$	(17,789	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		379			657
Stock-based compensation expense		135			274
Issuance of preferred stock warrants		40			523
Premium interest related to convertible promissory note (Note 3)		5,238			-
Non-cash interest		478			44
Changes in assets and liabilities:
Accounts receivable		(38	)		(6	)
Inventory		372			(816	)
Prepaid expenses and other assets		322			1,124
Other assets		-			1
Accounts payable		2,032			(964	)
Accrued interest		1,022			122
Accrued liabilities		7,825			577
Deferred revenue		-			(1,265	)
Deferred rent		16			118

Net cash used by operating activities		(13,578	)		(17,400	)

Cash flows from investing activities:
Purchase of property and equipment		(182	)		(486	)
Proceeds from sale of short-term investments		-			10,745

Net cash provided (used) by investing activities		(182	)		10,259

Cash flows from financing activities:
Proceeds from the sale of convertible preferred stock, net of issuance costs		7,938			6,581
Issuance of convertible promissory notes		1,000			3,491
Repayment of note payable		(1,638	)		(2,000	)
Proceeds from issuance of common stock, net		2			15

Net cash provided by financing activities		7,302			8,087

Net increase (decrease) in cash and cash equivalents		(6,458	)		946

Cash and cash equivalents at beginning of period		6,571			5,625

Cash and cash equivalents at end of period	$	113		$	6,571

Supplemental disclosure of cash flow information:
Non-cash investing and financing items:
Beneficial conversion feature in conjunction with convertible promissory notes	$	-		$	523
Issuance of warrants in conjunction with convertible promissory notes	$	-		$	523

See accompanying notes to consolidated financial statements.

TERANETICS, INC.

Consolidated statements of stockholders' equity (deficit)
For the year ended December 31, 2009 and the nine-month period ended September 30, 2010
(in thousands, except share and per share amounts)

	Convertible											Additional						Total
	preferred stock						Common stock					paid-in			Accumulated			stockholders'
	Shares			Amount			Shares			Amount		capital			deficit			equity (deficit)

Balance at December 31, 2008		48,755,339		$	77,696			3,344,391		$	3	$	909		$	(68,011	)	$	10,597

Issuance of Series E convertible preferred stock, net of issuance costs of $174,000 at $2.2716 per share		2,970,192			6,581														6,581

Issuance of common stock upon exercise of employee stock options								101,625					14						14

Vesting of early exercised options								33,479					1						1

Issuance of common stock to consultants for services at various dates								16,000											-

Stock-based compensation from stock options grated to employees													274						274

Issuance of warrants in conjunction with convertible promissory note													523						523

Beneficial conversion features in conjunction with convertible promissory notes													523						523

Net loss																(17,789	)		(17,789	)

Balance at December 31, 2009		51,725,531			84,277			3,495,495			3		2,244			(85,800	)		724

Issuance of Series F convertible preferred stock, net of issuance costs of $217,728 at $1.2332 per share		6,613,535			7,938														7,938

Issuance of common stock in conjunction with recapitalization transaction of the following convertible preferred stock:
Series A-1, Series B, Series C, Series D and Series E		(9,340,728	)		(15,048	)		9,340,728			9		15,039						-

Issuance of common stock in conjunction with recapitalization of
Series A convertible preferred stock		(8,050,001	)		(8,050	)		8,050,001			8		8,042						-

Issuance of common stock in conjunction with recapitalization of
Series A-1 convertible preferred stock		(5,438,798	)		(7,070	)		5,438,798			6		7,064						-

Stock-based compensation from stock options granted to employees													134						134

Issuance of common stock upon exercise of employee stock options								4,000			1		2						3

Repurchase of common stock								(7,500	)				(1	)					(1	)

Issuance of warrants in conjunction promissory note													40						40

Stock-based compensation from stock options granted to nonemployees													1						1

Net loss																(31,399	)		(31,399	)

Balance at September 30, 2010		35,509,539		$	62,047			26,321,522		$	27	$	32,565		$	(117,199	)	$	(22,560	)

See accompanying notes to consolidated financial statements.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

Teranetics, Inc. (the Company) was incorporated in the state of Delaware on December 16, 2002. The Company is engaged in developing solutions in data networking infrastructure to reduce the cost and complexity of providing high-speed Ethernet networks.

In January 2007, the Company established two wholly-owned subsidiaries, Teranetics Semiconductor India Private Limited in Bangalore and TRNS, Inc. (TRNS), a Delaware Corporation. Teranetics Semiconductor India Private Limited is primarily expected to be a research and development office and will be an integral extension of the parent company’s operations. TRNS is primarily a holding company.

On September 23, 2010, the Company signed a definitive merger agreement with PLX Technology (PLX). The merger was completed on October 1, 2010 (Note 9).

Principles of consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

Foreign currency translation - The functional currency of the Company’s foreign subsidiary is the U.S. dollar. Foreign currency assets and liabilities are translated into the U.S. dollar at the end-of-period exchange rate. Expenses are translated at average exchange rates in effect during each period. Gains or losses from foreign currency transactions, which have not been significant, are included in net loss.

Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash equivalents - The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents. As of September 30, 2010 and December 31, 2009, cash and cash equivalents consist of cash deposited with banks and money market funds. The recorded carrying amount of cash equivalents approximates their fair value.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

Comprehensive loss - Generally accepted accounting principles establish standards for reporting and display in the consolidated financial statements of total consolidated net loss and the components of all other non-owner changes in equity, referred to as comprehensive loss. Comprehensive loss for the period presented is the same as the consolidated net loss.

Certain significant risks and uncertainties - The Company operates in a dynamic industry, and accordingly, can be affected by a variety of factors. For example, management of the Company believes that changes in any of the following areas could have a significant negative impact on the Company in terms of its future financial position, results of operations or cash flows:

·	Advances and trends in new technologies and industry standards

·	Changes in certain strategic relationships or customer relationships

·	Market acceptance of the Company’s products

·	Loss of significant customers

·	Litigation or other claims against the Company

·	The hiring, training and retention of key employees

·	New product introductions by competitors

·	Ability to maintain research and development investment

Concentrations of credit risk - Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents. Cash and cash equivalents are deposited with federally insured commercial banks in the United States of America and the balances are in excess of federal insurance limits at September 30, 2010 and December 31, 2009.

