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EX-31 - EXHIBIT 31(B) - INTERPHASE CORPex31-b.htm
EX-31 - EXHIBIT 31(A) - INTERPHASE CORPex31-a.htm


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2013

OR

 

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: 1-35267

 

 

 INTERPHASE CORPORATION

(Exact name of registrant as specified in its charter)

 

Texas

75-1549797

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

 

 

Parkway Centre I

2901 North Dallas Parkway, Suite 200

Plano, Texas 75093

(Address of Principal Executive Offices and Zip Code)

 

 (214) 654-5000 

(Registrant’s Telephone Number, Including Area Code)

 

 

 

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  ☒    No  ☐

 

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  ☒   No  ☐

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer        Accelerated filer  ☐      Non-accelerated filer  ☐ 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  ☐    No  ☒

 

 

As of October 25, 2013, shares of common stock outstanding totaled 7,011,146. 

 

 



 

 
 

 

 

INTERPHASE CORPORATION

 

Index to Form 10-Q

Quarterly Period Ended September 30, 2013

 

Part I - Financial Information

 
       
 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 
       
   

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

2

       
   

Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2013 and 2012

3

       
   

Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2013 and 2012

4

       
   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012

5

       
   

Notes to Condensed Consolidated Financial Statements

6

       
 

Item 2.

Management’s Discussion and Analysis of  Financial Condition and Results of Operations

13

       
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18

       
 

Item 4.

Controls and Procedures

19

       
       

Part II - Other Information

 
       
 

Item 1.

Legal Proceedings

19

       
 

Item 1A.

Risk Factors

20

       
 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

21

       
 

Item 3.

Defaults Upon Senior Securities

21

       
 

Item 4.

Mine Safety Disclosures

21

       
 

Item 5.

Other Information

21

       
 

Item 6.

Exhibits

21

 

 
 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

INTERPHASE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

   

September 30,

2013

   

December 31,

2012

 

ASSETS

               

Cash and cash equivalents

  $ 2,562     $ 3,949  

Marketable securities

    4,283       4,854  

Trade accounts receivable, less allowances of $54 and $39, respectively

    3,395       2,781  

Inventories

    3,167       2,219  

Prepaid expenses and other current assets

    710       350  

Total current assets

    14,117       14,153  
                 

Machinery and equipment

    6,064       6,036  

Leasehold improvements

    332       332  

Furniture and fixtures

    400       400  
      6,796       6,768  

Less-accumulated depreciation and amortization

    (6,531 )     (6,434 )

Total property and equipment, net

    265       334  
                 

Capitalized software, net

    113       175  

Other assets

    624       516  

Total assets

  $ 15,119     $ 15,178  
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

Liabilities

               

Accounts payable

  $ 1,572     $ 777  

Deferred revenue

    1,021       375  

Accrued liabilities

    1,442       1,149  

Accrued compensation

    195       221  

Total current liabilities

    4,230       2,522  
                 

Deferred lease obligations

    38       103  

Long-term debt

    3,500       3,500  

Total liabilities

    7,768       6,125  
                 

Commitments and Contingencies

               
                 

Shareholders’ Equity

               

Common stock, $0.10 par value; 100,000,000 shares authorized; 7,011,146 and 7,006,310 shares issued and outstanding, respectively

    701       701  

Additional paid in capital

    46,284       45,730  

Retained deficit

    (38,722 )     (36,493 )

Cumulative other comprehensive loss

    (912 )     (885 )

Total shareholders' equity

    7,351       9,053  

Total liabilities and shareholders' equity

  $ 15,119     $ 15,178  

    

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
2

 

 

INTERPHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Revenues:

                               

Product

  $ 3,136     $ 2,120     $ 8,509     $ 8,115  

Service

    1,032       1,047       2,757       2,536  

Total revenues

    4,168       3,167       11,266       10,651  

Cost of sales:

                               

Product

    1,450       1,037       4,601       4,013  

Service

    733       666       2,015       1,748  

Total cost of sales

    2,183       1,703       6,616       5,761  

Gross margin

    1,985       1,464       4,650       4,890  
                                 

Research and development

    622       690       2,309       2,476  

Sales and marketing

    614       658       2,022       2,700  

General and administrative

    660       648       2,239       2,319  

Restructuring benefit

    -       -       (67 )     -  

Total operating expenses

    1,896       1,996       6,503       7,495  

Income (loss) from operations

    89       (532 )     (1,853 )     (2,605 )
                                 

Other (loss) income, net

    -       -       (343 )     13  

Income (loss) before income tax

    89       (532 )     (2,196 )     (2,592 )
                                 

Income tax expense

    13       9       33       -  

Net income (loss)

  $ 76     $ (541 )   $ (2,229 )   $ (2,592 )
                                 

Net income (loss) per share:

                               

Basic

  $ 0.01     $ (0.08 )   $ (0.32 )   $ (0.37 )

Diluted

  $ 0.01     $ (0.08 )   $ (0.32 )   $ (0.37 )

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
3

 

 

INTERPHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Net income (loss)

  $ 76     $ (541 )   $ (2,229 )   $ (2,592 )

Other comprehensive (loss) income:

                               

Foreign currency translation adjustment

    (31 )     (12 )     (23 )     (1 )

Unrealized holding gain (loss) arising during period, net of tax

    -       2       (4 )     3  

Other comprehensive (loss) income

    (31 )     (10 )     (27 )     2  

Comprehensive income (loss)

  $ 45     $ (551 )   $ (2,256 )   $ (2,590 )

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

 
4

 

 

INTERPHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

   

Nine Months Ended

September 30,

 
   

2013

   

2012

 

Cash flows from operating activities:

               

Net loss

  $ (2,229 )   $ (2,592 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Provision for/(recovery of) uncollectible accounts and returns

    15       (8 )

Provision for excess and obsolete inventories

    101       65  

Depreciation and amortization

    170       311  

Stock-based compensation expense

    528       501  

Change in assets and liabilities:

               

Trade accounts receivable

    (629 )     499  

Inventories

    (1,049 )     (952 )

Prepaid expenses and other current assets

    (359 )     (11 )

Other assets

    (101 )     (70 )

Accounts payable, deferred revenue and accrued liabilities

    1,706       (516 )

Accrued compensation

    (26 )     (298 )

Deferred lease obligations

    (65 )     (57 )

Net cash used in operating activities

    (1,938 )     (3,128 )
                 

Cash flows from investing activities:

               

Purchases of property and equipment

    (30 )     (162 )

