10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

☐ 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: 1-35267

INTERPHASE CORPORATION

(Exact name of registrant as specified in its charter)

Texas	75-1549797
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

4240 International Parkway, Suite 105

Carrollton, Texas 75007

(Address of Principal Executive Offices and Zip Code)

 (214) 654-5000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☒   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ☐      Accelerated filer  ☐      Non-accelerated filer  ☐      Smaller reporting company  ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of October 29, 2014, shares of common stock outstanding totaled 8,377,106.

INTERPHASE CORPORATION

Index to Form 10-Q

Quarterly Period Ended September 30, 2014

Part I - Financial Information
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	2
		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013	3
		Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2014 and 2013	4
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
	Item 4.	Controls and Procedures	18
Part II - Other Information
	Item 1.	Legal Proceedings	19
	Item 1A.	Risk Factors	20
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 3.	Defaults Upon Senior Securities	21
	Item 4.	Mine Safety Disclosures	21
	Item 5.	Other Information	21
	Item 6.	Exhibits	21

PART I

FINANCIAL INFORMATION

Item 1.            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

INTERPHASE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	September 30,			December 31,
	2014			2013
ASSETS
Cash and cash equivalents	$	3,915		$	1,478
Marketable securities		3,931			5,121
Trade accounts receivable, less allowances of $41 and $45, respectively		2,562			2,679
Inventories		3,369			3,332
Prepaid expenses and other current assets		479			1,041
Total current assets		14,256			13,651
Machinery and equipment		6,988			6,064
Leasehold improvements		587			380
Furniture and fixtures		152			425
		7,727			6,869
Less-accumulated depreciation and amortization		(6,086	)		(6,552	)
Total property and equipment, net		1,641			317
Capitalized software, net		46			96
Other assets		387			345
Total assets	$	16,330		$	14,409
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable	$	1,753		$	1,475
Deferred revenue		85			652
Accrued liabilities		1,681			1,513
Accrued compensation		218			231
Total current liabilities		3,737			3,871
Deferred lease obligations		1,288			16
Long-term debt		3,500			3,500
Total liabilities		8,525			7,387
Commitments and Contingencies
Shareholders’ Equity
Common stock, $0.10 par value; 100,000,000 shares authorized; 8,377,106 and 7,011,146 shares issued and outstanding, respectively		838			701
Additional paid in capital		50,025			46,442
Accumulated deficit		(42,193	)		(39,196	)
Cumulative other comprehensive loss		(865	)		(925	)
Total shareholders' equity		7,805			7,022
Total liabilities and shareholders' equity	$	16,330		$	14,409

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

INTERPHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2014			2013		2014			2013
Revenues:
Product	$	2,804		$	3,136	$	6,462		$	8,509
Service		1,408			1,032		4,445			2,757
Total revenues		4,212			4,168		10,907			11,266
Cost of sales:
Product		1,907			1,450		3,982			4,601
Service		997			733		3,624			2,015
Total cost of sales		2,904			2,183		7,606			6,616
Gross margin		1,308			1,985		3,301			4,650
Research and development		697			622		1,952			2,309
Sales and marketing		618			614		1,956			2,022
General and administrative		829			660		2,350			2,239
Restructuring benefit		-			-		-			(67	)
Total operating expenses		2,144			1,896		6,258			6,503
(Loss) income from operations		(836	)		89		(2,957	)		(1,853	)
Other loss, net		(9	)		-		(9	)		(343	)
(Loss) income before income tax		(845	)		89		(2,966	)		(2,196	)
Income tax provision		8			13		31			33
Net (loss) income	$	(853	)	$	76	$	(2,997	)	$	(2,229	)
Net (loss) income per share:
Basic	$	(0.11	)	$	0.01	$	(0.41	)	$	(0.32	)
Diluted	$	(0.11	)	$	0.01	$	(0.41	)	$	(0.32	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

INTERPHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Net (loss) income	$	(853	)	$	76		$	(2,997	)	$	(2,229	)
Other comprehensive income (loss):
Foreign currency translation adjustment		49			(31	)		53			(23	)
Unrealized holding gain (loss) arising during period, net of tax		7			-			7			(4	)
Other comprehensive income (loss)		56			(31	)		60			(27	)
Comprehensive (loss) income	$	(797	)	$	45		$	(2,937	)	$	(2,256	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

INTERPHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended
	September 30,
	2014			2013
Cash flows from operating activities:
Net loss	$	(2,997	)	$	(2,229	)
Adjustments to reconcile net loss to net cash used in operating activities:
Allowance for doubtful accounts and returns		13			15
Writedowns of excess and obsolete inventories		182			101
Depreciation and amortization		247			170
Amortization of stock-based compensation		368			528
Loss on retirement of machinery and equipment		14			-
Change in assets and liabilities:
Trade accounts receivable		104			(629	)
Inventories		(219	)		(1,049	)
Prepaid expenses and other current assets		532			(359	)
Other assets		(47	)		(101	)
Accounts payable, deferred revenue and accrued liabilities		(27	)		1,706
Accrued compensation		(13	)		(26	)
Deferred lease obligations		1,272			(65	)
Net cash used in operating activities		(571	)		(1,938	)
Cash flows from investing activities:
Purchases of property and equipment		(1,525	)		(30	)
Purchases of capitalized software		(10	)		(9	)
Proceeds from the sale of marketable securities		12,006			11,007
Purchases of marketable securities		(10,810	)		(10,439	)
Net cash (used in) provided by investing activities		(339	)		529
Cash flows from financing activities:
Borrowings under credit facility		10,500			10,500
Payments on credit facility		(10,500	)		(10,500	)
Proceeds from the issuance of common stock		3,349			-
Proceeds from the exercise of stock options		3			26
Net cash provided by financing activities		3,352			26
Effect of exchange rate changes on cash and cash equivalents		(5	)		(4	)
Net increase (decrease) in cash and cash equivalents		2,437			(1,387	)
Cash and cash equivalents at beginning of period		1,478			3,949
Cash and cash equivalents at end of period	$	3,915		$	2,562

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. - BASIS OF PRESENTATION

Interphase Corporation and its subsidiaries (“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 offers products and services from embedded computing solutions, engineering design services, and contract manufacturing services to a new line of embedded computer vision products.

Embedded solutions include communications networking products for connectivity, interworking and packet processing. Clients for this product line include Alcatel-Lucent, GENBAND, Hewlett Packard, and Samsung.

The engineering design and manufacturing services serve a wide variety of industries within the electronics market, from machine-to-machine (“M2M”) and Internet of Things (“IoT”) designs utilizing Cellular, GPS and Wi-Fi tracking solutions to cost-saving redesigns for manufacturability. Interphase Productization services provide customers with the full suite of rapid design and manufacturing services required to quickly take a project from design concept to full production in the marketplace.

The penveu® product line, from the embedded computer vision line of business, addresses both the education and enterprise markets. penveu® is a handheld device that adds interactivity to projectors and large screen displays, turning flat surfaces into an interactive display.

Founded in 1974, the Company is located in Carrollton, Texas, with sales offices in the United States and Europe. See Note 9 for information regarding the Company’s revenues related to North America and foreign regions.

The accompanying condensed consolidated financial statements include the accounts of Interphase Corporation and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. While the accompanying condensed consolidated financial statements are unaudited, they have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. 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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2013.

NOTE 2. - STOCK-BASED COMPENSATION

Stock Options

The Interphase Corporation 2014 Long-Term Stock Incentive Plan has been adopted by the Company’s Board of Directors and approved by its shareholders. Awards granted during the three months ended September 30, 2014 have been made under that plan. All other awards outstanding were made under the Interphase Corporation 2004 Long-Term Stock Incentive Plan, which expired on May 5, 2014 (so that no new awards could be made or granted under the Interphase Corporation 2004 Long-Term Stock Incentive Plan).