At September 30, 2010, three customers accounted for approximately 41%, 39% and 19% of total accounts receivable.

During the nine-month period ended September 30, 2010 and the year ended December 31, 2009, purchases from two suppliers comprised approximately 45% and 34% of total purchases, respectively. As of September 30, 2010, one vendor represented approximately 46% of total accounts payable.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

Property and equipment - Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements and assets acquired under capital leases are amortized on a straight-line basis over the term of the lease, or the useful life of the assets, whichever is shorter. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired, or otherwise disposed of, the cost and accumulated depreciation and amorti zation are removed from the accounts, and any resulting gain or loss is reflected in operations in the period realized.

Revenue recognition - The Company recognizes revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable and collection is reasonably assured. For most sales, the Company uses a binding purchase order and in certain cases uses a contractual agreement as evidence of an arrangement. Delivery is considered to have occurred upon shipments provided title and risk of loss have passed to the customer based on the shipping terms. At the point of sale, the Company assesses whether the arrangement fee is fixed or determinable and whether collection is reasonably assured. If one or both of these criteria are not met, revenue is deferred until both criteria ar e met.

Stock-based compensation - The Company uses the estimated grant date calculated value method of accounting for stock-based compensation. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of four years.

Impairment of long-lived assets - The Company evaluates the recoverability of its long-lived assets in accordance with generally accepted accounting principles which require recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. No such losses have been recognized through September 30, 2010.

Research and development - Research and development costs are charged to operations as incurred.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

Income taxes - Deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss (NOL) and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

In 2009, the Company adopted a new accounting standard relevant to uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A tax position is recognized when it is more-likely-than-not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. The standard also provides guidance on derecognition of tax benefits, classification on the balance sheet, intere st and penalties, accounting in interim periods, disclosure and transition.

New accounting pronouncements - In September 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance that applies to arrangements with multiple deliverables and provides another alternative for determining the selling price of deliverables. In addition, the residual method of allocating arrangement consideration is no longer permitted under this guidance. The guidance is effective for fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the potential impact, if any, of the adoption of this guidance on its consolidated financial statements.

In September 2009, the FASB issued authoritative guidance which removes non-software components of tangible products and certain software components of tangible products from the scope of existing software revenue guidance, resulting in the recognition of revenue similar to that for other tangible products. It also requires expanded qualitative and quantitative disclosures. The guidance is effective for fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the potential impact, if any, of the adoption of this guidance on its consolidated financial statements.

Reclassifications - Certain reclassifications were made to the 2009 consolidated financial statements to conform them to the 2010 consolidated financial statement presentation.

Subsequent events - The Company has evaluated subsequent events through December 9, 2010, which is the date the consolidated financial statements were available to be issued.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

NOTE 2 - SIGNIFICANT BALANCE SHEET COMPONENTS

Prepaid expenses and other current assets - Prepaid expenses and other current assets consisted of approximately the following (in thousands):

	September 30,		December 31,
	2010		2009
Deferred cost of goods sold	$	150	$	60
Prepaid software licenses		190		544
Other prepaid expense and other current assets		170		228

Total	$	510	$	832

Property and equipment - Property and equipment consisted of approximately the following (in thousands):

	September 30,			December 31,
	2010			2009
Computers and equipment and software	$	2,493		$	2,481
Furniture and fixtures		12			11
Leasehold improvements		197			197
Research and development equipment		955			786

		3,657			3,475

Less: accumulated depreciation and amortization		(2,984	)		(2,605	)

	$	673		$	870

Depreciation and amortization expense for the nine-month period ended September 30, 2010 and the year ended December 31, 2009 was approximately $379,000 and $657,000, respectively.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

Accrued liabilities - Accrued liabilities consisted of approximately the following (in thousands):

	September 30,		December 31,
	2010		2009
Employee-related compensation costs	$	616	$	362
Executive bonus compensation		1,425		-
Employee retention bonus		5,345		-
Other accrued liabilities		1,668		867

	$	9,054	$	1,229

NOTE 3 - FINANCING ARRANGEMENTS

In May 2007, the Company entered into a line of credit facility with a financial institution that provided for borrowings of up to $10,000,000 through the end of April 2009. In April 2008, the Company drew down $4,900,000 on the facility. As of September 30, 2010, $1,262,000 was still outstanding. Interest is payable on outstanding borrowings at 10% per annum plus a one time end of term payment of 2.5% of the total amount drawn, which is being accrued over the term of the agreement. The agreement calls for monthly interest only payments for the period from April 2008 through December 2008, with monthly principal and interest payments thereafter until the maturity date in April 2011. Borrowings under this agreement were collateralized by substantially all assets of the Company. 60; Upon acquisition of the Company on October 1, 2010, the Company paid the note in full (Note 9).

The Company issued $3,491,000 of secured convertible three year notes in September 2009. These notes accrue interest at an annual percentage rate of 12% payable at maturity in September 2012, unless earlier converted into preferred shares pursuant to a qualified financing of at least $10,000,000 prior to the expiration of the note. In the event of liquidation, the Company has agreed to provide 2.5 times the principal value of the notes, plus interest, upon a change in control. As of September 30, 2010, the Company recorded an additional $5,238,000 as interest expense related to the outstanding principal balance, plus an additional $945,000 as interest expense related to accrued interest. As of December 31, 2009, the Company had recorded $122,000 of interest expense related to this outstanding no te.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

In conjunction with the September 2009 convertible notes, the Company issued warrants to purchase 308,153 shares of a future series of convertible preferred stock if it raises an aggregate amount of $10,000,000 in subsequent issuance of convertible preferred stock and closes the financing prior to the maturity date. These warrants are exercisable through September 2012 at a purchase price of $0.56 per share. The allocated fair value of these warrants, determined using the Black-Scholes option pricing model, was approximately $523,000 as of December 31, 2009, which was recorded as a debt discount. As of September 30, 2010 and December 31, 2009, approximately $478,000 and $44,000, respectively, was amortized to interest expense. In addition, a beneficial conversion feature also resulted from the i ssuance of these warrants with a fair value of approximately $523,000 and was recognized as interest expense in 2009. Upon acquisition of the Company on October 1, 2010, these warrants were extinguished unexercised (Note 9).