Purchases of capitalized software

    (9 )     (104 )

Proceeds from the sale of marketable securities

    11,007       7,213  

Purchases of marketable securities

    (10,439 )     (7,456 )

Net cash provided by (used in) investing activities

    529       (509 )
                 

Cash flows from financing activities:

               

Borrowings under credit facility

    10,500       10,500  

Payments on credit facility

    (10,500 )     (10,500 )

Proceeds from the exercise of stock options

    26       824  

Net cash provided by financing activities

    26       824  
                 

Effect of exchange rate changes on cash and cash equivalents

    (4 )     (2 )
                 

Net decrease in cash and cash equivalents

    (1,387 )     (2,815 )

Cash and cash equivalents at beginning of period

    3,949       7,470  

Cash and cash equivalents at end of period

  $ 2,562     $ 4,655  

 

 The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
5

 

 

NOTE 1. - BASIS OF PRESENTATION

 

Interphase Corporation and its subsidiaries (“Interphase” or the “Company”) is a diversified information and communications technology company, committed to innovation through the process of identifying, developing and introducing new products and services. The Company provides its customers solutions for connectivity, interworking and packet processing. Clients of the Company’s communications networking products include Alcatel-Lucent, Fujitsu Ltd., Genband, Hewlett Packard, Nokia Solutions and Networks, Oracle, and Samsung. 

 

The Company also offers engineering design and manufacturing services to customers from a wide variety of industries within the electronics market. 

 

Interphase recently expanded its business to include penveu®, a handheld device that adds interactivity to the installed base of projectors and large screen displays, making any flat surface, from pull down screens to HDTVs, an interactive display system. penveu is an affordable and portable solution that targets the education and enterprise markets.

 

The Company, founded in 1974, is headquartered in Plano, Texas, with manufacturing facilities in Carrollton, Texas, and sales offices in the United States and Europe. See Note 10 for information regarding the Company’s revenues related to North America and foreign regions.

 

The accompanying condensed consolidated financial statements include the accounts of Interphase Corporation and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. While the accompanying condensed consolidated financial statements are unaudited, they have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, all material adjustments and disclosures necessary to fairly present the results of such periods have been made. All such adjustments are of a normal, recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2012.

 

NOTE 2. - STOCK-BASED COMPENSATION

 

Stock Options

 

During the nine months ended September 30, 2013, the Company issued 26,000 stock options that vest over a four year period and expire ten years from date of grant. The weighted average exercise price of these stock options is $4.16. During the nine months ended September 30, 2012, the Company issued 138,500 stock options that vest over a one to four year period and expire ten years from the date of grant. The weighted average exercise price of these stock options is $5.25. Compensation expense related to stock options without performance-based vesting conditions was $71,000 and $108,000 for the three months ended September 30, 2013 and 2012, respectively. Compensation expense related to stock options without performance-based vesting conditions was $274,000 and $285,000 for the nine months ended September 30, 2013 and 2012, respectively.

 

During the nine months ended September 30, 2013, the Company issued 102,500 stock options with performance-based vesting conditions related to revenue objectives for the year ended December 31, 2014, the achievement of which would result in vesting in February 2015. The weighted average exercise price of these stock options is $5.40. During the nine months ended September 30, 2012, the Company issued 448,000 stock options with performance-based vesting conditions for the years ended December 31, 2012, 2013, 2014, and 2015, the achievement of which would result in pro rata vesting per year in February 2013, 2014, 2015, and 2016, respectively. The weighted average exercise price of these stock options is $4.76. All stock options with performance-based conditions expire ten years from date of grant. Of the unvested stock options outstanding at September 30, 2013, 965,550 are subject to the achievement of certain performance conditions. The performance conditions related to approximately 66,000 of these stock options were deemed probable as of September 30, 2013. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was $62,000 and $28,000 for the three months ended September 30, 2013 and 2012, respectively. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was $174,000 and $113,000 for the nine months ended September 30, 2013 and 2012, respectively. The performance conditions related to the remaining options were not deemed probable at September 30, 2013; therefore no compensation expense related to these options has been recorded.

 

 

 
6

 

 

The weighted-average remaining contractual life of stock options outstanding and exercisable at September 30, 2013 and 2012 was 5.58 years and 3.42 years, respectively.

 

The following table summarizes the combined stock option activity under all of the plans:

 

   

Number of

Options

   

Weighted Average

Option Price

 

Balance, December 31, 2012

    2,052,783     $ 4.06  

Granted

    128,500       5.15  

Exercised

    (15,000 )     1.71  

Cancelled

    (397,554 )     4.71  

Balance, September 30, 2013

    1,768,729     $ 4.02  

 

Option Valuation

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with weighted-average assumptions based on the grant date.

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Weighted average risk free interest rates

    2.63 %     1.53 %     2.58 %     1.93 %

Weighted average life (in years)

    10       10       10       10  

Volatility

    68.13 %     66.00 %     67.97 %     65.90 %

Expected dividend yield

    -       -       -       -  

Weighted average grant-date fair value per share of options granted

  $ 4.06     $ 3.18     $ 3.87     $ 3.55  

 

Restricted Stock

 

The Interphase Corporation 2004 Long-Term Stock Incentive Plan provides for grants of bonus stock awards (“restricted stock”) to its directors and certain employees at no cost to the recipient. Holders of restricted stock are entitled to cash dividends, if declared, and to vote their respective shares. Restrictions limit the sale or transfer of these shares during a predefined vesting period, currently ranging from three to four years, and in some cases vesting is subject to the achievement of certain performance conditions. There were no shares of restricted stock issued during the nine months ended September 30, 2013. During the nine months ended September 30, 2012, the Company issued 9,000 shares of restricted stock. Upon issuance of restricted stock under the plan, unearned compensation equivalent to the market value at the date of grant is recorded as a reduction to shareholders’ equity and subsequently amortized to expense over the respective restriction periods. Compensation expense related to restricted stock was $24,000 and $34,000 for the three months ended September 30, 2013 and 2012, respectively. Compensation expense related to restricted stock was $80,000 and $103,000 for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, there was $147,000 of total unamortized compensation cost related to unvested restricted stock remaining to be recognized. The expense is expected to be recognized over a weighted-average period of 1.4 years. As of December 31, 2012, there was $261,000 of total unamortized compensation cost related to unvested restricted stock which was expected to be recognized over a weighted-average period of 2.1 years. The following table summarizes the restricted stock activity for the nine months ended September 30, 2013:

 

 

 
7

 

 

   

Restricted Stock Shares

   

Weighted Average

Grant Date Value

 

Nonvested restricted stock at December 31, 2012

    112,015     $ 3.17  

Granted

    -       -  

Vested

    (40,195 )     3.08  

Cancelled/Forfeited

    (10,164 )     3.35  

Nonvested restricted stock at September 30, 2013

    61,656     $ 3.21  

 

NOTE 3. - MARKETABLE SECURITIES

 

Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. The Company follows ASC 820 in its valuation of its marketable securities. ASC 820 defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 classifies the levels used to measure fair value into the following hierarchy:

 

Level 1 – Valuations based on quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to obtain at the measurement date. This level provides the most reliable evidence of fair value.