During the nine months ended September 30, 2014, the Company issued 8,000 stock options that vest over a three year period and expire ten years from date of grant. The weighted average exercise price of these stock options is $4.00. During the nine months ended September 30, 2013, the Company issued 26,000 stock options that vest over a four year period and expire ten years from date of grant. The weighted average exercise price of these stock options is $4.16. Compensation expense related to stock options without performance-based vesting conditions was $41,000 and $71,000 for the three months ended September 30, 2014 and 2013, respectively. Compensation expense related to stock options without performance-based vesting conditions was $132,000 and $274,000 for the nine months ended September 30, 2014 and 2013, respectively.

6

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

During the nine months ended September 30, 2014, the Company issued 136,000 stock options with performance-based vesting conditions for the years ended December 31, 2014, 2015, and 2016, the achievement of which would result in pro rata vesting per year in March 2015, 2016, and 2017, respectively. The weighted average exercise price of these stock options is $5.49. During the nine months ended September 30, 2013, the Company issued 102,500 stock options with performance-based vesting conditions related to revenue objectives for the year ended December 31, 2014, the achievement of which would result in vesting in February 2015. The weighted average exercise price of these stock options is $5.40. All stock options with performance-based conditions expire ten years from date of grant. Of the unvested stock options outstanding at September 30, 2014, 1,074,950 are subject to the achievement of certain performance conditions. The performance conditions related to approximately 74,000 and 66,000 of these stock options were deemed probable as of September 30, 2014 and 2013, respectively. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was approximately $72,000 and $62,000 for the three months ended September 30, 2014 and 2013, respectively. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was approximately $192,000 and $174,000 for the nine months ended September 30, 2014 and 2013, respectively. The performance conditions related to the remaining options were not deemed probable at September 30, 2014; therefore no compensation expense related to these options has been recorded.

The weighted-average remaining contractual life of stock options outstanding and exercisable at September 30, 2014 and 2013 was 6.70 years and 5.58 years, respectively.

As of September 30, 2014, there were 1,187,450 unvested options expected to vest over a weighted-average period of 8.5 years. As of December 31, 2013, there were 1,586,076 unvested options expected to vest over a weighted-average period of 8.9 years.

The following table summarizes the combined stock option activity under both of the plans:

	Number of Options			Weighted Average Option Price
Balance, December 31, 2013		2,187,019		$	4.11
Granted		144,000			5.41
Exercised		(625	)		4.37
Cancelled		(497,891	)		5.66
Balance, September 30, 2014		1,832,503		$	3.79

Option Valuation

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with weighted-average assumptions based on the grant date.

	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Risk free interest rate range		2.63	%		2.63	%		2.63 – 2.70	%		1.86 – 2.63	%
Weighted average life (in years)		10			10			10			10
Weighted average volatility		66.18	%		68.13	%		65.47	%		67.97	%
Volatility range		66.18	%		68.13	%		65.30 – 66.18	%		66.10 – 68.13	%
Expected dividend yield		-			-			-			-
Weighted average grant-date fair value per share of options granted	$	3.02		$	4.06		$	4.06		$	3.87

7

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Restricted Stock

The Interphase Corporation 2014 Long-Term Stock Incentive Plan provides, and the Interphase Corporation 2004 Long-Term Stock Incentive Plan provided, for grants of bonus stock awards (“restricted stock”) to the Company’s directors and certain employees at no cost to the recipient. Holders of restricted stock are entitled to cash dividends, if declared, and to vote their respective shares. Restrictions limit the sale or transfer of these shares during a predefined vesting period, currently ranging from three to six years. There were no shares of restricted stock issued during the nine months ended September 30, 2014 or 2013. Upon issuance of restricted stock under a plan, unearned compensation equivalent to the market value at the date of grant is recorded as a reduction to shareholders’ equity and subsequently amortized to expense over the respective restriction periods. Compensation expense related to previously granted restricted stock was $14,000 and $24,000 for the three months ended September 30, 2014 and 2013, respectively. Compensation expense related to previously granted restricted stock was $44,000 and $80,000 for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, there was $77,000 of total unamortized compensation cost related to unvested restricted stock remaining to be recognized. The expense is expected to be recognized over a weighted-average period of less than 1 year. As of December 31, 2013, there was $124,000 of total unamortized compensation cost related to unvested restricted stock remaining to be recognized. The expense is expected to be recognized over a weighted-average period of 1.2 years. The following table summarizes the restricted stock activity for the nine months ended September 30, 2014:

	Restricted Stock Shares			Weighted Average Grant Date Value
Nonvested restricted stock at December 31, 2013		61,656		$	3.21
Granted		-			-
Vested		(30,836	)		3.21
Cancelled/Forfeited		(1,665	)		1.82
Nonvested restricted stock at September 30, 2014		29,155		$	3.29

NOTE 3. - MARKETABLE SECURITIES

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:

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.

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.

Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, and significant to the overall fair value measurement.

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 accompanying condensed consolidated balance sheets. 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 were included in other comprehensive income (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.

8

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

		September 30, 2014						December 31, 2013
	Fair Value Hierarchy	Cost		Unrealized Gain		Fair Value		Cost		Unrealized Gain		Fair Value
Asset Backed	Level 2	$	369	$	-	$	369	$	455	$	1	$	456
Corporate Bonds	Level 2		162		-		162		164		1		165
US Treasuries	Level 2		3,400		-		3,400		4,500		-		4,500
Total		$	3,931	$	-	$	3,931	$	5,119	$	2	$	5,121

NOTE 4. - INVENTORIES

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

	September 30, 2014		December 31, 2013
Raw Materials	$	2,207	$	2,108
Work-in-Process		878		903
Finished Goods		284		321
Total	$	3,369	$	3,332

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. The Company’s reserve requirements increased by $168,000 and $21,000 during the three months ended September 30, 2014 and 2013, respectively. The Company increased reserve requirements by $182,000 and $101,000 during the nine months ended September 30, 2014 and 2013, respectively.

NOTE 5. - INCOME TAXES

The Company records a valuation allowance when it is “more likely than not” that all or a portion of a deferred tax asset will not be realized. Management reviews all available positive and negative evidence, including the Company’s current and past performance, the market environment in which the Company operates, the utilization of past tax credits, length of carry back and carry forward periods, existing contracts or sales backlog that will result in future profits, as well as other factors. The Company continues to maintain a valuation allowance on all of the net deferred tax assets for the periods presented. Until an appropriate level of profitability is sustained, the Company expects to continue to record a full valuation allowance on future tax benefits except for those that may be generated in foreign jurisdictions. The effective income tax rates for the periods presented differ from the U.S. statutory rate as the Company continues to provide a full valuation allowance for the net deferred tax assets at September 30, 2014 and 2013.

NOTE 6. - RESTRUCTURING CHARGE

On October 19, 2012, the Company committed to a plan intended to improve the balance between the Company’s communications networking product expenses with the reduced revenue levels of this product line. Under the 2012 restructuring plan, the Company reduced its workforce by 10 regular full-time positions. As a result of the 2012 restructuring plan, the Company recorded a restructuring charge of $253,000, classified as an operating expense, in the fourth quarter of 2012 related to future cash expenditures to cover employee severance and benefits. During the three months ended March 31, 2013, the Company reduced its restructuring charge by $67,000 related to reduced future cash expenditures related to severance and benefits for a former employee. The former employee’s accepting other employment in April 2013 reduced the amount of severance and benefit payouts by the Company. These amounts were paid out under the restructuring plan by June 30, 2013.

