Vitesse Semiconductor (VTSS) 10-Q 2015 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 ______________________________________

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2014

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                 

Commission file number 1-31614

 ______________________________________

VITESSE SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	77-0138960
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4721 Calle Carga

Camarillo, California 93012

(Address of principal executive offices)(zip code)

Registrant’s telephone number, including area code: (805) 388-3700

 ______________________________________

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

As of January 30, 2015, there were outstanding 68,977,645 shares of the registrant’s Common Stock, $0.01 par value.

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED DECEMBER 31, 2014

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Consolidated Balance Sheets as of December 31, 2014 and September 30, 2014	3
	Unaudited Consolidated Statements of Operations for the Three Months Ended December 31, 2014 and 2013	4
	Unaudited Consolidated Statements of Stockholders’ Equity for the Three Months Ended December 31, 2014	5
	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2014 and 2013	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 6.	Exhibits	25

2

PART I. FINANCIAL INFORMATION

ITEM 1:  FINANCIAL STATEMENTS

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

	December 31, 2014			September 30, 2014
	(in thousands, except par value)
ASSETS
Current assets:
Cash	$	31,745		$	71,903
Accounts receivable	10,081			10,850
Inventories	15,705			12,792
Restricted cash	1,608			794
Prepaid expenses and other current assets	2,170			1,047
Total current assets	61,309			97,386
Property, plant and equipment, net	2,913			2,858
Other intangible assets, net	1,811			1,476
Other assets	1,511			3,104
	$	67,544		$	104,824
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,947		$	6,814
Accrued expenses and other current liabilities	9,548			12,472
Current portion of debt, net	—			32,727
Deferred revenue	6,302			4,902
Total current liabilities	23,797			56,915
Other long-term liabilities	225			234
Long-term debt, net	16,508			16,417
Total liabilities	40,530			73,566
Commitments and contingencies, See note 10
Stockholders’ equity:
Preferred stock, $0.01 par value: 10,000 shares authorized; no shares issued or outstanding	—			—
Common stock, $0.01 par value: 250,000 shares authorized; 68,426 and 67,703 shares outstanding at December 31, 2014 and September 30, 2014, respectively	684			677
Additional paid-in-capital	1,925,774			1,924,984
Accumulated deficit	(1,899,444		)	(1,894,403		)
Total stockholders’ equity	27,014			31,258
	$	67,544		$	104,824

See accompanying notes to unaudited consolidated financial statements.

3

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended December 31,
	2014			2013
	(in thousands, except per share data)
Net revenues:
Product revenues	$	23,969		$	24,863
Intellectual property revenues	786			2,220
Net revenues	24,755			27,083
Costs and expenses:
Cost of product revenues	10,053			10,676
Engineering, research and development	11,337			10,679
Selling, general and administrative	7,415			7,854
Amortization of intangible assets	100			88
Costs and expenses	28,905			29,297
Loss from operations	(4,150		)	(2,214		)
Other expense:
Interest expense, net	818			1,704
Loss on extinguishment of debt	—			1,594
Other, net	28			61
Other expense, net	846			3,359
Loss before income tax expense (benefit)	(4,996		)	(5,573		)
Income tax expense (benefit)	45			(202		)
Net loss	$	(5,041	)	$	(5,371	)
Net loss per common share - basic and diluted	$	(0.07	)	$	(0.09	)
Weighted average common shares outstanding - basic and diluted	67,974			57,610

See accompanying notes to unaudited consolidated financial statements.

4

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock					Additional Paid-in-Capital			Accumulated Deficit			Total Stockholders' Equity
(in thousands)	Shares		Amount
Balance at September 30, 2014	67,703		$	677		$	1,924,984		$	(1,894,403	)	$	31,258
Net loss	—		—			—			(5,041		)	(5,041		)
Compensation expense related to stock options, awards and employee stock purchase plan	—		—			1,831			—			1,831
Issuance of common stock upon exercise of stock options	14		—			34			—			34
Release of restricted stock units	994		10			(10		)	—			—
Repurchase and retirement of restricted stock units for payroll taxes	(285	)	(3		)	(1,065		)	—			(1,068		)
Balance at December 31, 2014	68,426		$	684		$	1,925,774		$	(1,899,444	)	$	27,014

See accompanying notes to unaudited consolidated financial statements.

5

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three months ended December 31,
	2014			2013
	(in thousands)
Cash flows used in operating activities:
Net loss	$	(5,041	)	$	(5,371	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	519			496
Stock-based compensation	1,831			1,265
Gain on disposal of assets	—			(159		)
Loss on extinguishment of debt, net	—			1,594
Amortization of debt issuance costs	16			54
Amortization of debt discounts	207			512
Accretion of debt premiums	—			(9		)
Change in operating assets and liabilities:
Accounts receivable	769			(1,599		)
Inventories	(2,913		)	(1,852		)
Prepaids and other assets	(1,047		)	(1,124		)
Accounts payable	1,184			2,013
Accrued expenses and other current liabilities	(2,912		)	(856		)
Deferred revenue	1,400			513
Net cash used in operating activities	(5,987		)	(4,523		)
Cash flows used in investing activities:
Capital expenditures	(474		)	(884		)
Proceeds from sale of fixed assets	—			183
Payments under licensing agreements	(456		)	(87		)
Net cash used in investing activities	(930		)	(788		)
Cash flows used in financing activities:
Proceeds from the exercise of stock options and issuances of shares under the employee stock purchase plan	34			—
Repayment of convertible subordinated debentures	(32,843		)	(14,606		)
Consent fee on amendment of credit agreement	—			(308		)
Release of cash previously restricted under credit agreement	687			—
Repurchase and retirement of restricted stock units for payroll taxes	(1,068		)	(343		)
Other	(51		)	60
Net cash used in financing activities	(33,241		)	(15,197		)
Net decrease in cash	(40,158		)	(20,508		)
Cash at beginning of period	71,903			68,863
Cash at end of period	$	31,745		$	48,355
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	1,921		$	2,371
Income taxes	196			25
Non-cash investing and financing activities:
Licensing agreement obligation incurred but not paid	135			—

See accompanying notes to unaudited consolidated financial statements.