Level 2 – Valuations based on one or more quoted prices in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs that are observable other than quoted prices for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

The Company’s investments in marketable securities primarily consist of investments in debt securities, which are classified as available for sale and presented as current assets on the accompanying condensed consolidated balance sheets. Earnings from debt securities are calculated on a yield to maturity basis and recorded in the results of operations. Unrealized gains or losses for the periods presented were included in other comprehensive (loss) income. Realized gains and losses are computed based on the specific identification method and were not material for the periods presented. Marketable securities are used to secure the Company’s credit facility. The fair values of marketable securities were estimated using the market approach using prices and other relevant information generated by market transactions involving identical or comparable assets. The Company uses quoted market prices in active markets or quoted market prices in markets that are not active to measure fair value. When developing fair value estimates, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.

 

Financial assets, measured at fair value, by level within the fair value hierarchy were as follows (in thousands):

 

           

September 30, 2013

   

December 31, 2012

 
   

Fair Value Hierarchy

   

Cost

   

Unrealized Gain

   

Estimated Fair Value

   

Cost

   

Unrealized Gain

   

Estimated Fair Value

 

Asset Backed

 

Level 2

    $ 467     $ -     $ 467     $ 952     $ 3     $ 955  

Corporate Bonds

 

Level 2

      316       -       316       698       1       699  

US Treasuries

 

Level 2

      3,500       -       3,500       3,200       -       3,200  

Total

          $ 4,283     $ -     $ 4,283     $ 4,850     $ 4     $ 4,854  

 

 

 
8

 

 

 

NOTE 4. - INVENTORIES

 

Inventories are valued at the lower of cost or market and include material, labor and manufacturing overhead. Cost, determined on a first-in, first-out basis, is as follows (in thousands):

 

   

September 30, 2013

   

December 31, 2012

 

Raw Materials

  $ 1,854     $ 1,616  

Work-in-Process

    945       462  

Finished Goods

    368       141  

Total

  $ 3,167     $ 2,219  

 

Valuing inventory at the lower of cost or market involves an inherent level of risk and uncertainty due to technology trends in the industry and customer demand for the Company’s products. Future events may cause significant fluctuations in the Company’s operating results. Inventories are written down when needed to ensure the Company carries inventory at the lower of cost or market. The Company increased reserve requirements by $21,000 and $45,000 during the three months ended September 30, 2013 and 2012, respectively. The Company increased reserve requirements by $101,000 and $65,000 during the nine months ended September 30, 2013 and 2012, respectively.     

 

NOTE 5. - INCOME TAXES

 

The Company records a valuation allowance when it is “more likely than not” that all or a portion of a deferred tax asset will not be realized. Management reviews all available positive and negative evidence, including the Company’s current and past performance, the market environment in which the Company operates, the utilization of past tax credits, length of carry back and carry forward periods, existing contracts or sales backlog that will result in future profits, as well as other factors. The Company continues to maintain a valuation allowance on all of the net deferred tax assets for the periods presented. Until an appropriate level of profitability is sustained, the Company expects to continue to record a full valuation allowance on future tax benefits except for those that may be generated in foreign jurisdictions. The effective income tax rates for the periods presented differ from the U.S. statutory rate as the Company continues to provide a full valuation allowance for the net deferred tax assets at September 30, 2013 and 2012.

 

NOTE 6. - RESTRUCTURING CHARGE

 

On October 19, 2012, the Company committed to a plan intended to improve the balance between the Company’s telecommunications product expenses with the reduced revenue levels of this product line. Under the 2012 restructuring plan, the Company reduced its workforce by 10 regular full-time positions. As a result of the 2012 restructuring plan, the Company recorded a restructuring charge of $253,000, classified as an operating expense, in the fourth quarter of 2012 related to future cash expenditures to cover employee severance and benefits. During the three months ended March 31, 2013, the Company reduced its restructuring charge by $67,000 related to reduced future cash expenditures related to severance and benefits for a former employee. The former employee’s accepting other employment in April 2013 reduced the amount of severance and benefit payouts by the Company. The following table summarizes the timing of payments under the restructuring plan (in thousands):

 

Description

 

Severance &

Fringe Benefits

 

Restructuring charge

  $ 253  

Cash payments during quarter ended December 31, 2012

    (91 )

Reduction of restructuring charge during quarter ended March 31, 2013

    (67 )

Cash payments during quarter ended March 31, 2013

    (72 )

Cash payments during quarter ended June 30, 2013

    (23 )

Remaining liability as of September 30, 2013

  $ -  

 

 

 
9

 

 

NOTE 7. - CREDIT FACILITY

 

The Company maintains a $5.0 million revolving bank credit facility maturing December 19, 2015. The applicable interest rate on outstanding balances is LIBOR plus 1.0% to 1.5% based on certain factors included in the credit agreement. At September 30, 2013 and December 31, 2012, the Company’s interest rate on the $3.5 million outstanding balance was 1.7% and 1.2%, respectively. The unused portion of the credit facility is subject to an unused facility fee ranging from .25% to .75% depending on total deposits with the creditor. All borrowings under this facility are secured by marketable securities. The outstanding balance of $3.5 million as of September 30, 2013 and December 31, 2012 is classified as long-term debt on the Company’s condensed consolidated balance sheets. Subsequent to September 30, 2013 and prior to the Company’s filing of the condensed consolidated financial statements, the outstanding balance on the credit facility was repaid.