In September 2010, the Company entered into a $1,000,000 loan arrangement with PLX. Interest is payable on outstanding borrowings at 0.46% per annum. The principal of this note, plus interest accrued up to but not including the maturity date, will be due and payable in full, on the date of maturity that is earlier of: (a) the date on which the Company completes a transaction (or last in a series of transactions) constituting a capital raise or (b) March 31, 2011.

NOTE 4 - CONVERTIBLE PREFERRED STOCK

Convertible preferred stock (preferred stock) as of September 30, 2010 consisted of the following (in thousands):

			Shares				Proceeds net
	Shares		issued and		Liquidation		of issuance
	authorized		outstanding		amount		costs
Series A and A-2		8,200		150	$	150	$	150
Series A-1 and A-3		7,692		476		620		462
Series B and B-1		10,303		6,100		8,881		8,815
Series C and C-1		12,000		9,701		16,728		16,639
Series D and D-1		15,900		9,848		22,371		22,255
Series E and E-1		7,500		2,621		5,962		5,788
Series F		19,200		6,613		8,156		7,938

		80,795		35,509	$	62,868	$	62,047

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009 & #160;

The holders of preferred stock have various rights and preferences as follows:

Dividends - The holders of Series F shall be entitled to receive noncumulative dividends when and if declared by the Board of Directors, prior and in preference to any payment of any dividend on any series of the preferred stock, common stock or any other class of stock, at a rate of $0.0987 per share. After payment or setting aside of payment for the payment of dividends for Series F, the holders of Series E and Series E-1 shall be entitled to receive noncumulative dividends when and if declared by the Board of Directors, prior and in preferen ce to any payment of any dividend on the any series of the preferred stock, common stock or any other class of stock, at a rate of $0.1817 per share. After payment or setting aside of payment for the payment of dividends for Series E, the holders of Series D and Series D-1 shall be entitled to receive noncumulative dividends when and if declared by the Board of Directors, prior and in preference to any payment of any dividend on the any series of the preferred stock, common stock or any other class of stock, at a rate of $0.1817 per share. After payment or setting aside of payment for the payment of dividends for Series D, the holders of Series C and Series C-1 shall be entitled to receive noncumulative dividends when and if declared by the Board of Directors, prior and in preference to any payment of any dividend on the any series of the preferred stock, common stock, or any other class of stock, at a rate of $0.1379 per share. After payment or setting as ide of payment for the payment of dividends for Series C, the holders of Series B and Series B-1 shall be entitled to receive noncumulative dividends when and if declared by the Board of Directors, prior and in preference to any payment of any dividend on any series of

the preferred stock, common stock or any other class of stock, at a rate of $0.1165 per share. The holders of Series A and Series A-1 and Series A-2 and Series A-3 shall be entitled to receive noncumulative dividends when and if declared by the Board of Directors, prior and in preference to any payment of any dividend on the common stock, at a rate of $0.08 and $0.104 per share, respectively.

No dividends on common or preferred stock have been declared by the Board of Directors from inception through September 30, 2010.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009 & #160;

Liquidation- In the event of any liquidation, dissolution or winding-up of the Company, either voluntary or involuntary, the holders of Series F shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the common stock, Series A and Series A-2, Series A-1 and Series A-3, Series B and Series B-1, Series C and Series C-1, Series D and Series D-1, Series E and Series E-1 or any other class of stock by reason of their ownership thereof, the amount of $1.2332 per share for each share of Series F then held by them equal to the sum of three times the liquidation preference specified for such share of Series F. In addition, if, upon the occurrence of such event, the assets and funds thus distributed among the holders of Series F are insufficient to permit the payment to such holders of the full preferential amounts for Series F, then the entire assets of the Company legally available shall be distributed ratably among the holders of Series F in proportion to the preferential amount each holder would have otherwise received.

After payment to the holders of Series F of full preferential amounts as set forth above, the holders of Series E and Series E-1 shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the common stock, Series A and Series A-2, Series A-1 and Series A3, Series B and Series B-1, Series C and Series C-1, Series D and Series D-1 or any other class of stock by reason of their ownership thereof, the amount of $2.2716 per share for each share of Series E and Series E-1 then held by them, and an amount equal to all accrued and declared but unpaid dividends on Series E and Series E-1. In addition, if, upon the occurrence of such event, the assets and funds thus distributed among the holders of Series E and Series E-1 are insu fficient to permit the payment to such holders of the full preferential amounts for Series E and Series E-1, then the entire assets of the Company legally available shall be distributed ratably among the holders of Series E and Series E-1 in proportion to the preferential amount each holder would have otherwise received.

After payment to the holders of Series E and Series E-1 of full preferential amounts as set forth above, the holders of Series D and Series D-1 shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the common stock, Series A and Series A-2, Series A-1 and Series A-3, Series B and Series B-1, Series C and Series C-1 or any other class of stock by reason of their ownership thereof, the amount of $2.2716 per share for each share of Series D and Series D-1 then held by them, and an amount equal to all accrued and declared but unpaid dividends on Series D and Series D-1. In addition, if, upon the occurrence of such event, the assets and funds thus distributed among the holders of Series D and Series D-1 are insufficient to permit the payment to such holders of the full preferential amounts for Series D and Series D-1, then the entire assets of the Company legally available shall be distributed ratably among the holders of Series D and Series D-1 in proportion to the preferential amount each holder would have otherwise received.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009 & #160;

After payment to the holders of Series D and Series D-1 of full preferential amounts as set forth above, the holders of Series C and Series C-1 shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the common stock, Series A and Series A-2, Series A-1 and Series A-3, Series B and Series B-1, or any other class of stock by reason of their ownership thereof, the amount of $1.7243 per share for each share of Series C and Series C-1 then held by them, and an amount equal to all accrued and declared but unpaid dividends on Series C and Series C-1. In addition, if, upon the occurrence of such event, the assets and funds thus distributed among the holders of Series C and Series C-1 are insufficient to permit the payment to such holders of the full preferential amounts for Series C and Series C-1, then the entire assets of the Company legally available shall be distributed ratably among the holders of Series C and Series C-1 in proportion to the preferential amount each holder would have otherwise received.