6

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2014 AND 2013

NOTE 1-THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Vitesse Semiconductor Corporation (“Vitesse,” the “Company,” “us,” “we” or “our”) is a leading supplier of high-performance integrated circuits (“ICs”), associated application and protocol software, and integrated turnkey systems solutions used primarily by manufacturers of networking systems for Carrier, Enterprise and Industrial Internet of Things (“IoT”) networking applications. With these solutions, we enable networking industries to transition from legacy networks to standards-based, ubiquitous ‘Ethernet Everywhere’ networking, starting from Enterprise networks and Carrier networks, and now penetrating Industrial-IoT networks.

Vitesse was incorporated in the state of Delaware in 1987. Our headquarters are located at 4721 Calle Carga, Camarillo, California, and our phone number is (805) 388-3700. Our stock trades on the NASDAQ Global Market under the ticker symbol VTSS.

Fiscal Year

Our fiscal year is October 1 through September 30.

Basis of Presentation

The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. The September 30, 2014 balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required for annual periods. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, 2014, included in our Annual Report on Form 10-K filed with the SEC on December 4, 2014.

The consolidated financial statements included herein are unaudited. However, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position, the consolidated results of our operations and the consolidated cash flows and the changes in our stockholders’ equity. The results of operations for the three months ended December 31, 2014 are not necessarily indicative of the results to be expected for future quarters or the full year.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the consolidated financial statements. Management regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, warranty reserves, inventory valuation reserves, stock-based compensation, purchased intangible asset valuations and useful lives, asset retirement obligations, and deferred income tax asset valuation allowances. These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results we experience may differ materially and adversely from our original estimates. To the extent there are material differences between the estimates and the actual results, our future results of operations will be affected.

7

Risks and Uncertainties

Our future results of operations involve a number of risks and uncertainties. Factors that could affect our business or future results and cause actual results to vary materially from historical results include, but are not limited to, the highly cyclical nature of the semiconductor industry; our high fixed costs; declines in average selling prices; decisions by our IC manufacturer customers to curtail outsourcing; our substantial indebtedness; our ability to fund liquidity needs; our failure to maintain an effective system of internal controls; product return and liability risks; the absence of significant backlog in our business; our dependence on international operations and sales; proposed changes to United States tax laws; that our management information systems may prove inadequate; our ability to attract and retain qualified employees; difficulties consolidating and evolving our operational capabilities; our dependence on materials and equipment suppliers; our loss of customers; adverse tax consequences; the development of new proprietary technology and the enforcement of intellectual property rights by or against us; the complexity of packaging and test processes in our industry; competition; our need to comply with existing and future environmental regulations; and fire, flood or other calamity affecting us or others with whom we do business.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in fiscal year 2018.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual reporting periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. We are currently evaluating this new standard and after adoption, we will incorporate this guidance in our assessment of going concern.

NOTE 2-COMPUTATION OF NET LOSS PER SHARE

For the three months ended December 31, 2014 and 2013, we recorded a net loss. As such, all outstanding potential common shares were excluded from the diluted earnings per share computation.

The following potentially dilutive common shares are excluded from the computation of net loss per share.

	Outstanding as of December 31,
	2014	2013
	(in thousands)
Outstanding stock options	2,781	3,038
Outstanding restricted stock units	2,452	3,034
Employee Stock Purchase Plan shares	469	365
2014 Debentures	—	7,298
Term B Loan	—	1,887
Total potential common shares excluded from calculation	5,702	15,622

8

NOTE 3-INVENTORIES

	December 31, 2014		September 30, 2014
	(in thousands)
Raw materials	$	1,399	$	1,840
Work-in-process	5,140		4,503
Finished goods	9,166		6,449
Total inventories	$	15,705	$	12,792

NOTE 4-DEBT

	December 31, 2014		September 30, 2014
	(in thousands)
Term A and B Loans, bearing interest at 9.0%, interest payable quarterly in arrears, due August 2016	$	16,508	$	16,417
2014 Debentures, convertible, 8.0% fixed-rate notes, repaid in October 2014	—		32,727
Total debt, net	$	16,508	$	49,144

Additional information about our debt is as follows:

	Term A Loan			Term B Loan			Total
	(in thousands)
Principal	$	7,857		$	9,342		$	17,199
Unamortized debt discount	(59		)	(632		)	(691		)
Carrying value	$	7,798		$	8,710		$	16,508
Annual effective interest rate	9.5		%	13.5		%

Our long-term debt is comprised of our Term A Loan and our Term B Loan, which we collectively refer to as our “Term A and B Loans”, due in August 2016.

