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INPH > SEC Filings for INPH > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for INTERPHASE CORP

Form 10-Q for INTERPHASE CORP


8-Nov-2012

Quarterly Report


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, 2011.

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 the Company's 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 decreased 43% to $3.2 million for the three months ended September 30, 2012, compared to $5.5 million for the same period in the prior year. Our telecommunications product revenue decreased to $1.9 million for the three months ended September 30, 2012, compared to $4.4 million in the comparable period in the prior year. This decrease was primarily driven by two factors. First, we experienced significantly reduced sales of an interworking product where the primary customer has delayed, until November 2012, the launch of its product. This customer purchased inventory during the three months ended September 30, 2011 in anticipation of an earlier launch. Second, the slowdown in telecommunications equipment spending worldwide has had a negative impact on our major customers and has impacted their purchase volume from us. Our services revenues increased to $1.0 million for the three months ended September 30, 2012, compared to $831,000 for the same period in the previous year, because of increases in electronic manufacturing services and, to a lesser degree, increases in electronic engineering design services. Our enterprise product revenue decreased to $158,000 for the three months ended September 30, 2012 compared to $192,000 for the same period in the previous year. All other revenues decreased to $37,000, compared to $59,000 in the comparable period last year.

Total revenue decreased 42% to $10.7 million for the nine months ended September 30, 2012, compared to $18.4 million for the same period in the prior year. Our telecommunications product revenue decreased to $7.7 million for the nine months ended September 30, 2012, compared to $15.2 million in the comparable period in the prior year. This decrease was primarily driven by two factors. First, the slowdown in telecommunications equipment spending worldwide has had a negative impact on our major customers and has impacted their purchase volume from us. Second, we experienced significantly reduced sales of an interworking product where the primary customer has delayed, until November 2012, the launch of its product. This customer purchased inventory during the nine months ended September 30, 2011 in anticipation of an earlier launch. Our services revenues increased to $2.5 million for the nine months ended September 30, 2012, compared to $1.7 million for the same period in the previous year, because of increases in electronic manufacturing services and, to a lesser degree, increases in electronic engineering design services. As expected, our enterprise product revenue decreased to $346,000 for the nine months ended September 30, 2012 compared to $1.4 million for the same period in the previous year because the major customer roll-out driving this product line has been completed. All other revenues decreased to $88,000, compared to $124,000 in the comparable period last year.


On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expense and the reduced revenue levels of this product line. See Note 12 in the notes to condensed consolidated financial statements for more information on the plan.

During the third quarter of 2012, sales to one customer individually accounted for approximately 27% of total revenues. During the third quarter of 2011, sales to two customers individually accounted for approximately 38% and 17% of total revenues, respectively. No other customers individually accounted for more than 10% of our consolidated revenues in the periods presented.

Included in accounts receivable at September 30, 2012 was $693,000 and $322,000 due from Alcatel-Lucent and Genband, respectively. Included in accounts receivable at December 31, 2011 was $786,000 and $734,000, due from Alcatel-Lucent and Nokia Siemens Networks, 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 46% and 47% for the three months ended September 30, 2012 and 2011, respectively. The decrease in gross margin percentage in the third quarter of 2012 compared to the same period in the prior year was primarily due to decreased utilization of our manufacturing facility, partially offset by a shift in product mix toward higher margin products.

Gross margin as a percentage of revenue was 46% and 49% for the nine months ended September 30, 2012 and 2011, respectively. The decrease in gross margin was primarily due to decreased utilization of our manufacturing facility, partially offset by a shift in product mix toward higher margin products.

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

Research and Development

Our investment in research and development was $690,000 and $923,000 for the three months ended September 30, 2012 and 2011, respectively. The decrease in research and development expense was primarily due to a decrease in variable project-related expenses. As a percentage of revenue, research and development expenses were approximately 22% in the third quarter of 2012 compared to approximately 17% for the same period in the prior year. The increase in research and development expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than research and development expenses.

Our investment in research and development was $2.5 million and $3.0 million for the nine months ended September 30, 2012 and 2011, respectively. During the first nine months of 2012, there was an increase in professional services activities, which resulted in an increase in services revenues. Engineering costs associated with these activities generate revenue; therefore, the related expenses are recorded as cost of sales rather than research and development operating expenses, resulting in a decrease of $255,000 in research and development expenses during the period. In addition, there was a decrease in other variable project-related expenses of $177,000 during the period. As a percentage of revenue, research and development expenses were approximately 23% for the nine months ended September 30, 2012 compared to approximately 16% for the same period in the prior year. The increase in research and development expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than research and development expenses.