 

NOTE 8. - EARNINGS PER SHARE

 

Basic earnings per share are computed by dividing reported earnings available to common shareholders by weighted average common shares outstanding.  Diluted earnings per share give effect to dilutive potential common shares. Earnings per share are calculated as follows (in thousands, except per share data):

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Basic net income (loss) per share:

                               

Net income (loss)

  $ 76     $ (541 )   $ (2,229 )   $ (2,592 )

Weighted average common shares outstanding

    7,009       7,000       7,005       6,965  

Basic net income (loss) per share

  $ 0.01     $ (0.08 )   $ (0.32 )   $ (0.37 )
                                 

Diluted net income (loss) per share:

                               

Net income (loss)

  $ 76     $ (541 )   $ (2,229 )   $ (2,592 )

Weighted average common shares outstanding

    7,009       7,000       7,005       6,965  

Dilutive stock options

    229       -       -       -  

Weighted average common shares outstanding – assuming dilution

    7,238       7,000       7,005       6,965  

Diluted net income (loss) per share

  $ 0.01     $ (0.08 )   $ (0.32 )   $ (0.37 )
                                 

Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive

    577       717       664       713  

 

NOTE 9. - SHAREHOLDERS’ EQUITY

 

The Board of Directors adopted a Shareholder Rights Plan (the “Plan”) and, under the Plan, declared a non-taxable dividend, paid at the close of business on August 9, 2011 (the “Record Date”), of one common share purchase right (a “Right”) for each outstanding share of Common Stock. From the Record Date until the Rights become exercisable, the Rights will be attached to all outstanding shares of Common Stock and, therefore, will be represented by the certificates evidencing the shares of Common Stock and transferrable only with the shares of Common Stock. A Right will be exercisable, upon certain conditions, to purchase one share of Common Stock from the Company at a price of $39, subject to adjustment. The Rights will become exercisable, and separate from the shares of Common Stock, upon the earlier of:

 

(1)

ten business days following the date of the first public announcement (the “Stock Acquisition Date”) that a person or a group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock (an “Acquiring Person”), or

 

 

 
10

 

 

(2)

ten business days (or such later date as the Board of Directors may determine) following the commencement of a tender or exchange offer that, if consummated, would result in a person or group of persons becoming an Acquiring Person.

 

Upon a Stock Acquisition Date, each holder of a Right (other than an Acquiring Person) will be entitled to receive, upon exercise of the Right, shares of Common Stock at a 50% discount. Also, if, at any time following a Stock Acquisition Date, the Company is acquired in a merger or business combination and its Common Stock is exchanged or converted, or if 50% or more of the Company’s assets, cash flow or earning power is sold or transferred, then each holder of a Right (other than an Acquiring Person) will be entitled to receive, upon exercise of the Right, shares of the acquirer’s common stock at a 50% discount. Further, at any time after a person or group of persons becomes an Acquiring Person, but before any person or group of persons becomes the beneficial owner of 50% or more of the outstanding shares of Common Stock, the Company may cause each exercisable Right to be exchanged for one share of Common Stock. The Rights will expire at the close of business on July 29, 2021, or such other date as the Board of Directors may determine under certain circumstances. The Board of Directors may terminate the Plan or cause the Company to redeem the Rights, at a price of $0.001 per Right, at any time before the earlier of a Stock Acquisition Date or the expiration of the Rights. The Company has reserved 90,315,210 shares of Common Stock for possible issuance upon exercise of Rights under the Plan.

 

NOTE 10. - SEGMENT INFORMATION

 

Interphase is a diversified information and communications technology company, committed to innovation through the process of identifying, developing and introducing new products and services. The Company provides its customers solutions for connectivity, interworking and packet processing. The Company also offers engineering design and manufacturing services to customers from a wide variety of industries within the electronics market. Interphase recently expanded its business to include penveu®, a handheld device that adds interactivity to the installed base of projectors and large screen displays, making any flat surface, from pull down screens to HDTVs, an interactive display system. Except for revenues, which are monitored by product line, the chief operating decision-makers review financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to have only a single reporting segment.

 

Geographic revenue related to North America and foreign regions is as follows (in thousands):

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Revenues:

                               

North America

  $ 2,167     $ 2,092     $ 5,908     $ 5,989  

Pacific Rim

    1,493       623       3,255       2,869  

Europe

    508       452       2,103       1,793  

Total

  $ 4,168     $ 3,167     $ 11,266     $ 10,651  

 

Additional information regarding revenue by product line is as follows (in thousands):

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Product Revenues:

                               

Telecommunications and enterprise

  $ 3,079     $ 2,083     $ 8,397     $ 8,027  

Services

    1,032       1,047       2,757       2,536  

Other

    57       37       112       88  

Total

  $ 4,168     $ 3,167     $ 11,266     $ 10,651  

 

 

 
11

 

 

NOTE 11. - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-11 (“ASU 2013-11”), Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 addresses the diversity in practice regarding financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of it, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent the deferred tax asset is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with the deferred tax asset. The amendments to this standard are effective for reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this update is not expected to have a material impact on the consolidated financial statements, as it is consistent with the Company’s present practice.

 

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. This ASU was effective prospectively for interim and annual periods beginning after December 15, 2012. The Company’s adoption of this update did not have a material impact on the consolidated financial statements.

 

 
12

 

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and other material included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements about the business, financial condition and prospects of the Company. These statements are made under the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including (without limitation) effects of the ongoing issues in global credit and financial markets, our reliance on a limited number of customers, the lack of spending improvements in the telecommunications and computer networking industries, significant changes in product demand, the development and introduction of new products and services, changes in competition, various inventory risks due to changes in market conditions and other risks and uncertainties indicated in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 and in the Company’s other filings and reports with the Securities and Exchange Commission. All of the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases, the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this report, the words “believes”, “plans”, “expects”, “will”, “intends,” and “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.

 

RESULTS OF OPERATIONS

 

Revenue

 

Total revenue increased 32% to $4.2 million for the three months ended September 30, 2013, compared to $3.2 million for the same period in the prior year. Our telecommunications and enterprise product revenue increased 48% to $3.1 million for the three months ended September 30, 2013, compared to $2.1 million in the comparable period in the prior year. This increase was primarily due to revenue from a product purchased by two telecommunications equipment manufacturers. However, in October, we were notified by one of these customers that they have cancelled the project that was using our product. As a result, we expect that revenue growth for our product will be impacted to some degree in future periods. This customer’s orders represented approximately 25% of the revenue generated by this product in the third quarter of 2013. It is important to note, however, that our larger customer has expansion plans for its media gateway that uses our product; so some of this revenue may be restored for us. Our services revenue was $1 million for each of the three months ended September 30, 2013 and 2012. All other revenues increased to $57,000, compared to $37,000 in the comparable period last year.