We have the right to optionally prepay the Term A and B Loans in whole or in part, at any time and from time to time, subject to the payment of a prepayment fee. The prepayment fee is 3% for prepayments made on or after October 30, 2014 but prior to October 30, 2015, and 2% for prepayment made on or after October 30, 2015. Upon the occurrence of certain change in control events, the holders of the Term A and B Loans may require us to redeem all or a portion of the loans at 100% of the principal amount plus accrued and unpaid interest. Except for required repurchases upon a change in control or in the event of certain asset sales, as described in the applicable credit agreements, we are not required to make any sinking fund or redemption payments with respect to this debt.

The credit agreement for the Term A and B Loans provide for customary restrictions and limitations on our ability to incur indebtedness and liens on property, make restricted payments or investments, enter into mergers or consolidations, conduct asset sales, pay dividends or distributions and enter into specified transactions and activities, and also contain other customary default provisions. Additionally, we are required to maintain an unrestricted cash balance of $8.0 million and achieve minimum quarterly revenues of $10.0 million. We were in compliance with all covenants as of December 31, 2014. The Term A and B Loans are collateralized by substantially all of our assets.

In November 2013, we paid the holders of the Term A and B Loans a consent fee of $0.3 million and we repurchased $13.7 million principal amount of our convertible subordinated debentures (“2014 Debentures”) at 107% of the principal amount thereof plus accrued interest. We recorded a loss on extinguishment of debt of $1.6 million due to the repurchase during the three months ended December 31, 2013.

9

NOTE 5-FAIR VALUE MEASUREMENTS

We measure the fair value of our Term A and B Loans, which are carried at amortized cost, on a quarterly basis for disclosure purposes. We use a discounted cash flow based model to estimate the fair value of these financial instruments. The estimated fair value of the Term A and B Loans is determined using Level 3 inputs based primarily on the comparability of their terms to the terms we could obtain for similar instruments in the current market.  The key unobservable input utilized in the model includes a discount rate of approximately 4.5%.

The estimated fair values of our financial instruments are as follows:

	December 31, 2014				September 30, 2014
	Carrying value		Fair value		Carrying value		Fair value
	(in thousands)
Term A Loan	$	7,798	$	8,595	$	7,791	$	8,755
Term B Loan	8,710		10,055		8,626		10,245
2014 Debentures	—		—		32,727		33,040

NOTE 6-STOCKHOLDERS’ EQUITY

Authorized Capital Stock

We are authorized to issue up to 250 million shares of common stock, par value $0.01, per share, of which 7.8 million and 3.0 million shares of common stock have been reserved for issuance under our stock compensation plans and Employee Stock Purchase Plan (“ESPP”), respectively, as of December 31, 2014.

NOTE 7-STOCK BASED COMPENSATION

Stock Options

We have in effect one stock incentive plan, the 2013 Incentive Plan (the “Plan”), under which non-qualified stock options and restricted stock units have been granted to employees and non-employee directors. Under the Plan, we have 0.8 million shares available for future grant as of December 31, 2014.

Compensation cost related to our Plan and ESPP is as follows:

	Three Months Ended December 31,
	2014		2013
	(in thousands)
Cost of revenues	$	230	$	184
Engineering, research and development	671		485
Selling, general and administrative	930		596
Total stock-based compensation expense	$	1,831	$	1,265

As of December 31, 2014, there was $7.7 million of unrecognized stock-based compensation expense related to non-vested stock options, restricted stock units and our ESPP. The weighted average period over which the unearned stock-based compensation for stock options and restricted stock units expected to be recognized is approximately 0.9 years and 2.1 years, respectively. An estimated forfeiture rate of 4.2% has been applied to all unvested time-based options and restricted stock outstanding as of December 31, 2014.

10

Activity in stock option awards is as follows:

	Shares   (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life  (years)	Aggregate Intrinsic Value (in thousands)
Options outstanding, September 30, 2014	2,940		$	7.46	7.00	$	2,059
Granted	—
Exercised	(14	)	2.41			20
Cancelled or expired	(145	)	54.96
Options outstanding, December 31, 2014	2,781		$	5.01	7.08	$	2,353
Options exercisable, December 31, 2014	1,774		$	6.46	6.14	$	1,014

This intrinsic value represents the excess of the fair market value of our common stock on the date of exercise over the exercise price of such options. The aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on our closing stock price of $3.78 and $3.60 as of December 31, 2014 and September 30, 2014, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates. There were 0.8 million in-the-money stock options that were exercisable as of December 31, 2014.

The following table provides additional information in regards to options outstanding as of December 31, 2014:

	Options Outstanding				Options Exercisable
Range of Exercise Price	Number Outstanding (in thousands)	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable (in thousands)	Weighted Average Exercise Price
$2.10 - $2.26	409	8.19	$	2.11	187	$	2.10
2.53	987	8.94	2.53		239	2.53
2.54 - 4.36	732	6.52	3.45		700	3.49
4.60 - 30.60	584	4.60	7.58		579	7.60
33.60 - 66.40	69	0.88	52.36		69	52.36
$2.10 - $66.40	2,781	7.08	$	5.01	1,774	$	6.46

Restricted Stock Units

Activity for our restricted stock award units is as follows:

	Restricted Stock Units (in thousands)		Weighted Average Grant-Date Fair Value per Share		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Restricted stock units, September 30, 2014	2,328		$	2.61	0.96	$	8,380
Awarded	1,129		3.34
Released	(994	)	3.04
Forfeited	(11	)	2.80
Restricted stock units, December 31, 2014	2,452		$	2.77	1.38	$	9,267

