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| INPH > SEC Filings for INPH > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
Gross Margin
For the three months ended September 30, 2009, gross margin, as a percentage of
sales, was 25% compared to 58% for the same period in the prior year. The
decrease in our gross margin percentage in the third quarter of 2009 was
primarily due to a revenue mix shift toward lower margin products. During the
third quarter 2009, an additional excess and obsolete inventory reserve of
$200,000 was established negatively affecting our gross margin percentage.
Finally, gross margin percentage was negatively impacted by decreased
utilization of our manufacturing facility.
Gross margin as a percentage of sales was 51% and 54% for the nine months ended
September 30, 2009 and 2008, respectively. Our gross margin percentage decreased
primarily due to the effect of the $973,000 project cancellation fee recorded as
revenue in the first quarter of 2008 described earlier, which had no cost
associated with it. In addition, gross margin was negatively impacted by an
increase of $300,000 in excess and obsolete inventory charges during the nine
months ended September 30, 2009, compared to the same period in the prior year.
We believe that pricing pressures in the industry may dampen our gross margin in
future periods and it may continue to be challenging to entirely offset these
pressures with incremental supplier cost reductions and factory productivity
improvements.
Research and Development
Our investment in the development of new products through research and
development was $1.8 million and $2.0 million for the three months ended
September 30, 2009 and 2008, respectively. The decrease in research and
development expense is primarily related to project related expense which
decreased by approximately $120,000 during the three months ended September 30,
2009 compared to the same period in the prior year. Additionally, much of our
research and development resources are located in France and as such those costs
are subject to exchange rate fluctuations between the Euro and the Dollar. The
Dollar was stronger against the Euro in the third quarter of 2009 compared to
the third quarter of 2008. This exchange rate fluctuation resulted in a decrease
to research and development expense of approximately $50,000, compared to the
same period in the prior year. As a percentage of total revenue, research and
development expense was approximately 41% in the third quarter of 2009 as
compared to approximately 28% for the same period for the prior year. The
increase in research and development expense as a percentage of total revenue is
due to revenue decreasing at a higher rate than research and development expense
during the period.
Our investment in research and development was $5.8 million and $7.3 million for
the nine months ended September 30, 2009 and 2008, respectively. The decrease in
research and development expense is principally related to several factors.
First, we had a reduction in project related expense of $625,000 during the nine
months ended September 30, 2009, compared to the same period in the prior year.
Second, the reduced headcount and facility expense resulting from the
restructuring plan we undertook in the first quarter of 2008 decreased research
and development expense by approximately $345,000 for the nine months ended
September 30, 2009, compared to the same period in the prior year. See Note 7 in
the Notes to Condensed Consolidated Financial Statements for more information.
Third, a significantly stronger Dollar against the Euro in 2009 resulted in a
decrease to research and development expense of approximately $390,000 for the
nine months ended September 30, 2009, compared to the same period last year.
Finally, there were charges of approximately $185,000 during the nine months
ended September 30, 2008 related to software purchased for the development of
products that were subsequently discontinued. There were no such charges during
the nine months ended September 30, 2009. As a percentage of total revenue,
research and development expense was approximately 28% for the nine months ended
September 30, 2009 and 35% for the nine months ended September 30, 2008. 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
during the period.
Sales and Marketing
Sales and marketing expenses were $1.2 million for both the three months ended
September 30, 2009 and 2008. As a percentage of total revenue, sales and
marketing expense was approximately 28% for the third quarter of 2009 and 18%
for the third quarter of 2008. The increase in sales and marketing expenses as a
percentage of total revenue is due to revenue decreasing while sales and
marketing expense remained consistent.
Sales and marketing expenses were $4.3 million and $4.0 million for the nine
months ended September 30, 2009 and 2008, respectively. The increase in sales
and marketing expense is primarily due to increased headcount in business
development, product management and marketing. The increased headcount resulted
in an increase in sales and marketing expense of approximately $535,000 for the
nine months ended September 30, 2009 compared to the same period in 2008.
Additionally, sales and marketing expense increased as a result of increased
commission and variable compensation expense of approximately $225,000. These
two primary increases were partially offset by several factors including a
significantly stronger Dollar against the Euro in 2009. The stronger Dollar
against the Euro resulted in a decrease to sales and marketing expense of
approximately $155,000 for the nine months ended September 30, 2009, compared to
the same period last year. Additionally, sales and marketing expenses decreased
as a result of a reduction in tradeshow and evaluation board expenses of
approximately $150,000. Sales and marketing expenses also decreased as a result
of the restructuring plan we undertook in the first quarter of 2008 resulting in
a reduction of headcount expenses of approximately $138,000 in the first nine
months of 2009 compared to the same period in 2008. See Note 7 in the Notes to
Condensed Consolidated Financial Statements for more information. As a
percentage of total revenue, sales and marketing expense was approximately 21%
for the nine months ended September 30, 2009 and 19% for the nine months ended
September 30, 2008. The increase in sales and marketing expense as a percentage
of total revenue is due to revenue decreasing while sales and marketing expense
increased during the period. We will continue to monitor the level of sales and
marketing costs concurrently with actual revenue and profit results.
General and Administrative
General and administrative expenses were $860,000 and $990,000 for the three
months ended September 30, 2009 and 2008, respectively. The decrease in general
and administrative expenses was primarily due to the release of previously
accrued potential variable compensation awards in the third quarter of 2009. As
a percentage of total revenue, general and administrative expenses were
approximately 20% in the third quarter of 2009 and 14% for the same period in
the prior year. The increase as a percentage of revenue is due to revenue
decreasing at a higher rate than general and administrative expense.