 

Total revenue increased 6% to $11.3 million for the nine months ended September 30, 2013, compared to $10.7 million for the same period in the prior year. Our telecommunications and enterprise product revenue increased to $8.4 million for the nine months ended September 30, 2013, compared to $8 million in the comparable period in the prior year. This increase was primarily due to revenue from a product purchased by two telecommunications equipment manufacturers. However, in October, we were notified by one of these customers that they have cancelled the project that was using our product. As a result, we expect that revenue growth for our product will be impacted to some degree in future periods. It is important to note, however, that our larger customer has expansion plans for its media gateway that uses our product; so some of this revenue may be restored for us. This increase was partially offset by a decrease of two telecommunications products that are end-of-life, which led to reduced revenue from these products in the first nine months of 2013. Our services revenues increased to $2.8 million for the nine months ended September 30, 2013, compared to $2.5 million for the same period in the previous year. This increase was primarily related to increased electronic contract manufacturing services revenue, partially offset by decreased electronic engineering design services revenue. All other revenues increased to $112,000, compared to $88,000 in the comparable period last year.

 

 

 
13

 

 

During the third quarter of 2013, sales to three customers individually accounted for approximately 28%, 14% and 11% of total revenues, respectively. During the third quarter of 2012, sales to one customer individually accounted for approximately 27% of total revenues. No other customers individually accounted for more than 10% of our consolidated revenues in the periods presented.

 

Included in accounts receivable at September 30, 2013 was $863,000, $509,000 and $477,000 due individually from three customers, respectively. Included in accounts receivable at December 31, 2012 was $721,000, $401,000, $387,000 and $312,000, due individually from four customers, respectively. No other customers individually accounted for more than 10% of our accounts receivable in the periods presented.

 

Gross Margin

 

Gross margin as a percentage of revenue was 48% and 46% for the three months ended September 30, 2013 and 2012, respectively. The increase in gross margin percentage in the third quarter of 2013 compared to the same period in the prior year was primarily due to increased utilization of our manufacturing facility partially offset by a revenue mix shift toward lower margin products and services.

 

Gross margin as a percentage of revenue was 41% and 46% for the nine months ended September 30, 2013 and 2012, respectively. The decrease in gross margin percentage was primarily due to a revenue mix shift toward lower margin products and services partially offset by increased utilization of our manufacturing facility.

 

We believe that pricing pressures in the industry and our anticipated future product mix may reduce our gross margin percentage in future periods.

 

Research and Development

 

Our investment in research and development was $622,000 and $690,000 for the three months ended September 30, 2013 and 2012, respectively. The decrease in research and development expense was primarily due to a decrease in personnel-related expenses as a result of the 2012 restructuring plan. See Note 6 in the notes to condensed consolidated financial statements for more information on the restructuring plan. This decrease in research and development expense was partially offset by a decrease in professional services activities, which resulted in a decrease in services revenues. Engineering costs associated with these professional services activities generate revenue; therefore, the related expenses are recorded as cost of sales rather than research and development operating expenses. The decrease in professional services activities resulted in an increase in research and development expenses during the period of $36,000. As a percentage of revenue, research and development expenses were approximately 15% in the third quarter of 2013 compared to approximately 22% for the same period in the prior year. The decrease in research and development expenses as a percentage of total revenue was due to revenue increasing while research and development expenses decreased.

 

Our investment in research and development was $2.3 million and $2.5 million for the nine months ended September 30, 2013 and 2012, respectively. This decrease in research and development expense was made up of several items. A decrease in personnel-related expenses, as a result of the 2012 restructuring plan, represents approximately 49% of the decrease and a decrease in other personnel-related expenses, not associated with the 2012 restructuring plan, represents approximately 20% of the decrease. See Note 6 in the notes to condensed consolidated financial statements for more information on the restructuring plan. In addition, variable project-related expenses decreased approximately 29% during the period. These decreases in research and development expense were partially offset by a decrease in professional services activities. Engineering costs associated with these professional services activities generate revenue; therefore, the related expenses are recorded as cost of sales rather than research and development operating expenses. The decrease in professional services activities resulted in an increase in research and development expenses during the period of approximately $580,000. As a percentage of revenue, research and development expenses were approximately 20% for the nine months ended September 30, 2013 compared to approximately 23% for the same period in the prior year. The decrease in research and development expenses as a percentage of total revenue was due to revenue increasing while research and development expenses decreased. We will continue to monitor the level of our investments in research and development concurrently with actual revenue results.

 

 

 
14

 

 

Sales and Marketing

 

Sales and marketing expenses were $614,000 and $658,000 for the three months ended September 30, 2013 and 2012, respectively. The decrease in sales and marketing expense was primarily due to a decrease in personnel-related expenses. As a percentage of revenue, sales and marketing expenses were approximately 15% for the third quarter of 2013, compared to approximately 21% for the same period in the prior year. The decrease in sales and marketing expenses as a percentage of total revenue was due to sales and marketing expenses decreasing while revenue increased.

 

Sales and marketing expenses were $2.0 million and $2.7 million for the nine months ended September 30, 2013 and 2012, respectively. Approximately 62% of the decrease in sales and marketing expense was due to a decrease in personnel-related expenses. The remaining decrease in sales and marketing expense was primarily due to a decrease in marketing and tradeshow related expenses. As a percentage of revenue, sales and marketing expenses were approximately 18% for the nine months ended September 30, 2013, compared to approximately 25% for the same period in the prior year. The decrease in sales and marketing expenses as a percentage of total revenue was due to sales and marketing expenses decreasing while revenue increased. We will continue to monitor the level of sales and marketing costs concurrently with actual revenue results.

 

General and Administrative

 

General and administrative expenses were $660,000 and $648,000 for the three months ended September 30, 2013 and 2012, respectively. As a percentage of revenue, general and administrative expenses were approximately 16% for the third quarter of 2013 and 20% for the same period in the prior year. The decrease in general and administrative expenses as a percentage of total revenue was due to general and administrative expenses increasing at a lower rate than revenue increased.

 

General and administrative expenses were $2.2 million and $2.3 million for the nine months ended September 30, 2013 and 2012, respectively. The decrease in general and administrative expense was primarily due to a decrease in depreciation and amortization expense. As a percentage of revenue, general and administrative expenses were approximately 20% for the nine months ended September 30, 2013, compared to approximately 22% for the same period in the prior year. The decrease in general and administrative expenses as a percentage of total revenue was due to general and administrative expenses decreasing while revenue increased. We will continue to monitor the level of general and administrative costs concurrently with actual revenue results.