The aggregate intrinsic values in the preceding table for the restricted stock units outstanding represent the total pretax intrinsic value, based on our closing stock price of $3.78 and $3.60 as of December 31, 2014 and September 30, 2014, respectively. We issue restricted stock units as part of our equity incentive plans. For the three months ended December 31, 2014, the total grant date fair value of shares vested from restricted stock unit grants was $3.0 million. For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. The impact of such withholding totaled $1.1 million for the three months ended December 31, 2014 and the amount was recorded as settlement on restricted stock tax withholding in the accompanying unaudited consolidated statements of stockholders’ equity. Although

11

shares withheld are not issued, they are treated as common stock repurchases in our unaudited consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

Employee Stock Purchase Plan

Pursuant to our ESPP, eligible employees may authorize payroll deductions of up to 15% of their regular base salary subject to certain limits to purchase shares at the lower of 85% of the fair market value of the common stock on the date of the commencement of the offering or on the last day of the 6-month offering period. On January 30, 2015, 0.5 million shares were issued at a price per share of $2.50, a 15% discount to the share price on August 1, 2014, the commencement date for the purchase period that ended January 30, 2015. We recognized $0.2 million of stock compensation expense under the ESPP during the three months ended December 31, 2014. We determine the fair value of the ESPP awards using the Black-Scholes pricing model. We used the following assumptions during the three months ended December 31, 2014: expected useful life of 0.5 years, expected volatility of 44.8%, a zero dividend rate, and a risk-free interest rate of 0.05%.

NOTE 8-INCOME TAXES

The income tax expense (benefit) as a percentage of loss from operations before income taxes was 0.9% for the three months ended December 31, 2014 compared to (3.6)% for the comparable period in the prior year. Our income tax expense (benefit) is primarily impacted by foreign taxes, certain nondeductible interest and share based expenses. The income tax expense (benefit) is also impacted by the release of a portion of the valuation allowance related to certain foreign jurisdictions’ deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period based on our analysis of the available positive and negative evidence.

At December 31, 2014, we had approximately $55.8 million, $27.4 million, and $119.1 million of federal, state, and foreign Net Operating Losses (“NOLs”), respectively, that can be used in future tax years. In December 2012, we issued 10.7 million shares of common stock in a public offering which resulted in a Section 382 ownership change. In general, a Section 382 ownership change occurs if there is a cumulative change in our ownership by “5%” shareholders (as defined in the Internal Revenue Code of 1986, as amended) that exceeds 50 percentage points over a rolling three-year period. An ownership change generally affects the rate at which NOLs and potentially other deferred tax assets are permitted to offset future taxable income. Of our federal NOL amount as of December 31, 2014, $25.4 million is subject to an annual Section 382 limitation of $1.4 million due to the December 2012 ownership change. Since we maintain a full valuation allowance on all of our U.S. and state deferred tax assets, the impact of the ownership change on the future realizability of our U.S. and state deferred tax assets did not result in an impact to our provision for income taxes for the three months ended December 31, 2014, or on our net deferred tax asset as of December 31, 2014.

In June 2013, we issued an additional 18.7 million shares of common stock in a public offering. Based on a preliminary evaluation we do not believe this offering caused another Section 382 ownership change. As additional relevant information becomes available we will update our evaluation. If an additional ownership change did occur or does occur in the future, our ability to utilize our NOL carryforwards and other deferred tax assets to offset future taxable income may be further limited and the value and recoverability of our NOLs and other deferred tax assets could be further diminished.

NOTE 9-SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC INFORMATION

We manage and operate our business through one operating segment.

Net revenues from customers that were equal to or greater than 10% of total net revenues are as follows:

	Three Months Ended December 31,
	2014		2013
WPG Holdings and affiliates*	25.2	%	23.8	%

 __________________________________________________

*Distributor

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and accounts receivable. Cash consists of demand deposits maintained with several financial institutions, which often exceed Federal Deposit Insurance Corporation limits of $250,000. We have never experienced any losses related to these balances; however, our balances are significantly in excess of insured limits.

12

At December 31, 2014, there were two customers that accounted for 31.0% of accounts receivable. At September 30, 2014, there were two customers that accounted for 24.3% of accounts receivable. We believe that this concentration and the concentration of credit risk resulting from trade receivables owing from high-technology industry customers is substantially mitigated by our credit evaluation process, relatively short collection periods and maintaining an allowance for anticipated losses. We generally do not require collateral security for outstanding amounts.

Net revenues by geographic area are as follows:

	Three Months Ended December 31,
	2014		2013
	(in thousands)
United States	$	5,052	$	6,559
China, including Hong Kong	5,531		7,994
Taiwan	7,651		5,651
Other Asia Pacific	3,638		3,141
Europe, Middle East and Africa	2,883		3,738
Net revenues	$	24,755	$	27,083

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 original equipment manufacturers (“OEMs”) and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.

We also classify our product revenues based on our three product lines: (i) Ethernet switching; (ii) Connectivity; and (iii) Transport processing. Product revenues by product line are as follows:

	Three Months Ended December 31,
	2014		2013
	(in thousands)
Ethernet switching	$	12,171	$	11,336
Connectivity	10,219		8,949
Transport processing	1,579		4,578
Product revenues	$	23,969	$	24,863

NOTE 10-COMMITMENTS AND CONTINGENCIES

Operating Leases and Software Licenses

We lease facilities under non-cancellable operating leases. The leases expire at various dates through fiscal year 2019 and frequently include renewal provisions for varying periods of time, provisions which require us to pay taxes, insurance, maintenance costs, or provisions for minimum rent increases. Minimum leases payments, including scheduled rent increases are recognized as rent expenses on a straight line basis over the applicable lease term. Lease incentives received are recognized as a reduction of rental expense on a straight-line basis over the term of the lease.