After payment to the holders of Series C and Series C-1 of full preferential amounts as set forth above, the holders of Series B and Series B-1 shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock, Series A and Series A-2 and of Series A-1 and Series A-3 or any other class of stock by reason of their ownership thereof, the amount of $1.4559 per share for each share of Series B and Series B-1 then held by them, and an amount equal to all accrued and declared but unpaid dividends on Series B and Series B-1. In addition, if, upon the occurrence of such event, the assets and funds thus distributed among the holders of Series B and Series B-1 are insufficient to permit the payment to such holders of the full pre ferential amounts for Series B and Series B-1, then the entire assets of the Company legally available shall be distributed ratably among the holders of Series B and Series B-1 in proportion to the preferential amount each holder would have otherwise received.

After payment to the holders of Series B and Series B-1 of full preferential amounts as set forth above, the holders of Series A and Series A-2 and of Series A1 and Series A-3 shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the common stock or any other class of stock by reason of their ownership thereof, the amount of $1.00 and $1.30 per share for each share of Series A and Series A-2 and of Series A1 and Series A-3, then held by them, and an amount equal to all accrued and declared but unpaid dividends on Series A and Series A-2 and on Series A1 and Series A-3. If, upon the occurrence of such event, the assets and funds thus distributed among the holders of Series A and Series A-2 and of Series A1 and Series A-3 are insuff icient to permit the payment to such holders of the full preferential amounts for Series A and Series A-2 and for Series A1 and Series A-3, then the entire assets of the Company legally available for distribution shall be distributed, after payment to the holders of Series B and Series B-1 of the amounts as described earlier, ratably among the holders of Series A and Series A-2 and of Series A1 and Series A-3 in proportion to the preferential amount each holder would have otherwise received.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009 & #160;

Conversion - The holders of Series A, Series A-1, Series A-2, Series A-3, Series B and Series B-1, Series C and Series C-1, Series D and Series D1, Series E and Series E-1 and Series F shall have conversion rights as follows: each share of preferred stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share into such number of fully paid and nonassessable shares of common stock as is determined by dividing the original issue price of the preferred stock, plus accrued and unpaid dividends due on the preferred stock, by the applicable conversion price of the preferred stock as defined in the preferred stock agreement, in effect at the time of the conversion. The initial co nversion price of Series A and Series A-2 is $1.00, and Series A-1 and Series A-3, Series B and Series B-1, Series C and Series C-1, Series D and Series D-1, Series E and Series E-1 and Series F are $1.2332 per share. The conversion price is subject to adjustment for changes in capital stock including dilutive issuances.

Each share of preferred stock shall automatically be converted into shares of common stock at the then effective preferred stock conversion price at the time in effect for such shares immediately upon: (i) the filing of an initial public offering, which results in gross offering proceeds to the Company of at least $25,000,000, the public offering price of which was not less than $7.28 or (ii) the approval of the holders of at least 66 2/3% of the preferred stock then outstanding; however, a separate consent of at least 75% of the aggregate shares of Series C then outstanding shall be required for any conversion of Series C.

Exchange of certain then existing preferred stock - Pursuant to the Company’s Series F Preferred Stock Purchase Agreement dated May 14, 2010, each holder of the Company’s then preferred stock that purchased, prior to 5:00 p.m. on June 3, 2010, its full pro rata portion of Series F offered in the financing was entitled to exchange the number of shares of Series A, Series A-1, Series B, Series C, Series D and Series E (collectively, Existing Preferred Stock) owned by such holder for shares of newly created preferred stock (collectively, New Preferred Stock) at the following ratios: (i) each share of such Series A was exchangeable for one share of fully paid, nonassessable share of Se ries A-2, (ii) each share of such Series A-1 was exchangeable for one share of fully paid, nonassessable share of Series A-3, (iii) each such share of Series B was exchangeable for one share of fully paid, nonassessable share of Series B-1, (iv) each such share of Series C was exchangeable for one share of fully paid, nonassessable share of Series C-1, (v) each such share of Series D was exchangeable for one share of fully paid, nonassessable share Series D-1 and (vi) each such share of Series E was exchangeable for one share of fully paid, nonassessable share of Series E-1. As of the final closing of the financing, an aggregate of 8,200,001 shares of Series A, 5,914,656 shares of Series A-1, 6,100,263 shares of Series B, 9,700,936 shares of Series C, 9,848,105 shares of Series D and 2,620,842 shares of Series E were exchanged for respective shares of New Preferred Stock.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009 & #160;

Automatic conversion of certain then existing preferred stock - Pursuant to the Company’s Amended and Restated Certificate of Incorporation filed on May 14, 2010 in connection with the financing, each share of Existing Preferred Stock remaining outstanding as of 5 p.m. on June 3, 2010 was automatically converted into one fully paid, nonassessable share of the Company’s common stock. Pursuant to the foregoing, an aggregate of zero shares of Series A, 1,777,768 shares of Series A-1, 4,202,642 shares of Series B, 1,853,624 shares of Series C, 1,157,344 shares of Series D and 349,350 shares of Series E were converted into corresponding shares of common stock.

Conversion of Series A-2 and Series A-3 - During September 2010, the investors voted to convert 8,050,001 shares of Series A-2 and 5,438,798 of Series A-3 into nonassessable shares of the Company’s common stock.

Voting rights - The holders of each share of preferred stock are entitled to the number of votes equal to the number of shares of common stock into which such share is convertible.

Preferred stock warrants - From time to time the Company has issued warrants to purchase its preferred stock. The Company has the following preferred stock warrants outstanding as of September 30, 2010.

Warrants to purchase 103,029 shares of Series C, issued with respect to a line of credit in January 2006 and expired in 2007, exercisable at $1.456 per share, with a contractual term of ten years. Upon the consummation of the merger, the warrant shall be extinguished and be no of further force and effect and no payment shall be due.

Warrants to purchase 115,988 shares of Series C, issued with respect to the line of credit in May 2007, exercisable at $1.72 per share, with a contractual term of seven years. Upon the consummation of the merger, the warrant shall be extinguished and be no of further force and effect and no payment shall be due.