 

Restructuring Charge

 

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expenses with the reduced revenue levels of this product line. Under the 2012 restructuring plan, we reduced our workforce by 10 regular full-time positions. As a result of the 2012 restructuring plan, we recorded a restructuring charge of $253,000, classified as an operating expense, in the fourth quarter of 2012 related to future cash expenditures to cover employee severance and benefits. This plan is expected to result in savings of approximately $1.0 million to $1.6 million in annualized operating costs. During the three months ended March 31, 2013, we reduced our restructuring charge by $67,000 related to reduced future cash expenditures related to severance and benefits for a former employee. The former employee’s accepting other employment in April 2013 reduced the amount of severance and benefit payouts by us. These amounts were paid out under the restructuring plan by June 30, 2013. See Note 6 in the notes to the consolidated financial statements for more information regarding the 2012 restructuring plan.

 

Other (Loss) Income, Net

 

There was no other loss or income, net for the three months ended September 30, 2013 and 2012. Other loss, net was $343,000 for the nine months ended September 30, 2013. Other income, net was $13,000 for the nine months ended September 30, 2012. The loss for the nine months ended September 30, 2013 was primarily related to the decision of the Labor Court of Boulogne-Billancourt, France on March 22, 2013 related to specific French employment indemnity claims of four former employees. The Court ruled in our favor regarding all other claims brought by the twenty-two former employees. See Part II, Item 1. “Legal Proceedings” below for more information.

 

 

 
15

 

 

Income Taxes

 

Our effective income tax rate was 1.5% for the nine months ended September 30, 2013, compared to an effective income tax rate of 0% for the nine months ended September 30, 2012. The effective income tax rates for the periods presented differ from the U.S. statutory rate as we continue to provide a full valuation allowance for our net deferred tax assets at September 30, 2013 and September 30, 2012. The tax expense in the periods primarily relate to tax in a foreign jurisdiction.

 

Net Income (Loss)

 

We reported a net income of $76,000 for the three months ended September 30, 2013 and a net loss of $541,000 for the three months ended September 30, 2012. Basic and diluted earnings per share for the three months ended September 30, 2013 was $0.01. Basic loss per share for the three months ended September 30, 2012 was ($0.08).

 

We reported a net loss of approximately $2.2 million for the nine months ended September 30, 2013 and a net loss of approximately $2.6 million for the nine months ended September 30, 2012. Basic loss per share for the nine months ended September 30, 2013 was ($0.32). Basic loss per share for the nine months ended September 30, 2012 was ($0.37).

 

LIQUIDITY AND CAPITAL RESOURCES

 

Consolidated Cash Flows

 

Cash and cash equivalents decreased approximately $1.4 million from December 31, 2012 to September 30, 2013 and decreased approximately $2.8 million from December 31, 2011 to September 30, 2012. Cash flows are impacted by operating, investing and financing activities.

 

Operating Activities

 

Trends in cash flows from operating activities for the nine months ended September 30, 2013 and 2012 are generally similar to the trends in our earnings except for provision for uncollectible accounts and returns, provision for excess and obsolete inventories, depreciation and amortization and stock-based compensation expense. Cash used in operating activities totaled $1.9 million for the nine months ended September 30, 2013, compared to a net loss of $2.2 million for that period. Provision for uncollectible accounts and returns increased $23,000 for the nine months ended September 30, 2013 compared to the same period in 2012. Provision for excess and obsolete inventories increased $36,000 for the nine months ended September 30, 2013 compared to the same period in 2012. Depreciation and amortization decreased $141,000 for the nine months ended September 30, 2013 compared to the same period in 2012. Stock-based compensation expense increased $27,000 for the nine months ended September 30, 2013 compared to the same period in 2012.

 

Changes in assets and liabilities result primarily from the timing of production, sales, purchases and payments. Changes in assets and liabilities generally tend to even out over time and result in trends in cash flows from operating activities generally reflecting earnings trends.

 

Investing Activities

 

Cash provided by investing activities totaled $529,000 and cash used in investing activities totaled $509,000 for the nine months ended September 30, 2013 and 2012, respectively. Cash provided by or used in investing activities in each of the periods related principally to our investments in marketable securities and purchases of property and equipment and capitalized software. Additions to property and equipment and capitalized software were $39,000 for the nine months ended September 30, 2013, compared to $266,000 for the nine months ended September 30, 2012. The additions for the nine months ended September 30, 2013 primarily related to software and equipment purchases for penveu® and for our manufacturing operations. The additions for the nine months ended September 30, 2012 primarily related to software and equipment purchases for penveu® and for our manufacturing operations. Purchases of marketable securities were $10.4 million and $7.5 million for the nine months ended September 30, 2013 and 2012, respectively. Proceeds from the sale of marketable securities increased to $11.0 million for the nine months ended September 30, 2013, compared to $7.2 million for the nine months ended September 30, 2012.

 

 

 
16

 

 

 

Financing Activities

 

Net cash provided by financing activities totaled $26,000 and $824,000 for the nine months ended September 30, 2013 and 2012, respectively, consisting solely of proceeds from the exercise of stock options.

 

Restructuring Charge

 

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expenses with the reduced revenue levels of this product line. Under the 2012 restructuring plan, we reduced our workforce by 10 regular full-time positions. As a result of the 2012 restructuring plan, we recorded a restructuring charge of $253,000, classified as an operating expense, in the fourth quarter of 2012 related to future cash expenditures to cover employee severance and benefits. During the three months ended March 31, 2013, we reduced our restructuring charge by $67,000 related to reduced future cash expenditures related to severance and benefits for a former employee. The former employee’s accepting other employment in April 2013 reduced the amount of severance and benefit payouts by us. The following table summarizes the timing of payments under the restructuring plan (in thousands):

 

Description

 

Severance &

Fringe Benefits

 

Restructuring charge

  $ 253  

Cash payments dusing quarter ended December 31, 2012

    (91 )

Reduction of restructuring charge during quarter ended March 31, 2013

    (67 )

Cash payments during quarter ended March 31, 2013

    (72 )

Cash payments during quarter ended June 30, 2013

    (23 )

Remaining liability as of September 30, 2013

  $ -  

 

Commitments

 

At September 30, 2013, we had no material commitments to purchase capital assets; however, planned capital expenditures for the remainder of 2013 are estimated at approximately $60,000, which primarily relates to manufacturing equipment. At September 30, 2013, we had approximately $515,000 of non-cancelable purchase commitments for inventory as part of the normal course of business. Our significant long-term obligations are future debt payments, operating leases on facilities and our phone system. We have not paid any dividends since our inception and do not anticipate paying any dividends in 2013.