Software license commitments represent non-cancellable licenses of intellectual property from third‑parties used in the development of our products.

Future minimum lease payments under non-cancellable operating leases that have remaining non-cancellable lease terms in excess of one year and software licenses are as follows:

	Remaining in 2015		2016		2017		2018		2019		Thereafter		Total
	(in thousands)
Operating leases	$	1,482	$	670	$	186	$	60	$	15	$	—	$	2,413
Software licenses	4,989		4,555		4,275		4,175		—		—		17,994
Total	$	6,471	$	5,225	$	4,461	$	4,235	$	15	$	—	$	20,407

13

Litigation

We are party to various claims and lawsuits arising in the normal course of business. We closely monitor these claims and lawsuits and frequently consult with our legal counsel to determine whether they may, when resolved have a material adverse effect on our financial position or results or operations and accrue and/or disclose loss contingencies as appropriate.

Warranty

We establish reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with our customers. We generally warrant our products against defects for one year from date of shipment, with certain exceptions in which the warranty period can extend to more than one year based on contractual agreements. Our warranty reserves are established at the time of sale and updated throughout the warranty period based upon numerous factors including historical warranty return rates and expenses over various warranty periods. Historically, our warranty returns have not been material.

Intellectual Property Indemnities

We indemnify certain customers and our contract manufacturers against liability arising from third-party claims of intellectual property rights infringement related to our products. These indemnities appear in development and supply agreements with our customers as well as manufacturing service agreements with our contract manufacturers, are not limited in amount or duration and generally survive the expiration of the contract. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, we are unable to determine the maximum amount of losses that we could incur related to such indemnifications.

Guarantees and Indemnities

In the normal course of business, we are occasionally required to undertake indemnification for which we may be required to make future payments under specific circumstances. We review our exposure under such obligations no less than annually, or more frequently as required. The amount of any potential liabilities related to such obligations cannot be accurately determined until a formal claim is filed. Historically, any such amounts that become payable have not had a material negative effect our business, financial condition or results of operations. We maintain general and product liability insurance which may provide a source of recovery to us in the event of an indemnification claim.

14

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2014 (“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

Vitesse is a leading supplier of high-performance networking ICs, application software, and integrated turnkey systems solutions that are used primarily by manufacturers of equipment for Carrier, Enterprise and Industrial-IoT networking applications. For over 30 years, we have been a leading innovator in networking and connectivity IC solutions. During the last decade, our markets have gone through a dramatic transformation. We have responded with an aggressive transition strategy to address the emerging opportunities within these markets.

Affirmation of Our Transition Strategy

Several years ago, we strategically re-invented Vitesse to exploit the dramatic ongoing transformation of our target networking markets. Our vision was simple: ‘Ethernet Everywhere.’ We went ‘all in’ on the idea that all networks, in all markets, would eventually transition to Ethernet. We re-positioned our R&D team and invested over $200 million to enter new and expanding markets. We developed dozens of new products, captured growing market share, and are continuing to add new customers at an increasing rate. ‘Ethernet Everywhere’ is becoming a reality and we believe this exponentially expands our potential for success as well as the size of our serviceable markets, allowing us to create substantial revenue growth.

We define a set of products introduced since 2010 as our ‘new products.’ These products largely address the transition of our core markets to Ethernet technology. Growing at a compound annual growth rate of 78% from fiscal year 2012 to fiscal year 2014, the consistent revenue growth in our new product portfolio over the last three years validates our strategy. With continued growth in our Carrier and Enterprise markets, combined with early growth in new markets including Industrial-IoT, we anticipate our new product revenues will continue to increase in fiscal year 2015. To date, the growth of our new products has largely been offset by the decline in our legacy products that we identify as end-of-life (“EOL”) and “Mature.” We anticipate that as the legacy products decline and become a smaller portion of revenues, and our new products continue to grow, we will achieve overall revenue growth.

In addition to our new product revenue growth, our customer engagements and number of design opportunities and wins have consistently increased since 2010. We believe that design wins are a good leading indicator for future revenues. In 2014, the number of design wins for our new products grew over 50% from 2013, including wins from market leaders such as Adtran, Alcatel-Lucent, Alstrom, Belden-Hirschman, Cisco, Dragonwave, Ericsson, 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 in multiple markets. In fiscal year 2014, we had over 500 customers worldwide, nearly 300 of which purchased our new products. We added over 130 new customers in fiscal year 2014.

15

We intensified our focus in the Industrial-IoT market. This rapidly growing market provides substantial new growth opportunities for both revenues and diversification of our customer base. Partially as a result of this new market segment, in fiscal year 2014, we increased the number of first-time design wins from new customers by nearly 100% compared with fiscal year 2013. In fiscal year 2014, Industrial-IoT represented 33% of our total new customers and 28% of our customer base for new products as of September 30, 2014.

In fiscal year 2014, we introduced the fourth-generation of both our Switch and PHY products, adding substantial new features and capabilities to our product portfolio, significantly increasing our addressable markets in Carrier, Enterprise and Industrial-IoT networking. We invested to provide our customers a complete, turnkey application software package. We provide integrated Carrier Ethernet silicon and software solutions, making it simple for existing customers to migrate to our new solutions and for new customers to engage with Vitesse to quickly and efficiently bring their new products to market.