·	Warrants to purchase 308,153 shares of preferred stock, issued with debt in September 2009, exercisable at $0.56 per share, with a contractual term of ten years. Upon the consummation of the merger, the warrant shall be extinguished and be no of further force and effect and no payment shall be due.

Warrants to purchase shares of preferred stock, issued in connection with the Series E financing in September 2009, exercisable at $0.56 per share, with a contractual term of ten years. These warrants were accounted for as a deemed dividend in the current period. Upon conversion of the existing preferred stock, certain warrants were converted to common stock warrants. Upon the consummation of the merger, the warrant shall be extinguished and be no of further force and effect and no payment shall be due.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009 & #160;

·	Warrants to purchase 128,704 shares of common stock issued with Series F financing exercisable at $2.2716 per share, with a contractual term of ten years. Upon the consummation of the merger, the warrant shall be extinguished and be no of further force and effect and no payment shall be due.

NOTE 5 - COMMON STOCK

The Company’s Articles of Incorporation, as amended, authorize the Company to issue 160,000,000 shares of common stock. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the priority rights of holders of all classes of preferred stock outstanding.

During the year ended December 31, 2009, the Company issued 16,000 shares of common stock to consultants for services performed. The estimated fair value was not significant.

NOTE 6 - STOCK-BASED COMPENSATION

Stock-based compensation expense for all share-based payment awards granted after January 1, 2006, and for previous awards modified, repurchased or cancelled after January 1, 2006, is based on the grant-date calculated value. The Company recognizes these compensation costs, net of estimated forfeiture rate on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of four years. The Company estimated the forfeiture rate for the year based on its historical experience for annual grant years where the majority of the vesting terms have been satisfied.

Stock option plan - In August 2003, the Company adopted the 2003 Stock Option Plan (the Plan). The Plan provides for the granting of stock options to employees, directors and consultants of the Company. Options granted under the Plan may be either incentive stock options (ISOs) or nonqualified stock options (NSOs). ISOs may be granted only to Company employees. NSOs may be granted to Company employees and consultants. The Company reserved 13,785,983shares of common stock for issuance under the Plan. In addition, founder shares are granted under terms similar to options granted under the Plan.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009 & #160;

Options under the Plan may be granted for periods of up to ten years and priced accordingly:

(i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively and (ii) the exercise price of an ISO and NSO granted to a greater than 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. Options generally vest over four years; 25% at the end of one year and 1/48 per month thereafter. The Plan allows, but does not require, for each option to be immediately exercisable subject to the Company’s repurchase rights until vested. All options granted to date have included this provision.

During the nine-month period ended September 30, 2010, the Company recorded employee and nonemployee stock-based compensation expense of approximately $134,000 and $1,000, respectively.

Stock option activity for the nine-month period ended September 30, 2010, is as follows:

				Weighted		Weighted average
				average		remaining
				exercise price		contratual life
Options	Shares			per share		(in years)
Outstanding at December 31, 2009		9,855,882		$	0.18		5
Options granted		741,119			0.15
Options exercised		(4,000	)		0.15
Options cancelled		(1,967,772	)		0.14

Outstanding at September 30, 2010		8,625,229		$	0.19

Vested and expected to vest at
September 30, 2010 (1)		8,481,558		$	0.19		5

Exercisable at September 30, 2010		5,612,530		$	0.19		5

(1)

The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding options.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009 &# 160;

The total pretax intrinsic value of options exercised during the period ended September 30, 2010 and year ended December 31, 2009, was zero and approximately $2,300, respectively. The intrinsic value is the difference between estimated fair value of the Company’s common stock at the date of exercise and the exercise price for in-the-money options. The weighted average grant date calculated fair value of options granted during the nine-months period ended September 30, 2010 and the year ended December 31, 2009 was $0.08 and $0.08, respectively.

As of September 30, 2010, there is approximately $190,000 of unamortized stock-based compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 2.5 years.

The computed value of option grants for the period were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:

	Stock options
	September 30,			December 31,
	2010			2009

Expected dividend yield (1)		0	%		0	%
Risk-free interest rate (2)		2.14% - 2.78	%		0.49% - 2.59	%
Expected volatility (3)		58	%		58	%
Expected life (years) (4)		6.08			6.08

(1)

The Company has no history or expectation of paying cash dividends on its common stock.

(2)

The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant.

(3)

The Company identified similar entities that are publicly traded to determine the volatility summarized above while applying an additional risk factor based on their limited period of operations.

(4)

The expected life represents the period of time that options granted are expected to be outstanding.

Stock-based compensation to nonemployees - Stock-based compensation expense related to stock options granted to nonemployees is recognized as earned. At each reporting date, the Company revalues the stock-based compensation using the Black-Scholes option pricing model. As a result, stock-based compensation expense will fluctuate as the estimated fair market value of the Company’s common stock fluctuates.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009 &# 160;

NOTE 7 - INCOME TAXES

The components of the net deferred tax assets are approximately as follows as of (in thousands):

	September 30,			December 31,
	2010			2009
Net operating loss carryforwards	$	22,995		$	20,088
Tax credit carryforwards		7,466			6,349
Accruals and reserves		1,564			409
Depreciation and amortization		19,452			11,026

Total deferred taxes		51,477			37,872

Less: valuation allowance		(51,477	)		(37,872	)

Total net deferred tax assets	$	-		$	-

Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The net valuation allowance increased by approximately $13,605,000 from 2009 to 2010. As of September 30, 2010, the Company had NOL carryforwards for federal and state tax purposes of approximately $57,974,000 and $56,288,000, respectively. The NOL carryforwards will expire at various dates beginning in the years 2023, unless previously utilized. The Company also has federal and state research and development tax credit carryforwards of approximately $3,964,000 and $3,502,000, respectively. The federal tax credits will expire at various dates beginning in the year 2023, unless previ ously utilized. The state tax credits do not expire and will carry forward indefinitely until utilized.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009 &# 160;

Utilization of the NOL and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by the Internal Revenue Code (the Code), as well as similar state provisions. In general, an “ownership change” as defined by the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. Since the Company’s formation, the Company has raised capital through the issuance of capital stock on several occasions which, combined with the purchasing stockholders’ subsequent disposition of those shares, may have resulted in such an ownership change, or could result in an ownership change in the future upon subsequent disposition. The annual limitation may result in the expiration of NOL and tax credit carryforwards before utilization.

