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| INPH > SEC Filings for INPH > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
Gross margin as a percentage of sales was 54% and 59% for the nine months ended
September 30, 2008 and 2007, respectively. The decrease in gross margin
percentage was primarily a result of a shift in revenue mix toward lower margin
products. In addition, we experienced reduced utilization of our manufacturing
facility. These factors were partially offset by the effect of the $973,000
cancellation charge in the first quarter of 2008 described earlier, which had no
cost associated with it. Furthermore, for the nine months ended September 30,
2008, we recorded $300,000 less in obsolete inventory charges compared to the
nine months ended September 30, 2007, favorably impacting gross margin. We
believe that gross margins will continue to fluctuate based on product mix.
Research and Development
Our investment in the development of new products through research and
development was $2.0 million and $2.4 million for the three months ended
September 30, 2008 and 2007, respectively. The decrease in research and
development expense is primarily due to the restructuring plan we undertook in
the first quarter of 2008 (See Note 6 in the Notes to Condensed Consolidated
Financial Statements for more information). The reduced headcount and associated
facility expense resulted in a decrease in research and development expense of
approximately $305,000. Additionally, there was a reduction in project related
research and development expenses of approximately $230,000 during the third
quarter 2008 compared to the third quarter 2007 as we were preparing for several
new product introductions and conducting field trials during the third quarter
2007. These two factors were partially offset by the impact that the Euro to
Dollar exchange rate had on research and development expense. Much of our
research and development resources are located in France and as such those costs
are subject to exchange rate fluctuations with the Euro and the Dollar. The Euro
was stronger against the Dollar in the third quarter of 2008 compared to the
third quarter of 2007. This exchange rate fluctuation resulted in an increase to
research and development expense of approximately $95,000, compared to the same
period last year. As a percentage of total revenue, research and development
expense was approximately 28% in the third quarter of 2008 as compared to
approximately 29% for the same period for the prior year. The decrease in
research and development expense as a percentage of total revenue is due to
research and development expense decreasing at a higher rate than revenue. We
anticipate that spending on research and development will begin to level in the
near future as a result of the restructuring plan undertaken in the first
quarter of 2008, subject to fluctuations in currency exchange rates because much
of our development expense is associated with our engineering lab in France. We
will continue to take steps, when appropriate, to attempt to mitigate the impact
of currency exposure by strategically acquiring foreign exchange contracts to
purchase a fixed amount of Euros on a specific date in the future at a
predetermined rate established by contract (see Item 3 - Foreign Currency Risk).
In addition to our foreign exchange contracts, our total cost of performing
research and development activities in France is reduced by the effect of a 30%
research and development tax credit offered by the French tax administration.
See Note 6 in the Notes to Condensed Consolidated Financial Statements for more
information.
Our investment in research and development was consistent at $7.3 million for
the nine months ended September 30, 2008 and 2007, respectively. The stronger
Euro against the Dollar in 2008 resulted in an increase to research and
development expense of approximately $460,000 for the nine months ended
September 30, 2008, compared to the same period last year. Additionally, there
were charges of approximately $185,000 during 2008 related to software purchased
for specific products that is no longer required. These two factors were offset
by the actions taken as part of the restructuring plan initiated in the first
quarter of 2008. As a percentage of total revenue, research and development
expense was approximately 35% for the nine months ended September 30, 2008 and
34% for the nine months ended September 30, 2007. The increase in research and
development expense as a percentage of total revenue is due to revenue
decreasing while research and development expense increased slightly.
Sales and Marketing
Sales and marketing expenses were $1.2 million and $1.4 million for the three
months ended September 30, 2008 and 2007, respectively. The decrease in sales
and marketing expense is primarily due to the restructuring plan we undertook in
the first quarter of 2008 (See Note 7 in the Notes to Condensed Consolidated
Financial Statements for more information). The reduced headcount resulted in a
decrease in sales and marketing expense of approximately $140,000. Additionally,
lower variable compensation and travel related expense of approximately $55,000
in the three months ended September 30, 2008 compared to 2007 also contributed
to the decrease in total sales and marketing expense. As a percentage of total
revenue, sales and marketing expense was approximately 18% for the third quarter
of 2008 and 17% for the third quarter of 2007. The increase in sales and
marketing expenses as a percentage of total revenue is due to revenue decreasing
at a higher rate than sales and marketing expenses. We will continue to monitor
the level of sales and marketing costs concurrently with actual revenue and
profit results.
