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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 0-13071
 INTERPHASE CORPORATION
  Texas
(State or Other Jurisdiction of Incorporation or Organization)
    
    75-1549797
(I.R.S. Employer Identification No.)
 Parkway Centre I
2901 North Dallas Parkway, Suite 200
Plano, Texas 75093
 (214) 654-5000
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 o þ




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##### 



INTERPHASE CORPORATION
 Index to Form 10-Q
Quarterly Period Ended March 31, 2011
 Part I  Financial InformationItem 1. Condensed Consolidated Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of March 31, 2011
and December 31, 2010
    
    
    2Condensed Consolidated Statements of Operations for the three
months ended March 31, 2011 and 2010
    
    
    3Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2011 and 2010
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    17Part II  Other InformationItem 1. Legal Proceedings
    
    
    17Item 1A. Risk Factors
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3. Defaults Upon Senior Securities
    
    
    18Item 4. Removed and Reserved
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    18EX-31.AEX-31.BEX-32.AEX-32.B




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PART I
FINANCIAL INFORMATION
 
 Item 1.
    
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 
 March 31,
    
    
    December 31,2011
    
    
    2010ASSETSCash and cash equivalents
    
    $
    7,057
    
    
    $
    4,772Marketable securities
    
    
    2,551
    
    
    
    6,005Trade accounts receivable, less allowances
of $88 and $70, respectively
    
    
    6,011
    
    
    
    4,633Inventories
    
    
    1,530
    
    
    
    1,645Prepaid expenses and other current assets
    
    
    1,191
    
    
    
    623Total current assets
    
    
    18,340
    
    
    
    17,678Machinery and equipment
    
    
    6,246
    
    
    
    6,840Leasehold improvements
    
    
    327
    
    
    
    327Furniture and fixtures
    
    
    398
    
    
    
    3986,971
    
    
    
    7,565Less-accumulated depreciation and amortization
    
    
    (6,590
    )
    
    
    (7,151
    )Total property and equipment, net
    
    
    381
    
    
    
    414Capitalized software, net
    
    
    394
    
    
    
    485Other assets
    
    
    649
    
    
    
    737Total assets
    
    $
    19,764
    
    
    $
    19,314LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    1,699
    
    
    $
    1,388Deferred revenue
    
    
    49
    
    
    
    39Accrued liabilities
    
    
    1,837
    
    
    
    2,486Accrued compensation
    
    
    733
    
    
    
    648Total current liabilities
    
    
    4,318
    
    
    
    4,561Deferred lease obligations
    
    
    229
    
    
    
    243Long-term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    8,047
    
    
    
    8,304Commitments and ContingenciesShareholders EquityCommon stock, $0.10 par value; 100,000,000
shares authorized; 6,814,835 and
6,815,600 shares issued and outstanding,
respectively
    
    
    681
    
    
    
    682Additional paid in capital
    
    
    43,889
    
    
    
    43,355Retained deficit
    
    
    (31,972
    )
    
    
    (32,203
    )Cumulative other comprehensive loss
    
    
    (881
    )
    
    
    (824
    )Total shareholders equity
    
    
    11,717
    
    
    
    11,010Total liabilities and shareholders equity
    
    $
    19,764
    
    
    $
    19,314
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  2




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INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 Three Months EndedMarch 31,2011
    
    
    2010Revenues
    
    $
    6,688
    
    
    $
    3,759Cost of sales
    
    
    3,436
    
    
    
    1,900Gross margin
    
    
    3,252
    
    
    
    1,859Research and development
    
    
    1,032
    
    
    
    2,093Sales and marketing
    
    
    1,004
    
    
    
    1,260General and administrative
    
    
    985
    
    
    
    1,004Total operating expenses
    
    
    3,021
    
    
    
    4,357Income (loss) from operations
    
    
    231
    
    
    
    (2,498
    )Interest income, net
    
    
    3
    
    
    
    46Other income (loss), net
    
    
    5
    
    
    
    (78
    )Income (loss) before income tax
    
    
    239
    
    
    