The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company’s formation due to the complexity and cost associated with such a study, and the fact that there may be additional such ownership changes in the future. If the Company has experienced an ownership change at any time since its formation, utilization of the NOL or tax credit carryforwards to offset future taxable income and taxes, respectively, would be subject to an annual limitation under the Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in ex piration of all or a portion of the NOL or tax credit carryforwards before utilization. The Company maintains a full valuation allowance for other deferred tax assets due to its historical losses and uncertainties surrounding its ability to generate future taxable income to realize these assets.

TERANETICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009 &# 160;

NOTE 8 - COMMITMENTS

Operating leases - The Company leases its office facilities under noncancelable operating leases. Rent expense related to the Company’s operating leases for the nine-month period ended September 30, 2010 and December 31, 2009, were approximately $343,000 and $576,000, respectively.

Future minimum payments under noncancelable leases are approximately as follows for the 12 month periods ending September 30, 2010 (in thousands):

2011	$	546
2012		421
2013		14

	$	981

Employee retention plan - The Company entered into an agreement in May 2010 to provide employees with an incentive and financial security to continue their service until a change of control as the Company had been working to find a buyer. The plan provides for 10% of the value of any consideration being paid by an acquirer in the event of a change in control to employees and management, prior to any payments to stockholders. The Company has accrued approximately $5,345,000 under the retention plan (Note 2) as a result of the merger with PLX (Note 9).

NOTE 9 - SUBSEQUENT EVENTS

Change in control - On September 23, 2010, the Company signed a definitive merger agreement in which all of the outstanding shares of capital stock of the Company will be acquired by PLX. The merger was completed on October 1, 2010.

Under the terms of the agreement, PLX will acquire all of the outstanding shares of the Company’s stock in exchange for: (i) 7,399,980 shares of PLX valued at approximately $27,454,000 based on the closing price on October 01, 2010, (ii) cash of approximately $1,000,000 and (iii) two promissory notes aggregating approximately $6,900,000. The first note, totaling $5,400,000, is due one year from closing, and the second note, totaling $11,517,000 is due three years from closing. PLX assumed or repaid approximately $15,879,000 of the Company’s obligations, including indebtedness, transaction expenses incurred by the Company and cash bonuses payable to Company employees upon closing.

EX-99.2 4 plx_exhibit992-100110.htm PLX TECHNOLOGY, INC. EXHIBIT 99.2 plx_exhibit992-100110.htm

Exhibit 99.2

UNAUDITED PROFORMA CONDENSED COMBINED FINANCIAL STATEMENTS

On October 1, 2010, PLX Technology, Inc. (“PLX” or the “Company”) completed the acquisition of Teranetics Inc. (“Teranetics”) pursuant to the Agreement and Plan of Merger (“Merger Agreement”) dated September 23, 2010.

For the purpose of the unaudited pro forma condensed combined financial statements, the acquisition was assumed to have occurred as of January 1, 2009 with respect to the unaudited pro forma condensed combined statements of operations and as of September 30, 2010 with respect to the unaudited pro forma condensed combined balance sheet.

The acquisition has been accounted for using the purchase method of accounting in accordance with Accounting Standards Codification (“ASC”) 805 - Business Combinations. Under the purchase method of accounting, the total purchase consideration of the acquisition is allocated to the tangible assets and identifiable intangible assets and liabilities assumed based on their relative fair values. The excess of the purchase consideration over the net tangible and identifiable intangible assets is recorded as goodwill. The purchase price allocation is preliminary since the valuation of the net tangible and identifiable intangible assets is still being finalized. Accordingly, the pro forma adjustments related to the purchase price allocation and certain other adjustments are preliminary and h ave been made solely for the purpose of providing unaudited pro forma condensed combined financial statements. Any revisions to the purchase price allocation are not expected to have a material impact on the statements of operations.

The unaudited pro forma condensed combined statements of operations do not reflect nonrecurring charges resulting from the acquisition transactions. The nonrecurring charges adjusted out in the proforma condensed combined statement of operations which resulted from the acquisition include an interest premium on a convertible note triggered by the change in control, a bonus to Teranetics’ chief executive officer for completion of the acquisition, legal and investment banking acquisition related expenses, and a retention bonus to Teranetics’ employees. In addition, the future costs under the PLX retention bonus are not reflected in the proforma condensed combined statements of operations as they are non-recurring.

The unaudited pro forma combined condensed financial information is for informational purposes only and does not purport to represent what the Company’s actual results would have been if the acquisition had been completed as of the date indicated above, or that may be achieved in the future. The unaudited pro forma combined condensed statements of operations do not include the effects of any cost savings from operating efficiencies or synergies that may result from the acquisition.

The unaudited pro forma combined condensed financial statements, including the notes thereto, should be read in conjunction with the Company’s historical financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2009 filed on March 4, 2010 and quarterly reports on Form 10-Q for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010 filed on May 5, 2010, August 8, 2010 and November 4, 2010, respectively.