We have accelerated our efforts to increase our product gross margins, which has substantially improved our operating leverage. Average margins vary widely within the markets we serve, with the Industrial-IoT and Carrier networking markets having the highest average margins and the Enterprise networking market having the lowest average margins. Based on our strengthening turnkey solutions mix and our aggressive cost reduction efforts, our overall gross margin profile is steadily improving. Based on estimated gross margins on our new product design wins, we anticipate that our product gross margins will continue to increase in fiscal year 2015, underscoring the value that Vitesse brings to these markets.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with 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, 2014, 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, 2014.

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.

16

Results of Operations for the three months ended December 31, 2014, as compared to the three months ended December 31, 2013

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,
	2014					2013
	$			%		$			%
	(in thousands, except for percentages)
Net revenues:
Product revenues	$	23,969		96.8	%	$	24,863		91.8	%
Intellectual property revenues	786			3.2	%	2,220			8.2	%
Net revenues	24,755			100.0	%	27,083			100.0	%
Costs and expenses:
Cost of product revenues	10,053			40.6	%	10,676			39.4	%
Engineering, research and development	11,337			45.8	%	10,679			39.4	%
Selling, general and administrative	7,415			30.0	%	7,854			29.0	%
Amortization of intangible assets	100			0.4	%	88			0.3	%
Costs and expenses	28,905			116.8	%	29,297			108.1	%
Loss from operations	(4,150		)	(16.8	)%	(2,214		)	(8.1	)%
Other expense:
Interest expense, net	818			3.3	%	1,704			6.3	%
Loss on extinguishment of debt	—			—	%	1,594			5.9	%
Other, net	28			0.1	%	61			0.2	%
Other expense, net	846			3.4	%	3,359			12.4	%
Loss before income tax expense (benefit)	(4,996		)	(20.2	)%	(5,573		)	(20.5	)%
Income tax expense (benefit)	45			0.2	%	(202		)	(0.7	)%
Net loss	$	(5,041	)	(20.4	)%	$	(5,371	)	(19.8	)%

Product Revenues

We sell our products into the following markets: (i) Carrier networking; (ii) Enterprise networking; and (iii) Industrial-IoT networking. 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/SMB networks and Cloud Access services. The Industrial-IoT networking market includes industrial-classswitching and routing equipment for networks within Industrial Process Control, Smart-Grid Energy Distribution, Transportation, and Factory Automation applications, as well as switching and connectivity for a broad variety of equipment such as security cameras, LCD signage, intelligent sensors, metering equipment, home and office automation and ‘things’ of all kinds.

In the normal course of business, we regularly assess our product portfolio. At such time, we may determine to phase-out products and put them through EOL. 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.

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, 2014 may not necessarily be indicative of future revenues.

17

Product revenues by market are as follows:

	Three Months Ended December 31,
	2014				��	2013
	Amount		% of Product Revenues			Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Carrier networking	$	11,370	47.4	%		$	12,539	50.4	%	$	(1,169	)	(9.3	)%
Enterprise networking	10,472		43.7	%		9,768		39.3	%	704			7.2	%
Industrial-IoT networking	2,127		8.9	%		2,556		10.3	%	(429		)	(16.8	)%
Product revenues	$	23,969	100.0	%		$	24,863	100.0	%	$	(894	)	(3.6	)%

The lower Carrier networking revenues are largely attributable to a decrease in sales of older products for SONET/SDH applications, some of which went through EOL in prior periods. The decline is partially offset by the continued increase in sales of our new products, primarily for Carrier Ethernet applications, which increased more than 110% from the comparable period in the prior year.

The higher Enterprise networking revenues are primarily due to a more than 50% increase in sales of our new products, including switches, Cu PHYs, and 10 GE PHYs, as new customers ramp into production. The increases are partially offset by declines in sales of our older generation switches and PHYs.

The lower Industrial-IoT revenues are primarily due to decreased sales of older Ethernet switches and Cu PHYs. This decrease was partially offset by growth in sales of our new products in Industrial-IoT applications which increased more than 90% over the prior year.

Revenues from our new products increased 82% to $16.2 million for the three months ended December 31, 2014 from $8.9 million for the prior year period.

We also classify our product revenues based on our three product lines: (i) Ethernet switching; (ii) Connectivity; and (iii) Transport processing.

Product revenues by product line are as follows:

	Three Months Ended December 31,
	2014				2013
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Ethernet switching	$	12,171	50.8	%	$	11,336	45.6	%	$	835		7.4	%
Connectivity	10,219		42.6	%	8,949		36.0	%	1,270			14.2	%
Transport processing	1,579		6.6	%	4,578		18.4	%	(2,999		)	(65.5	)%
Product revenues	$	23,969	100.0	%	$	24,863	100.0	%	$	(894	)	(3.6	)%

The higher Ethernet switching revenues are largely attributable to an increase in sales of our new Enterprise switches, Carrier Ethernet switch engines and Cu PHYs into Carrier, Enterprise and Industrial-IoT applications partially offset by a decrease in sales of our mature Cu PHYs and Ethernet switches.

The higher Connectivity revenues are primarily attributable to the strong increase in sales of our new 10 GE PHYs, partially offset by a decrease in sales of our older generation PHYs and mature crosspoint switches.

The lower Transport processing revenues are largely attributable to decreased sales of SONET/SDH framers that went through EOL in prior periods. The decrease is partially offset by an increase in sales of new OTN products.