    (2,530
    )Income tax expense (benefit)
    
    
    8
    
    
    
    (167
    )Net income (loss)
    
    $
    231
    
    
    $
    (2,363
    )Net income (loss) per share:Basic EPS
    
    $
    0.03
    
    
    $
    (0.34
    )Diluted EPS
    
    $
    0.03
    
    
    $
    (0.34
    )Weighted average common shares
    
    
    6,787
    
    
    
    6,871Weighted average common and dilutive shares
    
    
    6,911
    
    
    
    6,871
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  3




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INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 Three Months EndedMarch 31,2011
    
    
    2010Cash flows from operating activities:Net income (loss)
    
    $
    231
    
    
    $
    (2,363
    )Adjustments to reconcile net income (loss) to net cash used in
operating activities:Provision for uncollectible accounts and returns
    
    
    18
    
    
    
    (10
    )Provision for excess and obsolete inventories
    
    
    
    
    
    
    100Depreciation and amortization
    
    
    145
    
    
    
    203Amortization of stock-based compensation
    
    
    91
    
    
    
    93Write-off of impaired capitalized software
    
    
    
    
    
    
    2Change in assets and liabilities:Trade accounts receivable
    
    
    (1,396
    )
    
    
    942Inventories
    
    
    115
    
    
    
    (301
    )Prepaid expenses and other current assets
    
    
    (549
    )
    
    
    (24
    )Other assets
    
    
    128
    
    
    
    (176
    )Accounts payable, deferred revenue and accrued liabilities
    
    
    (430
    )
    
    
    (306
    )Accrued compensation
    
    
    71
    
    
    
    13Deferred lease obligations
    
    
    (14
    )
    
    
    (11
    )Net cash used in operating activities
    
    
    (1,590
    )
    
    
    (1,838
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (53
    )
    
    
    (14
    )Purchase of capitalized software
    
    
    (6
    )
    
    
    (5
    )Proceeds from the sale of marketable securities
    
    
    3,441
    
    
    
    1,917Purchase of marketable securities
    
    
    
    
    
    
    (1,641
    )Net cash provided by investing activities
    
    
    3,382
    
    
    
    257Cash flows from financing activities:Borrowings under credit facility
    
    
    
    
    
    
    3,500Payments on credit facility
    
    
    
    
    
    
    (3,500
    )Proceeds from the exercise of stock options
    
    
    442
    
    
    
    Net cash provided by financing activities
    
    
    442
    
    
    
    Effect of exchange rate changes on cash and cash equivalents
    
    
    51
    
    
    
    (56
    )Net increase (decrease) in cash and cash equivalents
    
    
    2,285
    
    
    
    (1,637
    )Cash and cash equivalents at beginning of period
    
    
    4,772
    
    
    
    8,115Cash and cash equivalents at end of period
    
    $
    7,057
    
    
    $
    6,478
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  4




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INTERPHASE CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 1.    BASIS OF PRESENTATION
   NOTE 2.    STOCK-BASED COMPENSATION
 Stock Options:
  Number of
    
    
    Weighted AverageOptions
    
    
    Option PriceBalance,
December 31, 2010
    
    
    1,470,222
    
    
    $
    5.00Granted
    
    
    204,500
    
    
    
    1.83Exercised
    
    
    (86,500
    )
    
    
    5.11Canceled
    
    
    (286,683
    )
    
    
    5.46Balance,
March 31, 2011
    
    
    1,301,539
    
    
    $
    4.39
  5




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Option Valuation:
 Three months endedMarch 31,
    
    
    March 31,2011
    
    
    2010Weighted average risk free interest rates
    
    
    3.62
    %
    
    
    3.87
    %Weighted average life (in years)
    
    
    10
    
    
    
    10Volatility
    
    
    63.62
    %
    
    
    66.48
    %Expected dividend yield
    
    
    
    
    
    
    Weighted average grant-date fair value per share of options granted
    
    $
    1.36
    
    
    $
    1.95
 Restricted Stock:
 WeightedRestricted Stock
    
    
    Average GrantShares
    
    
    Date ValueNonvested restricted stock at December 31, 2010
    
    
    318,555
    
    
    $
    2.52Granted
    
    
    
    
    
    
    Vested
    
    
    (33,295
    )
    
    
    3.84Cancelled/Forefeited
    
    
    (87,265
    )
    
    
    1.87Nonvested restricted stock at March 31, 2011
    
    
    197,995
    
    
    $
    2.59
 NOTE 3.    MARKETABLE SECURITIES
  1.
    