Sales and marketing expenses were $4.0 million and $4.2 million for the nine
months ended September 30, 2008 and 2007, respectively. The decrease in sales
and marketing expenses is primarily attributable to the impact of the
restructuring plan we undertook in the first quarter of 2008. As a percentage of
total revenue, sales and marketing expense was approximately 19% for the nine
months ended September 30, 2008 and 2007.
General and Administrative
General and administrative expenses were $1.0 million and $1.2 million for the
three months ended September 30, 2008 and 2007, respectively. The decrease in
general and administrative expenses is primarily due to a reduction in
utilization of outside consulting, legal and accounting services compared to the
same period in the prior year. As a percentage of total revenue, general and
administrative expenses were approximately 14% in the third quarter of 2008 and
2007. We will continue to monitor the level of general and administrative costs
concurrently with actual revenue and profit results.
General and administrative expenses were $3.0 million and $3.3 million for the
nine months ended September 30, 2008 and 2007, respectively. General and
administrative expenses decreased in the nine months ended September 30, 2008
primarily due to a reduction in utilization of outside consulting, legal and
accounting services of approximately $155,000 compared to the same period in the
prior year. In addition, bad debt expense during the nine months ended
September 30, 2008 was approximately $45,000 less than the same period in the
prior year. As a percentage of total revenue, general and administrative expense
was approximately 14% for the nine months ended September 30, 2008 and 15% for
the nine months ended September 30, 2007. The decrease as a percentage of
revenue is due to general and administrative expenses decreasing at a higher
rate than revenue.
Restructuring Charge
On March 27, 2008, we adopted a plan to restructure our United States based
business operations to balance our current spending with recent revenue trends.
The primary goal of the restructuring program was to improve our ability to
invest in future business opportunities that are designed to provide us with
increased growth potential and greater revenue diversification in the coming
years and better align our skills with our future direction. Under the
restructuring plan, we reduced our workforce by 14 employees. As a result of the
restructuring program, the Company recorded a restructuring charge of $365,000
in the first quarter of 2008, classified as operating expense. There was an
additional charge of $38,000 associated with a facility closure during the
second quarter of 2008 related to lease termination costs. We currently estimate
that activities related to the restructuring plan will remove over $1.5 million
of annualized operating costs. See Note 7 in Notes to Condensed Consolidated
Financial Statements for more information. There were no such restructuring
activities during 2007.
Interest Income, Net
Interest income, net of interest expense, decreased to $133,000 for the three
months ended September 30, 2008 from $185,000 in the comparable period in the
prior year. Interest income, net of interest expense, was $419,000 for the nine
months ended September 30, 2008 and $578,000 for the nine months ended
September 30, 2007. The decrease in interest income, net for each period
primarily relates to lower cash and investment balances as well as lower rates
of return on our investments during the three and nine months ended
September 30, 2008 compared to the same periods in 2007, resulting in decreased
interest income during the periods. A decrease in interest expense due to
improved interest rates during the periods presented partially offset the
decrease in interest income.
Other (Loss) Income, Net
Other loss, net, was $175,000 for the three months ended September 30, 2008,
compared to other income, net of $192,000 for the same period in the prior year.
The change in other loss, net, primarily relates to the change in market value
of our one foreign exchange derivative financial instrument outstanding at
September 30, 2008 and resulted in loss of approximately $162,000 for the three
months ended September 30, 2008. For the three months ended September 30, 2007,
the change in market value of the two financial instruments outstanding at
September 30, 2007 was a gain of approximately $187,000. Other income, net, was
$150,000 and $349,000 for the nine months ended September 30, 2008 and 2007,
respectively. For the nine months ended September 30, 2008 and 2007 our foreign
exchange derivative financial instruments resulted in income of approximately
$184,000 and $306,000, respectively. See Note 5 in the Notes to Condensed
Consolidated Financial Statements for more information.
Income Taxes
Our tax benefit rate for the nine months ended September 30, 2008 was 36%,
compared to a tax benefit rate of 28% for the nine months ended September 30,
2007.
