Note 1 - Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2013

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Business: Interphase Corporation (“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 (formerly Nokia Siemens Networks), 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 Carrollton, Texas, with sales offices in the United States and Europe. See Note 13 for information regarding the Company’s revenues related to North America and foreign regions.

Principles of Consolidation and Basis of Presentation: The accompanying consolidated financial statements include the accounts of Interphase Corporation and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. 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.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. Areas involving estimates include the allowance for doubtful accounts and returns, warranties, inventory impairment charges, accrued liabilities, income tax accounts and revenues. 

Fair Value of Financial Instruments: Fair value is 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. The Company classifies the levels used to measure fair value into the following hierarchy:

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 observable inputs other than Level 1, such as: quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Valuations in the category are inherently less reliable than Level 1 due to the degree of subjectivity involved in determining appropriate methodologies and the applicable observable market underlying assumptions.
3.	Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, and significant to the overall fair value measurement.

Cash and Cash Equivalents: The Company considers cash and temporary investments with original maturities of less than three months, as well as interest-bearing money market accounts, to be cash equivalents. The Company maintains cash balances at various financial institutions with high credit ratings. From time to time, the Company has had cash in financial institutions in excess of federally insured limits or in interest bearing accounts.

Marketable Securities: 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 balance sheet. 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 are included in other comprehensive loss. 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. As of December 31, 2013, the fair market value of marketable securities was approximately $5.1 million, of which approximately $4.6 million matures in one year or less, and approximately $500,000 matures after one year, but less than five years. As of December 31, 2012, the fair market value of marketable securities was approximately $4.9 million, of which approximately $4.7 million matures in one year or less, and approximately $200,000 matures after one year, but less than five years. The Company recorded an unrealized loss with respect to certain available-for-sale securities in 2013 of $3,000. The Company recorded an unrealized gain with respect to certain available-for-sale securities in 2012 of $1,000.

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

		December 31, 2013						December 31, 2012
	Fair Value Hierarchy	Cost		Unrealized Gain		Fair Value		Cost		Unrealized Gain		Fair Value
Asset Backed	Level 2	$	455	$	1	$	456	$	952	$	3	$	955
Corporate Bonds	Level 2		164		1		165		698		1		699
US Treasuries	Level 2		4,500		-		4,500		3,200		-		3,200
Total		$	5,119	$	2	$	5,121	$	4,850	$	4	$	4,854

Accounts Receivable and Allowance for Doubtful Accounts: The Company records accounts receivable at their net realizable value, which requires management to estimate the collectability of the Company’s trade receivables. A considerable amount of judgment is required in assessing the realization of these receivables, including the current creditworthiness of each customer and related aging of the past due balances. Management evaluates all accounts periodically and a reserve is established based on the best facts available to management. This reserve is also partially determined by using percentages applied to certain aged receivable categories based on historical results and is reevaluated and adjusted as additional information is received. After all attempts to collect a receivable have failed, the receivable is written off against the allowance for doubtful accounts.

The activity in this account was as follows (in thousands):

	Balance at				(Write-offs)			Balance
	Beginning		Charged to		Net of			at End
Year Ended December 31:	of Period		Expense		Recoveries			of Period
2013	$	17	$	13	$	(13	)	$	17
2012	$	18	$	1	$	(2	)	$	17
2011	$	23	$	-	$	(5	)	$	18

Allowance for Returns: The Company maintains an allowance for returns, based upon expected return rates, when such return rates are estimable. The estimates of expected return rates are generally based upon historical returns experience. Changes in return rates could impact allowance for return estimates. As of December 31, 2013, 2012 and 2011, the allowance for returns was $28,000, $22,000 and $25,000, respectively, and presented as a reduction to accounts receivable.

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

	Years ended December 31,
	2013		2012
Raw Materials	$	2,108	$	1,616
Work-in-Process		903		462
Finished Goods		321		141
Total	$	3,332	$	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. Writedowns in 2013, 2012 and 2011 were $120,000, $57,000 and $60,000, respectively.

Property and Equipment: Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of depreciable assets using the straight-line method. When property and equipment are sold or otherwise retired, the cost and accumulated depreciation applicable to such assets are eliminated from the accounts, and any resulting gain or loss is reflected in current operations. Related depreciation expense was as follows (in thousands):

Year ended December 31:	Depreciation Expense
2013	$	129
2012	$	200
2011	$	217

The depreciable lives of property and equipment are as follows:

Machinery and equipment	3	-	5	years
Leasehold improvements		Term of the respective leases
Furniture and fixtures	3	-	10	years

Capitalized Software: Capitalized software represents various software licenses purchased by the Company and utilized in connection with the Company’s products as well as the general operations of the Company. In addition, the Company capitalizes certain external direct costs incurred to create internal use software, principally related to applications, infrastructure and the development of its websites. Capitalized software is amortized over three to five years utilizing the straight-line method. Related amortization expense and accumulated amortization were as follows (in thousands):

Year ended December 31:	Amortization Expense		Accumulated Amortization
2013	$	92	$	3,495
2012	$	177	$	3,401
2011	$	348	$	3,306

Long-Lived Assets: Property and equipment and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. All impairments are recognized in operating results when a permanent reduction in value occurs. There was no such writedown during 2013, 2012 or 2011.    