General and administrative expenses were $3.1 million and $3.0 million for the
nine months ended September 30, 2009 and 2008, respectively. The increase in
general and administrative expense is primarily driven by an increased cost of
outside providers for accounting, consulting and legal services, which accounted
for approximately $135,000. As a percentage of total revenue, general and
administrative expense was approximately 15% and 14% for the nine months ended
September 30, 2009 and 2008, respectively. The increase as a percentage of
revenue is due to revenue decreasing while general and administrative expense
increased slightly. We will continue to monitor the level of general and
administrative costs concurrently with actual revenue and profit results.
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. During the nine
months ended September 30, 2008, the Company recorded restructuring charges of
$403,000, classified as operating expense, related to severance and fringe
benefits and lease obligations. See Note 7 in the Notes to Condensed
Consolidated Financial Statements for more information. There were no such
restructuring activities during 2009.
Interest Income, Net
Interest income, net of interest expense, decreased to $65,000 for the three
months ended September 30, 2009 from $133,000 in the comparable period in the
prior year. Interest income, net of interest expense, was $243,000 for the nine
months ended September 30, 2009 and $419,000 for the nine months ended
September 30, 2008. The decrease in interest income, net for each period
primarily relates to lower rates of return on our investments during the three
and nine months ended September 30, 2009 compared to the same periods in 2008,
resulting in decreased interest income during the periods.
Other (Loss) Income, Net
Other loss, net, was $3,000 and $175,000 for the three months ended
September 30, 2009 and 2008, respectively. Other loss, net was $9,000 for the
nine months ended September 30, 2009. Other income, net was $150,000 for the
nine months September 30, 2008. During 2008, the other income and loss, net was
the result of the change in market value of our foreign exchange derivative
financial instruments which resulted in a loss of approximately $162,000 for the
three months ended September 30, 2008 and a gain of approximately $184,000 for
the nine months ended September 30, 2008. During the three and nine months ended
September 30, 2009, we have had no such foreign exchange derivative financial
instruments. 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, 2009 was 34%,
compared to a tax benefit rate of 36% for the nine months ended September 30,
2008.
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, 2009 and September 30, 2008. During each of the nine months ended
September 30, 2009 and September 30, 2008, we recorded a tax benefit related to
our operations in France. This benefit was primarily the result of a 30%
research and development tax credit.
Net Loss
We reported a net loss of $2.4 million and $1.6 million for the three months and
nine months ended September 30, 2009, respectively. Basic and diluted loss per
share for the three months and nine months ended September 30, 2009 was ($0.34)
and ($0.23), respectively. The Company reported a net loss of $55,000 and
$1.7 million for the three and nine months ended September 30, 2008,
respectively. Basic and diluted loss per share for the three and nine months
ended September 30, 2008 was ($0.01) and ($0.27), respectively.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Cash Flows
Cash and cash equivalents increased $4.4 million from December 31, 2008 to
September 30, 2009 and decreased $1.9 million from December 31, 2007 to
September 30, 2008. 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, 2009 and 2008 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 provided
by operating activities totaled $1.7 million for the nine months ended
September 30, 2009, compared to a net loss of $1.6 million. Provision for
uncollectible accounts and returns increased $131,000 for the nine months ended
September 30, 2009 compared to the same period in 2008. Provision for excess and
obsolete inventories increased by $300,000 for the nine months ended
September 30, 2009, compared to the same period in 2008. Depreciation and
amortization decreased by $34,000 for the nine months ended September 30, 2009
compared to the same period in 2008. Amortization of restricted stock increased
$36,000 for the nine months ended September 30, 2009, compared to the nine
months ended September 30, 2008. See Note 2 in Notes to Condensed Consolidated
Financial Statements for more information on restricted stock. Write-offs of
impaired capitalized software decreased by $185,000 for the nine months ended
September 30, 2009 compared to the same period in 2008.
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 $2.7 million and $376,000 for the
nine months ended September 30, 2009 and 2008, respectively. Cash provided by
investing activities in each of the periods presented related principally to
proceeds from the sale of marketable securities partially offset by
disbursements for additions to property and equipment, capitalized software and
investments in marketable securities. Additions to property and equipment and
capitalized software were $253,000 for the nine months ended September 30, 2009
compared to $428,000 for the nine months ended September 30, 2008. The additions
for the nine months ended September 30, 2009 primarily related to enhancements
to our enterprise performance management system and software purchases for our
engineering function. The additions for the nine months ended September 30, 2008
primarily related to software and equipment purchases for our engineering and
manufacturing functions. Purchases of marketable securities were $4.1 million
and $6.0 million for the nine months ended September 30, 2009 and 2008,
respectively. Proceeds from the sale of marketable securities increased to
$7.1 million for the nine months ended September 30, 2009 compared to
$6.9 million for the same period in 2008.
Financing Activities
Cash provided by financing activities totaled $4,000 and $2,000 for the nine
months ended September 30, 2009 and 2008, respectively. For both periods
presented net cash provided by financing activities related to proceeds from
employees exercising stock options.
Commitments
Commitments
At September 30, 2009, we had no material commitments to purchase capital
assets. However, planned capital expenditures for the remainder of 2009 are
estimated at approximately $75,000, a significant portion of which relates to
engineering equipment and tools. The remaining planned purchases relate to
enhancement to our manufacturing and general office equipment. Our significant
long-term obligations as of September 30, 2009, 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 2009.
Off-Balance Sheet Arrangements
At September 30, 2009 and December 31, 2008, we did not have any off-balance
sheet arrangements including foreign exchange contracts.
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 Quarterly Report on 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, 2008.
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