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expense and the reduced revenue levels of this product line. See Note 12 in the notes to condensed consolidated financial statements for more information on the plan.

Sales and Marketing

Sales and marketing expenses were $658,000 and $834,000 for the three months ended September 30, 2012 and 2011, respectively. The decrease in sales and marketing expense was primarily due to a decrease in professional sales and marketing services expense of $86,000 and a decrease in personnel-related expense of $79,000. As a percentage of revenue, sales and marketing expenses were approximately 21% for the third quarter of 2012, compared to approximately 15% for the same period in the prior year. The increase in sales and marketing expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than sales and marketing expenses.


Sales and marketing expenses were $2.7 million for each of the nine months ended September 30, 2012 and 2011. In the nine months ended September 30, 2012, the increase in marketing, public relations and tradeshow activities related to the introduction of our new product, penveuŽ, was offset by a decrease in personnel-related expense. As a percentage of revenue, sales and marketing expenses were approximately 25% for the nine months ended September 30, 2012, compared to approximately 15% for the same period in the prior year. The increase in sales and marketing expenses as a percentage of total revenue was due to revenue decreasing while sales and marketing expenses were flat.

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expense and the reduced revenue levels of this product line. See Note 12 in the notes to condensed consolidated financial statements for more information on the plan.

General and Administrative

General and administrative expenses were $648,000 and $753,000 for the three months ended September 30, 2012 and 2011, respectively. The decrease in general and administrative expenses was primarily due to a decrease in legal services expense of $57,000 and a decrease in depreciation and amortization expense of $45,000. As a percentage of revenue, general and administrative expenses were approximately 20% for the third quarter of 2012 and 14% for the same period in the prior year. The increase in general and administrative expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than general and administrative expenses.

General and administrative expenses were $2.3 million and $2.8 million for the nine months ended September 30, 2012 and 2011, respectively. The decrease in general and administrative expenses was primarily due to a decrease in personnel-related expense of $195,000, a decrease in legal services expense of $129,000, and a decrease in depreciation of $45,000. As a percentage of revenue, general and administrative expenses were approximately 22% for the nine months ended September 30, 2012 and 15% for the same period in the prior year. The increase in general and administrative expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than general and administrative expenses. We will continue to monitor the level of general and administrative costs concurrently with actual revenue results.

Income Taxes

Our tax rate was 0% for the nine months ended September 30, 2012, compared to a tax expense rate of 8% for the nine months ended September 30, 2011. 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, 2012 and September 30, 2011. The tax expense for the nine months ended September 30, 2011 primarily relates to tax in a foreign jurisdiction.

Net (Loss) Income

We reported a net loss of $541,000 for the three months ended September 30, 2012 and a net income of $59,000 for the three months ended September 30, 2011. Basic loss per share for the three months ended September 30, 2012 was ($0.08). Basic and diluted earnings per share for the three months ended September 30, 2011 was $0.01. We reported a net loss of $2.6 million for the nine months ended September 30, 2012 and a net income of $607,000 for the nine months ended September 30, 2011. Basic loss per share for the nine months ended September 30, 2012 was ($0.37). Basic and diluted earnings per share for the nine months ended September 30, 2011 was $0.09.

Recently Announced Product

On April 18, 2012 we announced the debut of penveuŽ. penveu is a handheld device that enhances the functionality of installed projectors and large screen displays; making any flat surface, from pull down screens to HDTVs, an interactive display system. Using embedded computer vision technology, penveu works with any device with a VGA connection and requires no software or driver installation, no particular operating system, and no periodic calibration. penveu is targeted at the education and enterprise markets. An independent source estimates the interactive whiteboard market to grow to approximately $1.85 billion in revenue in 2017. However, penveu also has the unique ability to turn the estimated over 51 million projectors and 7 million large screen displays that are currently installed worldwide into interactive display devices. The retail price of penveu will be less than 25% of the average price of a typical installed interactive whiteboard and, unlike an interactive whiteboard, penveu will not require the time and expense of installation. penveu will be offered and sold through our website, other online retailers and catalogs. We continue to make significant investments in development, marketing and infrastructure associated with penveu to position this important product for a successful launch.


LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Cash and cash equivalents decreased $2.8 million from December 31, 2011 to September 30, 2012 and increased $3.3 million from December 31, 2010 to September 30, 2011. 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, 2012 and 2011 are generally similar to the trends in our earnings except for the recovery of uncollectible accounts and returns, provision for excess and obsolete inventories, depreciation and amortization and amortization of stock-based compensation. Cash used in operating activities totaled $3.1 million for the nine months ended September 30, 2012, compared to net loss of $2.6 million. Recovery of uncollectible accounts and returns decreased $4,000 for the nine months ended September 30, 2012 compared to the same period in 2011. Provision for excess and obsolete inventories increased $65,000 for the nine months ended September 30, 2012 compared to the same period in 2011. Depreciation and amortization decreased $105,000 for the nine months ended September 30, 2012 compared to the same period in 2011. Amortization of stock-based compensation increased $229,000 for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to stock options issued during the first half of 2012. See Note 2 in the notes to condensed consolidated financial statements for more information on stock-based compensation.

Changes in assets and liabilities result primarily from the timing of production, sales, purchases and payments except for the increase in inventory during the nine months ended September 30, 2012, which was primarily due to the purchase of parts for penveu and parts associated with an interworking product where the primary customer has delayed the launch of its product. 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 used in investing activities totaled $509,000 and cash provided by investing activities totaled $2.5 million for the nine months ended September 30, 2012 and 2011, respectively. Cash used in or provided by investing activities in each of the periods related principally to our investments in marketable securities, additions to property and equipment and capitalized software purchases. Additions to property and equipment and capitalized software were $266,000 for the nine months ended September 30, 2012, compared to $238,000 for the nine months ended September 30, 2011. The additions for the nine months ended September 30, 2012 primarily related to software and equipment purchases for our newly announced product, penveuŽ, and for our manufacturing function. The additions for the nine months ended September 30, 2011 primarily related to software and equipment purchases for our engineering, manufacturing, and administrative functions. Purchases of marketable securities were $7.5 million and $2.8 million for the nine months ended September 30, 2012 and 2011, respectively. Proceeds from the sale of marketable securities increased to $7.2 million for the nine months ended September 30, 2012, compared to $5.5 million for the nine months ended September 30, 2011.

Financing Activities

Net cash provided by financing activities totaled $824,000 for the nine months ended September 30, 2012, consisting solely of proceeds from the exercise of stock options. Net cash provided by financing activities totaled $527,000 for the nine months ended September 30, 2011, also consisting solely of proceeds from the exercise of stock options.


Restructuring Charge

On September 30, 2010, the Company initiated a restructuring plan to mitigate gross margin erosion by reducing manufacturing and procurement costs, streamline research and development expense and focus remaining resources on key strategic growth areas, and reduce selling and administrative expenses through product rationalization and consolidation of support functions. Under the 2010 restructuring plan, the Company reduced its worldwide work force by 39 employees, including the closure of its European engineering and support center located in Chaville, France. As a result of the 2010 restructuring plan, the Company recorded a restructuring charge of approximately $3.3 million, classified as an operating expense, in the third quarter of 2010 related to future cash expenditures to cover employee severance and benefits and other related costs. Cash payments, net of currency translation adjustments, during the three and nine months ended September 30, 2011 were approximately $10,000 and $1.2 million, respectively. The remaining liability as of September 30, 2011 was $19,000. These amounts were paid out under the restructuring plan by the end of 2011.

Commitments

At September 30, 2012, we had no material commitments to purchase capital assets; however, planned capital expenditures for the remainder of 2012 are estimated at approximately $30,000, which primarily relates to software for penveu. At September 30, 2012, we had $124,000 of non-cancelable purchase commitments for inventory and product tooling as part of the normal course of business. Our significant long-term obligations are operating leases on facilities and our phone system and future debt payments. We have not paid any dividends since our inception and do not anticipate paying any dividends in 2012.

Other

Management believes that 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 the indebtedness of the Company or its subsidiaries.

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, 2011.

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.

Subsequent Event

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expense and the reduced revenue levels of this product line. See Note 12 in the notes to condensed consolidated financial statements for more information on the plan.


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