The effective tax rate differed from the U.S. statutory rate as we continued to
provide a full valuation allowance for our net deferred tax assets at
September 30, 2008 and September 30, 2007. During each of the nine months ended
September 30, 2008 and September 30, 2007, we recorded a tax benefit related to
our operations in France. This benefit was primarily the result of a research
and development tax credit that increased for 2008 to 30% from the previous rate
of 10% used during 2007. During 2008 the benefit from the research and
development tax credit was partially offset by tax expense related to income
generated in France as the result of foreign currency fluctuations.
Net (Loss) Income
We reported a net loss of $55,000 for the three months ended September 30, 2008
and net income of $698,000 for the three months ended September 30, 2007. Basic
loss per share for the three months ended September 30, 2008 was ($0.01). Basic
and diluted earnings per share for the three months ended September 30, 2007 was
$0.11 and $0.10, respectively. The Company reported a net loss of $1.7 million
and $764,000 for the nine months ended September 30, 2008 and September 30,
2007, respectively. Basic loss per share for the nine months ended September 30,
2008 and September 30, 2007 was ($0.28) and ($0.13), respectively.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flows
Cash and cash equivalents decreased $1.9 million and $3.6 million for the nine
months ended September 30, 2008 and September 30, 2007, respectively. 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, 2008 and 2007 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, amortization of
restricted stock and write-off of impaired capitalized software. Cash used in
operating activities totaled $2.1 million for the nine months ended
September 30, 2008, compared to a net loss of $1.7 million. Provision for
uncollectible accounts and returns decreased $86,000 for the nine months ended
September 30, 2008 compared to the same period in 2007. Provision for excess and
obsolete inventories decreased $300,000 for the nine months ended September 30,
2008 compared to the same period in 2007. Depreciation and amortization
increased slightly for the nine months ended September 30, 2008 compared to the
same period in 2007. Amortization of restricted stock increased slightly for the
nine months ended September 30, 2008, compared to the nine months ended
September 30, 2007. See Note 2 in Notes to Condensed Consolidated Financial
Statements for more information on restricted stock.
Changes in assets and liabilities result primarily from the timing of
production, sales, purchases and payments. Such 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 $376,000 for the nine months ended
September 30, 2008 compared to cash used in investing activities of $2.1 million
for the nine months ended September 30, 2007. Additions to property and
equipment and capitalized software were $428,000 for the nine months ended
September 30, 2008 compared to $1.2 million for the nine months ended
September 30, 2007. The additions for the nine months ended September 30, 2008
primarily related to software and equipment purchases for our engineering and
manufacturing functions. The additions for the nine months ended September 30,
2007 primarily related to our new enterprise performance management system and
equipment purchases for our engineering function. Purchases of marketable
securities were $6.0 million and $12.4 million for the nine months ended
September 30, 2008 and 2007, respectively. Proceeds from the sale of marketable
securities decreased to $6.9 million for the nine months ended September 30,
2008 compared to $11.5 million for the same period in 2007.
Financing Activities
Net cash provided by financing activities totaled $2,000 for the nine months
ended September 30, 2008 compared to $735,000 for the nine months ended
September 30, 2007. Net cash provided by financing activities for both periods
presented related to proceeds from employees exercising stock options.
Commitments
Commitments
At September 30, 2008, we had no material commitments to purchase capital
assets. However, planned capital expenditures for the remainder of 2008 are
estimated at approximately $60,000, relating to engineering, manufacturing and
general office equipment. Our significant long-term obligations as of
September 30, 2008, are our operating leases on facilities and future debt
payments related to our credit facility. To date, we have not paid any dividends
and do not anticipate paying any dividends in 2008.
Off-Balance Sheet Arrangements
At September 30, 2008 we had one foreign exchange contract outstanding to
acquire 1.1 million Euros on a specified date during the next month. At
September 30, 2008, we recorded approximately $145,000 in accrued liabilities
related to the fair value of this outstanding foreign exchange contract. There
was one such contract outstanding at December 31, 2007, we recorded
approximately $167,000 in prepaid expenses and other current assets for this
contract.
Other
Management believes that cash generated from operations and borrowing
availability under the revolving credit facility, together with cash on hand,
will be sufficient to meet our liquidity needs for working capital, capital
expenditures and debt service. To the extent that our actual operating results
or other developments differ from our expectations, our liquidity could be
adversely affected.
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 our indebtedness or our subsidiaries' indebtedness.
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, 2007.
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