PLX TECHNOLOGY, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET

(in thousands)

	As of September 30, 2010						Pro Forma				Pro Forma
	PLX			Teranetics			Adjustments				Combined

ASSETS
Current Assets:

Cash and cash equivalents	$	25,100		$	113		$	(922	)	(a)	$	8,412
								(15,879	)	(b)
Short-term investments		13,727			-			-				13,727
Accounts receivable, net		12,921			442			-				13,363
Inventories		14,168			444			-				14,612
Other current assets		3,519			510			(1,000	)	(c)		2,879
								(150	)	(d)
Total current assets		69,435			1,509			(17,951	)			52,993
Property and equipment, net		11,452			673			-				12,125
Goodwill		1,367			-			25,389		(e)		26,756
Other purchased intangible assets		3,695			-			30,500		(f)		34,195
In-process IPR&D		-			-			-				-
Long-term investments		4,305			-			-				4,305
Other assets		2,192			42			-				2,234
Total assets	$	92,446		$	2,224		$	37,938			$	132,608

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable	$	7,320		$	2,890		$	(1,247	)	(b)	$	8,963
Line of credit		-			2,262			(1,000	)	(c)		-
								(1,262	)	(b)
Convertible promissory note		-			8,728			(8,728	)	(b)		-
Accrued compensation and benefits		3,256			7,386			(2,664	)	(b)		6,631
								(1,347	)	(g)
Accrued commissions		729			-			-				729
Income taxes payable		812			-			-				812
Short term capital lease obligation		1,131			-			-				1,131
Deferred revenue		-			500			(500	)	(d)		-
Other accrued expenses		1,437			3,018			(1,978	)	(b)		2,477
Total current liabilities		14,685			24,784			(18,725	)			20,744
Long-term capital lease obligation		295			-			-				295
Long-term notes payable		-			-			6,650		(h)		6,650
Total liabilities		14,980			24,784			(12,075	)			27,689

Stockholders' equity (deficit):
Convertible preferred stock		-			62,047			(62,047	)	(i)		-
Common stock		37			27			7		(j)		44
								(27	)	(i)
Additional paid-in capital		155,098			32,565			27,447		(j)		182,545
								(32,565	)	(i)
Accumulated other comprehensive income		(122	)		-			-				(122	)
Accumulated deficit		(77,547	)		(117,199	)		117,199		(i)		(77,547	)
Total stockholders' equity (deficit)		77,466			(22,560	)		50,014				104,920
Total liabilities and stockholders' equity (deficit)	$	92,446		$	2,224		$	37,938			$	132,608

PLX TECHNOLOGY, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

(in thousands)

	For the year ended December 31, 2009
							Pro Forma				Pro Forma
	PLX			Teranetics			Adjustments				Combined
Net revenues	$	82,832		$	3,454		$	-			$	86,286
Cost of revenues		35,900			2,495			-				38,395
Gross margin		46,932			959			-				47,891

Operating expenses
Research and development		31,387			14,039			-				45,426
Selling, general and administrative		24,719			3,628			-				28,347
Acquisition and restructuring related costs		2,900			-			-				2,900
Amortization of purchased intangible assets		3,416			-			8,250		(k)		11,666
Total operating expenses		62,422			17,667			8,250				88,339
Operating loss		(15,490	)		(16,708	)		(8,250	)			(40,448	)
Interest income		622			58			-				680
Interest expense		(450	)		(1,139	)		(187	)	(l)		(637	)
								1,139		(m)
Other income (expense), net		164			-			-				164
Loss on fair value remeasurement		(3,842	)		-			-				(3,842	)
Loss before provision for income taxes		(18,996	)		(17,789	)		(7,298	)			(44,083	)
Provision for (benefit from) income taxes		(194	)		-			-		(q)		(194	)
Net loss	$	(18,802	)	$	(17,789	)	$	(7,298	)		$	(43,889	)

Basic and diluted net loss per share	$	(0.53	)								$	(1.02	)

Shares used to compute basic and diluted per share amounts		35,653						7,400				43,053

PLX TECHNOLOGY, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

(in thousands)

	For the nine months ended September 30, 2010
							Pro Forma				Pro Forma
	PLX			Teranetics			Adjustments				Combined
Net revenues	$	88,774		$	2,638		$	-			$	91,412
Cost of revenues		37,010			1,905			-				38,915
Gross margin		51,764			733			-				52,497

Operating expenses
Research and development		23,392			17,931			(4,007	)	(n)		37,316
Selling, general and administrative		19,734			5,235			(1,338	)	(n)		22,284
								(1,347	)	(o)
Acquisition and restructuring related costs		510			2,029			(2,539	)	(p)		-
Amortization of purchased intangible assets		1,945			-			4,950		(k)		6,895
Total operating expenses		45,581			25,195			(4,281	)			66,495
Operating loss		6,183			(24,462	)		4,281				(13,998	)
Interest income		163			2			-				165
Interest expense		(50	)		(6,939	)		(30	)	(l)		(80	)
								6,939		(m)
Other income (expense), net		(5	)		-			-				(5	)
Income (loss) before provision for income taxes		6,291			(31,399	)		11,190				(13,918	)
Provision for (benefit from) income taxes		1,948			-			-		(q)		1,948
Net income (loss)	$	4,343		$	(31,399	)	$	11,190			$	(15,866	)

Basic net income (loss) per share	$	0.12									$	(0.36	)

Shares used to compute basic per share amounts		37,068						7,400				44,468

Diluted net income (loss) per share	$	0.11									$	(0.36	)

Shares used to compute diluted per share amounts		37,795						7,400				44,468
								(727	)

PLX TECHNOLOGY, INC.

NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

1. BASIS OF PRO FORMA PRESENTATION

The unaudited pro forma financial combined condensed balance sheet as of September 30, 2010 is based on the historical financial statements of the Company and Teranetics after giving effect to the acquisition adjustments resulting from the acquisition of Teranetics. The unaudited pro forma combined balance sheet as of September 30, 2010 is presented as if the acquisition had occurred on September 30, 2010.

The unaudited pro forma combined statements of operations for the year ended December 31, 2009 and the nine months ended September 30, 2010 are based on the historical financial statements of the Company for the year and nine months then ended and Teranetics’ financial statements for the year and nine months then ended after giving effect to the acquisition adjustments. The unaudited pro forma combined statements of operations are presented as if the acquisition had occurred on January 1, 2009.

2. PURCHASE PRICE ALLOCATION

As a part of the Merger Agreement, the Company acquired all of the outstanding shares of capital stock of Teranetics for a purchase price of $34,679,000, consisting of common stock of PLX, cash and promissory notes.