 

On September 3, 2013, we entered into a lease with 4240 International Associates, LLC (operating under the name “Denley Investment and Management Company”) to combine and relocate our corporate and manufacturing facilities. The leased facility is located in Carrollton, Texas. The effective date of the lease is August 22, 2013, and the lease term extends from March 1, 2014 to February 28, 2025. A copy of the agreement, which includes the terms of the future rent schedule, was filed as an exhibit to our Form 8-K filed on September 6, 2013.

 

Other

 

Management believes borrowing availability under the revolving credit facility, together with cash on hand and marketable securities, will be sufficient to meet our liquidity needs for working capital, capital expenditures, debt service and other obligations for the next twelve months. To the extent our actual operating results or other developments differ from our expectations, our liquidity could be adversely affected. Actual results could differ materially from our expectations because of various risks and uncertainties, including (without limitation), delays in the development and introduction of penveu and other new products and services, our reliance on a limited number of customers, the lack of spending improvements in the telecommunications and computer networking industries, significant changes in product demand and other risks and uncertainties disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

We periodically evaluate our liquidity requirements, alternative uses of capital, capital needs and available resources in view of, among other things, our capital expenditure requirements and estimated future operating cash flows. As a result of this process, we have in the past and may in the future seek to raise additional capital, refinance or restructure indebtedness, issue additional securities, repurchase shares of our common stock or take a combination of such steps to manage our liquidity and capital resources. In the normal course of business, we may review opportunities for acquisitions, joint ventures or other business combinations. In the event of any such transaction, we may consider using available cash, issuing additional equity securities or increasing the indebtedness of the Company or its subsidiaries.

 

 

 
17

 

 

Critical Accounting Policies

 

There have been no significant changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Recently Issued Accounting Pronouncements

 

See Note 11 in the notes to the condensed consolidated financial statements for more information regarding recently issued accounting pronouncements, including the dates of adoption and estimated effects on our condensed consolidated financial statements.

 

Item 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Foreign Currency Risk

 

We are exposed to adverse movements in foreign currency exchange rates because we conduct business on a global basis and, in some cases, in foreign currencies. The Company’s operations in France were transacted in the local currency and converted into U.S. Dollars based on published exchange rates for the periods reported and were therefore subject to risk of exchange rate fluctuations. The Euro to U.S. Dollar translation accounted for no charge for the three months ended September 30, 2013. The Euro to U.S. Dollar translation accounted for charges of $2,000 for the three months ended September 30, 2012. The Euro to U.S. Dollar translation accounted for charges of $4,000 and $14,000 for the nine months ended September 30, 2013 and 2012, respectively.     

 

Market Price Risk

 

We had no equity hedge contracts outstanding as of September 30, 2013 or December 31, 2012.

 

Interest Rate Risk

 

Our investments are subject to interest rate risk. Interest rate risk is the risk that our financial condition and results of operations could be adversely affected due to movements in interest rates. We invest our cash in a variety of interest-earning financial instruments, including bank time deposits, money market funds, and variable rate and fixed rate obligations of corporations and national governmental entities and agencies. Due to the demand nature of our money market funds and the short-term nature of our time deposits and debt securities portfolio, these assets are particularly sensitive to changes in interest rates. We manage this risk through investments with shorter-term maturities and varying maturity dates.

 

A hypothetical 50 basis point increase in interest rates would result in an approximate decrease of less than 1% in the fair value of our available-for-sale securities at September 30, 2013. This potential change is based on sensitivity analyses performed on our marketable securities at September 30, 2013. Actual results may differ materially. The same hypothetical 50 basis point increase in interest rates would have resulted in an approximate decrease of less than 1% in the fair value of our available-for-sale securities at December 31, 2012.

 

We maintain a $5.0 million revolving bank credit facility maturing December 19, 2015 with an applicable interest rate on any outstanding balances under the credit facility based on London Interbank Offered Rate (“LIBOR”) plus 1.0% to 1.5% applicable margin rate based on certain factors included in our credit agreement. The interest rate on the borrowings under the revolving credit facility was 1.7% and 1.2% at September 30, 2013 and December 31, 2012, respectively. The unused portion of the credit facility is subject to an unused facility fee ranging from .25% to .75% depending on total deposits with the creditor. A hypothetical 50 basis point increase in LIBOR would increase annual interest expense on this credit facility by $17,500. All borrowings under this facility are secured by marketable securities. Subsequent to September 30, 2013 and prior to the Company’s filing of the condensed consolidated financial statements, the outstanding balance on the credit facility was repaid.

 

 

 
18

 

 

Item 4.          CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, under the supervision of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report using the “Internal Control – Integrated Framework (1992)” created by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding disclosure and that information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

 

Changes in Internal Controls

 

The Company maintains a system of internal controls that is designed to provide reasonable assurance that its books and records accurately reflect, in all material respects, the transactions of the Company and that its established policies and procedures are adhered to. From time to time the Company may experience changes to its internal controls due, for example, to employee turnover, re-balancing of workloads, extended absences and promotions of employees. However, there were no changes in our internal controls over financial reporting during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II

OTHER INFORMATION

 

Item 1.          LEGAL PROCEEDINGS

 

Twenty-five former employees (“Plaintiffs”) of Interphase SAS, a subsidiary of Interphase Corporation, brought suit in France against Interphase SAS alleging various causes of action and rights to damages relating to claims of wrongful dismissal of employment, specific French employment indemnities, general economic losses, and contractual claims relating specifically to their employment relationship and contracts entered into between the individual and Interphase SAS. The lawsuits were filed between November 2010 and April 2011 and were filed before the Labor Court of Boulogne-Billancourt, France and the Administrative Court of Cergy-Pontoise, France. The various claims and assertions arise from, and relate to, the Plaintiffs’ release from employment as part of the restructuring actions taken during the third quarter of 2010. The updated statement of claim is for an aggregate payment of approximately €2.1 million, which translated to approximately $2.8 million at September 30, 2013. The Company believed that the Plaintiffs’ claims were without merit and vigorously defended itself in this lawsuit.