18

Intellectual Property Revenues

	Three Months Ended December 31,
	2014				2013
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Intellectual property revenues	$	786	3.2	%	$	2,220	8.2	%	$	(1,434	)	(64.6	)%

Intellectual property revenues include licenses, support, royalties, and sales of patents. The lower intellectual property revenues are due to fewer 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,
	2014		2013
WPG Holdings and affiliates*	25.2	%	23.8	%

______________________________________

* Distributor

Net revenues by geographic area are as follows:

	Three Months Ended December 31,
	2014				2013
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change			% Change
	(in thousands, except percentages)
United States	$	5,052	20.4	%	$	6,559	24.2	%	$	(1,507	)	(23.0	)%
China, including Hong Kong	5,531		22.3	%	7,994		29.5	%	(2,463		)	(30.8	)%
Taiwan	7,651		31.0	%	5,651		20.9	%	2,000			35.4	%
Other Asia Pacific	3,638		14.7	%	3,141		11.6	%	497			15.8	%
Europe, Middle East and Africa	2,883		11.6	%	3,738		13.8	%	(855		)	(22.9	)%
Net revenues	$	24,755	100.0	%	$	27,083	100.0	%	$	(2,328	)	(8.6	)%

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,
	2014				2013
	Amount		% of Product Revenues		Amount		% of Product Revenues		Change			% Change
	(in thousands, except percentages)
Cost of product revenues	$	10,053	41.9	%	$	10,676	42.9	%	$	(623	)	(5.8	)%

We use third-parties for wafer fabrication and assembly and test 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.

19

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.

Cost of product revenues as a percentage of product revenues decreased primarily due to a mix shift toward Carrier Ethernet switches, which have higher margins as compared to the prior year period.

Engineering, Research and Development

	Three Months Ended December 31,
	2014				2013
	Amount		% of Net Revenues		Amount		% of Net Revenues		Change		% Change
	(in thousands, except percentages)
Engineering, research and development	$	11,337	45.8	%	$	10,679	39.4	%	$	658	6.2	%

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 the 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.

The increase in R&D spending is due primarily to higher employee compensation expenses of $0.7 million, including stock compensation, and higher tooling and other expense of $0.4 million. The increase is partially offset by decreased spending for masks and test wafers of $0.4 million.

Selling, General and Administrative

	Three Months Ended December 31,
	2014				2013
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Selling, general and administrative	$	7,415	30.0	%	$	7,854	29.0	%	$	(439	)	(5.6	)%

SG&A expenses consist primarily of compensation expense, legal and other professional fees, facilities expenses, outside labor, and communication expenses. In fiscal year 2014, we invested in our marketing, sales and applications organization, adding critical industry expertise in hardware and software, as well as additional sales representatives and distributors.

The decrease in SG&A expenses is primarily due to lower professional fees of $0.6 million, and lower facilities and other expenses of $0.5 million. The decrease is partially offset by higher compensation expense of $0.3 million, including stock compensation, and increased other expenses aggregating $0.4 million.

20

Interest Expense, Net

	Three Months Ended December 31,
	2014				2013
	Amount		% of Net  Revenues		Amount		% of Net  Revenues		Change			% Change
	(in thousands, except percentages)
Interest expense, net	$	818	3.3	%	$	1,704	6.3	%	$	(886	)	(52.0	)%

Interest expense, net is comprised of cash interest expense, amortization of debt discount and debt issuance cost, net of interest income. Interest expense, net decreased primarily due to the retirement in October 2014 of $32.8 million principal amount of our 2014 Debentures.

Loss on Extinguishment of Debt

	Three Months Ended December 31,
	2014			2013
	Amount		% of Net  Revenues	Amount		% of Net  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.

Income Tax Expense (Benefit)

	Three Months Ended December 31,
	2014				2013
	Amount		% of Net  Revenues		Amount			% of Net  Revenues		Change		% Change
	(in thousands, except percentages)
Income tax expense (benefit)	$	45	0.2	%	$	(202	)	(0.7	)%	$	247	(122.3	)%

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 valuation allowance related to certain foreign jurisdictions’ deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period. Our effective tax rate for the three months ended December 31, 2014 was 0.9% 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 $31.7 million at December 31, 2014, from $71.9 million at September 30, 2014. Our cash flows from operating, investing and financing activities are summarized as follows:

	Three months ended December 31,
	2014			2013
	(in thousands)
Net cash used in operating activities	$	(5,987	)	$	(4,523	)
Net cash used in investing activities	(930		)	(788		)
Net cash used in financing activities	(33,241		)	(15,197		)
Net decrease in cash	(40,158		)	(20,508		)
Cash at beginning of period	71,903			68,863
Cash at end of period	$	31,745		$	48,355

21

Net Cash Used In Operating Activities

During the three months ended December 31, 2014, cash used in operations totaled $6.0 million. Excluding changes in working capital, we used $2.5 million to fund the cash portion of our net loss. We used cash to fund increases in inventories and prepaid expenses and other assets totaling $4.0 million and to fund decreases in accrued expenses and other liabilities totaling $2.9 million. These uses were offset by lower accounts receivable of $0.8 million, and higher accounts payable and deferred revenue totaling $2.6 million which provided cash.