Revenue Recognition: Product revenues and electronic manufacturing services revenues are recognized in accordance with shipping terms, which is typically upon shipment, provided fees are fixed and determinable, a customer purchase order is obtained (when applicable), and collection is probable. Sales tax collected from customers and remitted to the applicable taxing authorities is accounted for on a net basis, with no impact to revenues. Service revenue, other than electronic manufacturing services revenue, is recognized as the services are performed. Deferred revenue consists primarily of advance payments for electronic manufacturing services where the goods have not yet shipped.

The Company’s engineering design services are typically provided on a fixed-fee basis. The revenues for such longer duration projects that require significant customization and integration are recognized using the percentage-of-completion method. In using the percentage-of-completion method, revenues are generally recorded based on the percentage of effort incurred to date on a contract relative to the estimated total expected contract effort. Significant judgment is required when estimating total contract effort and progress to completion on the arrangements as well as whether a loss is expected to be incurred on the contract. Management uses historical experience, project plans and an assessment of the risks and uncertainties inherent in the arrangement to establish these estimates. Uncertainties include implementation delays or performance issues that may or may not be within the Company’s control. Changes in these estimates could result in a material impact on revenues and net earnings (loss). If the Company is unable to develop reasonably dependable cost or revenue estimates, the completed contract method is applied under which all revenues and related costs are deferred until the contract is completed. The Company had unbilled receivables of $46,000 and $77,000 included in trade accounts receivable on the Company’s balance sheet at December 31, 2013 and 2012, respectively.

Warranty Reserve: The Company offers to its customers a limited warranty that its products will be free from defect in the materials and workmanship for a specified period. The Company has established a warranty reserve of $20,000 and $15,000 at December 31, 2013 and 2012, respectively, as a component of accrued liabilities, for any potential claims. The Company estimates its warranty reserve based upon an analysis of all identified or expected claims and an estimate of the cost to resolve those claims.

Research and Development: Research and development costs are charged to expense as incurred.

Interest Income, Net: Interest income from investments in securities and cash balances was $12,000, $34,000 and $46,000 for the years ended December 31, 2013, 2012 and 2011, respectively. Interest expense related to the Company’s credit facility was $5,000, $9,000 and $24,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

Advertising Expense: Advertising costs are charged to expense as incurred. Advertising expense was $1,000, $9,000 and $6,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

Foreign Currency Translation: Assets and liabilities of the Company’s French subsidiary, whose functional currency is other than the U.S. Dollar, are translated at year-end rates of exchange, and revenues and expenses are translated at average exchange rates prevailing during the year. Realized foreign currency transaction gains and losses are recognized in the Consolidated Statements of Operations as incurred. Unrealized gains or losses are accumulated in shareholders’ equity as a component of other comprehensive income.

Income Taxes: The Company determines its deferred taxes using the asset and liability method. Deferred tax assets and liabilities are based on the estimated future tax effects of differences between the financial statement basis and tax basis of assets and liabilities given the provisions of enacted tax law. The Company’s consolidated financial statements include deferred income taxes arising from the recognition of revenues and expenses in different periods for income tax and financial reporting purposes.

The Company records a valuation allowance to reduce its deferred income tax assets to the amount that are more likely than not to be realizable. The Company considers all available evidence, both positive and negative, such as future reversals of deferred tax assets and liabilities, cumulative losses in recent years, projected future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. In making such judgments, significant weight is given to evidence that can be objectively verified. Management is continuously assessing the realizability of deferred tax assets.

The Company recognizes the impact of uncertain tax positions taken or expected to be taken on an income tax return in the financial statements at the amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position, interest, and penalties will not be recognized in the financial statements unless it is more likely than not of being sustained.

Other Comprehensive Loss: Other comprehensive loss is presented on the Consolidated Statements of Comprehensive Loss and is comprised of unrealized gains and losses excluded from the Consolidated Statements of Operations. These unrealized gains and losses consist of holding period gains and losses related to marketable securities, net of income taxes, and foreign currency translation, which are not adjusted for income taxes since they relate to indefinite investments in a non-U.S. subsidiary.