 

On March 22, 2012, a hearing was conducted before the Labor Court of Boulogne-Billancourt, France related to the claims of twenty-three of the twenty-five former employees. On May 31, 2012, the Court reported that the four judges’ votes were split; therefore, another hearing before the Labor Court took place on January 25, 2013. The same four judges heard the case again, along with a professional judge from another court to ensure that a majority decision will be reached.

 

The decision of the Labor Court regarding the claims of twenty-two former employees was rendered on March 22, 2013. All employee claims were rejected, because the Labor Court ruled that the redundancy procedure was regular and that redundancies were based on valid reasons, except claims from four Plaintiffs based on non-competition indemnity (amounting in total to approximately €265,000, which translated to approximately $340,000 at March 31, 2013). During the three months ended March 31, 2013, the Company recorded a charge of approximately $340,000 classified as other loss on its condensed consolidated statements of operations and as a current liability on its condensed consolidated balance sheets. Regarding the claims of the four Plaintiffs based on non-competition indemnity, one of these Plaintiffs has filed an appeal of the Labor Court’s decision (the part of the judgment dismissing his claims based on the redundancy procedures; the economic and financial justification for the redundancy); therefore, related to this Plaintiff, the Company is currently evaluating its appeal options. No payment to this Plaintiff is to be made at this time. The Company is not filing an appeal related to the other three Plaintiffs’ claims based on non-competition indemnity. For these three Plaintiffs, the Company must pay approximately €238,000, which translated to approximately $305,000 at March 31, 2013. Fourteen other former employees also filed an appeal. The Company intends to defend itself against these appeals.

 

 

 
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On May 22, 2012, a hearing was conducted before the Labor Court of Boulogne-Billancourt, France related to the claims of one of the twenty-five former employees with non-executive status. On July 31, 2012, the Court reported that the four judges’ votes were split; therefore, the Labor Court decided to join this case to the cases of the other twenty-three former employees described above in order to be heard again at the same hearing. Therefore, this case was heard again at the hearing on January 25, 2013 before the Labor Court. On March 22, 2013, the Labor Court rejected this former employee's claims.

 

Among the twenty-five cases described above, two former employees were made redundant related to a decision of the Labor Inspector to authorize their redundancy. Because of their protected status as employee representatives, their redundancy required the prior authorization of the French administration. Each of those former employees also filed a claim before the Administrative Tribunal in order to challenge the decision of the Labor Inspector which authorized their redundancy. Although each such claim or action is directed against the State, Interphase is also a party to these proceedings. These cases are still pending before the Administrative Tribunal, and the date of the hearing has not been scheduled since additional briefs and evidence are still being communicated.

 

For one of the twenty-five former employees, who was an employee representative, the Labor Court granted the Company’s motion at the January 25, 2013 hearing; the Labor Court rejected the Plaintiff’s claim to hear the case on the merits, regarding the alleged irregularity of the information and consultation procedure, and postponed this case in deference to the pending case before the Administrative Tribunal as described above. This case was heard again on September 27, 2013, and the Labor Court rendered the same decision (to postpone the case to a hearing on September 5, 2014, and the case will not be heard on the merits until the Administrative Tribunal makes its decision).

 

On June 12, 2012, a hearing was conducted with the Labor Court of Boulogne-Billancourt, France related to the claims of one of the twenty-five former employees, who was also an employee representative. The Labor Court granted the Company’s motion and rejected the Plaintiff’s claim to hear the case on the merits, regarding the alleged irregularity of the information and consultation procedure, and decided to postpone this case in deference to the pending case before the Administrative Tribunal as described above. This case was heard again on May 28, 2013. The Labor Court rendered the same decision and again postponed the hearing until the Administrative Tribunal makes its decision; therefore, this case will be heard again on June 17, 2014.

 

Item 1A.     RISK FACTORS

 

There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, except as follows:

 

The common stock is listed on the Nasdaq Capital Market. If the stock does not continue to be traded on an established exchange, an active trading market may not exist and the trading price of the stock may decline.

 

On April 11, 2013, the Company received notification from the Listing Qualifications Department of the Nasdaq Stock Market LLC (“Nasdaq”) that the Company’s application to list its common stock on the Nasdaq Capital Market was approved and that the listing of the Company’s securities was transferred from the Nasdaq Global Market to the Nasdaq Capital Market at the opening of business on April 15, 2013. The Nasdaq Capital Market is one of the three markets for Nasdaq-listed securities and generally operates in the same manner as the Nasdaq Global Market. Companies listed on the Nasdaq Capital Market must meet certain financial requirements and adhere to Nasdaq’s corporate governance standards. The Company’s common stock will continue to trade under the symbol “INPH”.

 

The Company currently anticipates that it will be able to satisfy the continuing listing standards for the Nasdaq Capital Market. Nevertheless, there can be no assurance that it will be able to do so. If there were a failure to satisfy the continued listing requirements and the deficiency could not be corrected or resolved, the Company's common stock could be delisted by the Nasdaq Capital Market. In that event, the common stock may be eligible to be traded on the OTC Bulletin Board or the Pink OTC Markets. In such an event, it may become more difficult to dispose of, or obtain accurate quotations for the price of, our common stock, and there would also likely be a reduction in our coverage by the news media, which could cause the price of the common stock to decline further.

 

 

 
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Item 2.          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

Item 3.          DEFAULTS UPON SENIOR SECURITIES

 

None.

 

Item 4.          MINE SAFETY DISCLOSURES

 

None.

 

Item 5.          OTHER INFORMATION

 

None.

 

Item 6.          EXHIBITS

 

Exhibits

 

31 (a)

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31 (b)

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32 (a)

Section 1350 Certification of Chief Executive Officer.

32 (b)

Section 1350 Certification of Chief Financial Officer.

101.INS

XBRL Instance Document. *

101.SCH

XBRL Taxonomy Extension Schema Document. *

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document. *

101.LAB

XBRL Taxonomy Extension Label Linkbase Document. *

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document. *

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document. *

 


 

* Furnished electronically herewith, but (in accordance with Rule 406T of Regulation S-T) not deemed “filed”.

 

 

 

 

SIGNATURE

 

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.

 

 

 

INTERPHASE CORPORATION

 

 

(Registrant)

 
     

Date: November 4, 2013

By:

/s/Thomas N. Tipton Jr.

 

 

Thomas N. Tipton Jr.

 

 

Chief Financial Officer, Secretary,

 
 

Vice President of Finance and Treasurer

 
  (Principal Financial and        
  Accounting Officer)   

            

 

 

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