Inventory levels increased $2.9 million to $15.7 million at December 31, 2014 from $12.8 million at September 30, 2014 to meet anticipated increased demand. Accounts payable, accrued expenses and other liabilities decreased by $1.8 million, from $19.5 million at September 30, 2014 to $17.7 million at December 31, 2014, due to the timing of obligations and/or payments to our vendors and other service providers. Deferred revenue increased $1.4 million from $4.9 million at September 30, 2014, to $6.3 million at December 31, 2014, due to the timing of payments from distributors.

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 pay down 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.

Net Cash Used In Investing Activities

Investing activities used cash in the three months ended December 31, 2014 for capital expenditures of $0.5 million and payments under licensing agreements of $0.5 million. 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 in the three months ended December 31, 2013.

Net Cash Used In Financing Activities

Net cash used in financing activities during the three months ended December 31, 2014 totaled $33.2 million. Cash used to retire our 2014 Debentures totaled $32.8 million. Cash used for the repurchase of restricted stock units for payroll taxes on behalf of employees totaled $1.1 million. Cash in the amount of $0.7 million that had been previously restricted under the terms of our credit agreement was released during the three months ended December 31, 2014. 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.

Capital Resources, Including Long-Term 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 $31.7 million at December 31, 2014. Our working capital at December 31, 2014, was $37.5 million.

In order to achieve sustained profitability and positive cash flows from operations, we may need to 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.

22

Our long-term debt is comprised of our senior Term A and B Loans which have a total principal amount of $17.2 million due on August 31, 2016. The credit agreement for our Term A and B Loans requires us to maintain an unrestricted cash balance of $8.0 million. 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 and to meet our minimum cash covenant. Our available liquidity could be adversely affected, however, if we incur operating losses and negative cash flows in the future, and we may need to reduce or postpone 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. As of December 31, 2014, we raised a total of $28.7 million of gross proceeds from the sale of 8,582,076 shares of our common stock, leaving approximately $46.3 million of securities available for issuance pursuant to the Form S-3. The Form S-3 will expire in January 2017.

Contractual Obligations

	Payment Obligations by Fiscal Year
	Remaining in 2015		2016		2017		2018		2019		2020 and Thereafter		Total
	(in thousands)
Term A and B Loans (1)	$	—	$	17,199	$	—	$	—	$	—	$	—	$	17,199
Loan interest (2)	1,174		1,776		—		—		—		—		2,950
Operating leases (3)	1,482		670		186		60		15		—		2,413
Software licenses (4)	4,989		4,555		4,275		4,175		—		—		17,994
Inventory and other purchase obligations (5)	5,750		114		60		—		—		—		5,924
Total	$	13,395	$	24,314	$	4,521	$	4,235	$	15	$	—	$	46,480

_________________________________________________

(1) Represents amounts due for our 9.0% fixed rate notes due August 31, 2016.

(2) Interest payable for Term A and B Loans through 2016.

(3) We lease facilities under non-cancellable operating lease agreements that expire at various dates through 2019.

(4) Software license commitments represent non-cancellable licenses of technology from third-parties used in the development of our products.

(5) 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, 2014, we had no material off-balance sheet arrangements, other than operating leases, certain software licenses and non-cancellable purchase commitments.

23

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our quantitative and qualitative disclosures about market risk are described in our Annual Report on Form 10-K for the year ended September 30, 2014. There have been no material changes to these risks during the three months ended December 31, 2014.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated as of December 31, 2014, the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2014, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, during the quarter ended December 31, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitation on the Effectiveness of Internal Controls

Our disclosure controls and procedures provide our Chief Executive Officer and Chief Financial Officer reasonable assurances that our disclosure controls and procedures will achieve their objectives. However, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within the Company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.

24

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time-to-time in our normal course of business, we are a party to various legal claims, actions and complaints. Although the ultimate outcome of these matters cannot be determined, management believes that, as of December 31, 2014, the final disposition of these proceedings will not have a material adverse effect on the financial position, results of operations, or liquidity of the Company.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2014.

ITEM 6. EXHIBITS

Exhibit		Incorporated by Reference				Filed or Furnished
Number	Exhibit Description	Form	File Number	Exhibit	Filing Date	Herewith
10.1*†	Vitesse Semiconductor Corporation Fiscal Year 2015 Executive Bonus Plan, dated as of October 7, 2014.					X
10.2*	Employment Agreement, dated as of October 7, 2014, between Vitesse Semiconductor Corporation and Christopher R. Gardner.	8-K	001-31614	10.1	October 10, 2014
10.3*	Employment Agreement, dated as of October 7, 2014, between Vitesse Semiconductor Corporation and Martin S. McDermut.	8-K	001-31614	10.2	October 10, 2014
31.1	Certification of Principal Executive officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
31.2	Certification of Principal Financial officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
32.1#	Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					X
101.INS**	XBRL Instance Document					X
101.SCH**	XBRL Taxonomy Extension Schema Document					X
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document					X
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document					X
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document					X

_____________________________________________________

* A management contract or compensatory plan or arrangement.

† Certain portions of this agreement have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for an order granting confidential treatment pursuant to Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934.

# The information in this exhibit is furnished and deemed not filed with the Securities and Exchange Commission for purposes of section 18 of the Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of Vitesse Semiconductor Corporation under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

25

** The information in this exhibit is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

26

SIGNATURES

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

February 3, 2015	VITESSE SEMICONDUCTOR CORPORATION
	By:	/s/ CHRISTOPHER R. GARDNER
		Christopher R. Gardner
		Chief Executive Officer
February 3, 2015	VITESSE SEMICONDUCTOR CORPORATION
	By:	/s/ MARTIN S. MCDERMUT
		Martin S. McDermut
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

27