	Common Stock		Cash at		Notes		Bridge
	of PLX		Closing		A and B		Note		Total

Purchase price	$	26,406	$	887	$	6,386	$	1,000	$	34,679
Allocated to CEO bonus		1,048		35		264		-		1,347
Payment of assumed liabilities		-		15,879		-		-		15,879
Total	$	27,454	$	16,801	$	6,650	$	1,000	$	51,905

Under the merger agreement, PLX issued 7,399,980 shares of its common stock, with a closing price of $3.71 at date of acquisition for an aggregate value of approximately $27.5 million and cash of $922,000. In addition PLX issued two promissory notes in the aggregate amount of approximately $6.9 million. One note is for the principal amount of approximately $1.5 million and is due 3 years after the closing of the Merger, and the other note is for the principal amount of $5.4 million and is due 12 months after the closing of the Merger (this $5.4 million note is to be delivered into an escrow fund that may be used to satisfy indemnity obligations owed to PLX). The stated interest rate on the promissory notes is 0.46%. In accordance with ASC 805 , the promissory notes were fair valued based on market interest rates and the assessed fair value of the promissory notes are approximately $6.7 million.

Under a prior employment agreement between Teranetics and its chief executive officer, the chief executive officer was entitled to receive a bonus for services rendered based on the merger consideration amount. The agreement provided that the chief executive officer was to receive his distribution in the same manner and timing in which the shareholders of Teranetics receive their purchase consideration and did not require continuing employment after the merger. The chief executive officer’s retention bonus of approximately $1.3 million is included in the stock, cash and promissory notes issued.

PLX made a bridge loan to Teranetics in the amount of $1 million prior to entering into the Merger Agreement. The bridge note was entered into during negotiations to support the working capital needs of Teranetics and in contemplation of the Merger. Upon closing, the $1 million bridge note is also considered part of the merger consideration provided as part of the purchase price.

In addition to consideration transferred to former stockholders of Teranetics, PLX made payments at closing in the amount of $15.9 million to repay debt and other assumed liabilities. The payments consisted of $11.2 million for convertible promissory note and line of credit debt, along with accrued interest, $2.7 million to employees of Teranetics for the initial payments under the Teranetics Employee Retention Plan and $2.0 million of payables for legal and investment banking services performed prior closing in connection with the merger.

The allocation of the purchase price paid for Teranetics is based on the estimated fair values of the acquired assets and liabilities assumed of Teranetics as of October 1, 2010. The allocation of the purchase price is preliminary since the valuation of the net tangible and identifiable intangible assets is still being finalized. The final amounts allocated to assets and liabilities could change from the information presented in the unaudited pro forma combined condensed financial statements and these changes could be material.

The preliminary allocation of purchase price based on estimated fair values (in thousands):

Net liabilities	$	(21,210	)
Indentifiable intangible assets
Existing and core technology		20,100
Customer Relationships		10,200
Trade name		200
In process research and development (1)		-
Goodwill		25,389
Total purchase price	$	34,679

(1)

Current development efforts are not expected to generate positive cash flow contributions

Following is a reconciliation of the net tangible assets (in thousands):

Net stockholders' deficit per historical Teranetics financial statements as of 9/30/10	$	(22,560	)
Adjustment to bridge note (1)		1,000
Adjustment to deferred cost (2)		(150	)
Adjustment to deferred revenue (2)		500
Net tangible assets	$	(21,210	)

(1)	Refer to item (c) in Footnote 3
(2)	Refer to item (d) in Footnote 3

Intangible assets

The fair value of intangible assets of $30.5 million has been allocated to the following asset categories:

					Nine Month			Estimated
	Preliminary		First Year		of Year 2		Amortization	Useful
	Fair Value		Amortization		Amortization		Method	Life
Existing and core technology	$	20,100	$	3,350	$	2,512	Straight line	6 Years
Customer Relationships		10,200		4,800		2,363	Accelerated	3.5 Years
Trade Name		200		100		75	Straight line	2 Years
Totals	$	30,500	$	8,250	$	4,950

3. PRO FORMA ADJUSTMENTS

The unaudited pro forma combined condensed balance sheet and statement of operations gives effect to the following adjustments:

(a)	To record payment at closing to the escrow account and shareholders representative fund.

(b)	To record payment of notes payable and other assumed liabilities at closing that were required to be paid under the terms of the merger agreement.

(c)	To adjust the bridge note between PLX and Teranetics entered into during the negotiation to purchase price consideration.

(d)	To eliminate Teranetics deferred revenue and associated deferred cost for development work on behalf of a customer as no there was no performance obligation required to earn this revenue and no fair value was recorded upon acquisition.

(e)	To record goodwill for the excess of cost over the fair value of acquired net tangible and intangible assets.

(f)	To record the preliminary fair values of Teranetics intangible assets acquired.

(g)	To adjust retention bonus accrual to the chief executive officer for the portion paid in cash and stock at closing and amounts allocated to the notes issued in connection with acquisition to match the distribution to stockholders as per the initial retention and subsequent merger agreement.

(h)	To record the fair value of the debt issued as part of the merger consideration and the portion related to the chief executive officer retention bonus references in (g) above.

(i)	To eliminate Teranetics preferred and common stock, paid-in capital and accumulated deficit as of the date of acquisition.

(j)	To record the issuance of 7.4 million common PLX shares valued at $3.71 per share or $27,454,000

(k)	To record amortization expense of acquired intangibles resulting from the Teranetics acquisition.

(l)	To record interest expense related to the notes issued as a part of the merger consideration.

(m)	To adjust the interest expense of Teranetics line of credit and notes as if the debt was paid as of acquisition as required per the merger agreement.

(n)	To adjust the Teranetics retention bonus since it is a non-recurring charge recorded in connection with the merger.

(o)	To adjust the Teranetics' CEO’s bonus under a pre-existing management compensation agreement. since it is a non-recurring charge resulting from the merger.

(p)	To adjust acquisition related costs incurred prior to acquisition.

(q)	Since the Company is in a net operating loss position with a fully reserved deferred tax asset, the income tax effect of the adjustments to the proforma statement of operations is assumed to be zero.

4. PRO FORMA COMBINED NET LOSS PER SHARE

The pro forma basic and diluted net income per share amounts presented are based upon the weighted average number of common shares outstanding during the period presented. The entire 7.4 million shares issued in connection with the merger were included in the calculation as if they were issued on January 1, 2009. As the combined company incurred a loss for the periods presented, the effect of dilutive securities, amounting to 727,000 shares, has been excluded from the computation of proforma combined diluted loss per share, as the impact would be anti-dilutive.

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