    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.
 2.
    
    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.
 3.
    
    Level 3  Valuations based on inputs that are unobservable and significant to
the overall fair value measurement.
  6




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   March 31, 2011
    
    
    December 31, 2010Estimated
    
    
    
    
    
    
    
    
    
    
    EstimatedFair Value
    
    
    
    
    
    
    Unrealized
    
    
    Fair
    
    
    
    
    
    
    Unrealized
    
    
    FairHierarchy
    
    
    Cost
    
    
    Gain
    
    
    Value
    
    
    Cost
    
    
    Gain
    
    
    ValueAgencies
    
    Level 2
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    304
    
    
    $
    1
    
    
    $
    305Asset Backed
    
    Level 2
    
    
    1,468
    
    
    
    6
    
    
    
    1,474
    
    
    
    1,675
    
    
    
    8
    
    
    
    1,683Corporate Bonds
    
    Level 2
    
    
    1,072
    
    
    
    5
    
    
    
    1,077
    
    
    
    1,411
    
    
    
    6
    
    
    
    1,417Municipal Bonds and US
Treasuries
    
    Level 2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,590
    
    
    
    10
    
    
    
    2,600Total
    
    
    
    
    
    $
    2,540
    
    
    $
    11
    
    
    $
    2,551
    
    
    $
    5,980
    
    
    $
    25
    
    
    $
    6,005
 NOTE 4.    INVENTORIES
  March 31, 2011
    
    
    December 31, 2010Raw Materials
    
    $
    1,075
    
    
    $
    1,236Work-in-Process
    
    
    391
    
    
    
    384Finished Goods
    
    
    64
    
    
    
    25Total
    
    $
    1,530
    
    
    $
    1,645
  NOTE 5.    DERIVATIVE FINANCIAL INSTRUMENTS
    7




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 6.    INCOME TAXES
   NOTE 7.    RESTRUCTURING CHARGE
  Reclassification of
    
    
    Cash payments, net of
    
    
    Cash payments, net of
    
    
    Remainingrestructuring charge,
    
    
    currency translation
    
    
    currency translation
    
    
    liabilitynet of currency
    
    
    adjustments, during
    
    
    adjustments, during
    
    
    as ofRestructuring
    
    
    translation
    
    
    quarter ended
    
    
    quarter ended
    
    
    March 31,Description
    
    charge
    
    
    adjustments
    
    
    December 31, 2010
    
    
    March 31, 2011
    
    
    2011Severance & Fringe
Benefits
    
    $
    3,181
    
    
    $
    (111
    )
    
    $
    2,057
    
    
    $
    957
    
    
    $
    56Other Related Costs
    
    
    158
    
    
    
    111
    
    
    
    93
    
    
    
    62
    
    
    
    114Total
    
    $
    3,339
    
    
    $
    
    
    
    $
    2,150
    
    
    $
    1,019
    
    
    $
    170
   8




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 8.    CREDIT FACILITY
  NOTE 9.    COMPREHENSIVE INCOME (LOSS)
  Three months endedMarch 31,2011
    
    
    2010Net income (loss)
    
    $
    231
    
    
    $
    (2,363
    )Other comprehensive income:Unrealized holding loss arising during
period, net of tax
    
    
    (13
    )
    
    
    (14
    )Foreign currency translation adjustment
    
    
    (44
    )
    
    
    12Comprehensive income (loss)
    
    $
    174
    
    
    $
    (2,365
    )
 NOTE 10.    EARNINGS PER SHARE
  Three months endedMarch 31,2011
    
    
    2010Basic net income (loss) per share:Net income (loss)
    
    $
    231
    
    
    $
    (2,363
    )Weighted average common shares outstanding
    
    
    6,787
    
    
    
    6,871Basic net income (loss) per share
    
    $
    0.03
    
    
    $
    (0.34
    )Diluted net income (loss) per share:Net income (loss)
    
    $
    231
    
    
    $
    (2,363
    )Weighted average common shares outstanding
    
    
    6,787
    
    
    
    6,871Dilutive stock options
    
    
    124
    
    
    
    Weighted
average common shares outstanding  assuming dilution
    
    
    6,911
    
    
    
    6,871Diluted net income (loss) per share
    
    $
    0.03
    
    
    $
    (0.34
    )Outstanding stock options that were not included
in the diluted calculation because their effect
would be anti-dilutive
    
    
    978
    
    
    
    1,336
  9




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 11.    SEGMENT INFORMATION
   Three months endedMarch 31,2011
    
    
    2010Revenues:Europe
    
    $
    2,963
    
    
    $
    1,650Pacific Rim
    
    
    2,027
    
    
    
    742North America
    
    
    1,698
    
    
    
    1,367Total
    
    $
    6,688
    
    
    $
    3,759
  Three months endedMarch 31,2011
    
    
    2010Product Revenues:Telecommunications
    
    $
    5,459
    
    
    $
    3,210Enterprise
    
    
    840
    
    
    
    217Services
    
    
    319
    
    
    
    291Other
    
    
    70
    
    
    
    41Total
    
    $
    6,688
    
    
    $
    3,759
 NOTE 12.    RECENTLY ISSUED ACCOUNTING PROUNOUCEMENTS
   10




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   11




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  RESULTS OF OPERATIONS
 Revenue
   Gross Margin
  Research and Development
   12




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Sales and Marketing
  General and Administrative
  Interest Income, Net
  Other Income (Loss), Net
  Income Taxes
    13




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Net Income (Loss)
  LIQUIDITY AND CAPITAL RESOURCES
 Consolidated Cash Flows
  Operating Activities
   Investing Activities
  Financing Activities
   14




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Restructuring Charge
  Reclassification of
    
    
    Cash payments, net of
    
    
    Cash payments, net of
    
    
    Remainingrestructuring charge,
    
    
    currency translation
    
    
    currency translation
    
    
    liabilitynet of currency
    
    
    adjustments, during
    
    
    adjustments, during
    
    
    as ofRestructuring
    
    
    translation
    
    
    quarter ended
    
    
    quarter ended
    
    
    March 31,Description
    
    charge
    
    
    adjustments
    
    
    December 31, 2010
    
    
    March 31, 2011
    
    
    2011Severance &
Fringe Benefits
    
    $
    3,181
    
    
    $
    (111
    )
    
    $
    2,057
    
    
    $
    957
    
    
    $
    56Other Related
Costs
    
    
    158
    
    
    
    111
    
    
    
    93
    
    
    
    62
    
    
    
    114Total
    
    $
    3,339
    
    
    $
    
    
    
    $
    2,150
    
    
    $
    1,019
    
    
    $
    170
  Commitments
  Off-Balance Sheet Arrangements
  Other
     15




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk
   Market Price Risk
  Interest Rate Risk
     16




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Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  
 PART II
OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
 French Restructuring Litigation: 
 Patent-infringement Litigation:
    17




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Item 1A. RISK FACTORS
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. (REMOVED AND RESERVED)
 
 Item 5. OTHER INFORMATION
  
 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.
 
 SIGNATURE
  INTERPHASE CORPORATION
(Registrant)Date: May 9, 2011
    By:
    /s/ Thomas N. Tipton Jr.Thomas N. Tipton Jr.Chief Financial Officer,
Vice President of Finance and
Treasurer
(Principal Financial and Accounting Officer)  18