9

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 7. - CREDIT FACILITY

The Company maintains a $5.0 million revolving bank credit facility maturing December 19, 2016. The applicable interest rate on outstanding balances is LIBOR plus 1.0% to 1.5% based on certain factors included in the credit agreement. At both September 30, 2014 and December 31, 2013, the Company’s interest rate on the $3.5 million outstanding balance was 1.7%. The unused portion of the credit facility is subject to an unused facility fee ranging from .25% to .75% depending on total deposits with the creditor. All borrowings under this facility are secured by marketable securities. The outstanding balance of $3.5 million as of September 30, 2014 and December 31, 2013 was classified as long-term debt on the Company’s condensed consolidated balance sheets. Subsequent to September 30, 2014 and prior to the Company’s filing of the condensed consolidated financial statements, the outstanding balance on the credit facility was repaid.

NOTE 8. - EARNINGS PER SHARE

Basic earnings per share are computed by dividing reported earnings available to common shareholders by weighted average common shares outstanding.  Diluted earnings per share give effect to dilutive potential common shares. Earnings per share are calculated as follows (in thousands, except per share data):

	Three months ended					Nine months ended
	September 30,					September 30,
	2014			2013		2014			2013
Basic net (loss) income per share:
Net (loss) income	$	(853	)	$	76	$	(2,997	)	$	(2,229	)
Weighted average common shares outstanding		7,694			7,009		7,239			7,005
Basic net (loss) income per share	$	(0.11	)	$	0.01	$	(0.41	)	$	(0.32	)
Diluted net (loss) income per share:
Net (loss) income	$	(853	)	$	76	$	(2,997	)	$	(2,229	)
Weighted average common shares outstanding		7,694			7,009		7,239			7,005
Dilutive stock options		-			229		-			-
Weighted average common shares outstanding – assuming dilution		7,694			7,238		7,239			7,005
Diluted net (loss) income per share	$	(0.11	)	$	0.01	$	(0.41	)	$	(0.32	)
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive		424			577		343			664

On August 13, 2014, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Hodges Small Cap Fund (“Hodges”) pursuant to which the Company issued and sold on that date 1,367,000 shares (the “Shares”) of the Company’s common stock, $0.10 par value per share (the “Common Stock”), to Hodges in a private placement for an aggregate purchase price of approximately $3.3 million in cash. The purchase price for the Shares under the Purchase Agreement, as determined by negotiations between the Company and Hodges, was approximately $2.45 per Share. The Shares constituted approximately 19.5% of the total of issued and outstanding shares of Common Stock immediately before the execution of the Purchase Agreement and the closing of the purchase and sale of the Shares thereunder.

10

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 9. - SEGMENT INFORMATION

Interphase 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 offers products and services from embedded computing solutions, engineering design services, and contract manufacturing services to a new line of embedded computer vision products.

Except for revenues, which are monitored by product line, the chief operating decision-makers review financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to have only a single reporting segment.

Geographic revenue related to North America and foreign regions is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2014		2013		2014		2013
Revenues:
North America	$	2,127	$	2,167	$	6,472	$	5,908
Pacific Rim		1,815		1,493		3,605		3,255
Europe		270		508		830		2,103
Total	$	4,212	$	4,168	$	10,907	$	11,266

Additional information regarding revenue by product line is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2014		2013		2014		2013
Product Revenues:
Communications networking	$	2,760	$	3,079	$	6,305	$	8,397
Services		1,408		1,032		4,445		2,757
Other		44		57		157		112
Total	$	4,212	$	4,168	$	10,907	$	11,266

NOTE 10. - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. The International Accounting Standards Board (“IASB”) issued International Financial Reporting Standard 15 with the same title. The standard represents the culmination of the FASB and IASB efforts to improve revenue recognition guidance. ASU 2014-09 creates a new, principles-based revenue recognition framework that will affect nearly every revenue-generating entity. ASU 2014-09 also creates a new topic in the Codification, Topic 606. Accounting Standards Codification (“ASC”) 606 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific aspects of revenue recognition, and expands and improves disclosures about revenue. ASC 606 is effective for public business entities for annual reporting periods beginning after December 15, 2016, including interim periods therein. Early application is not permitted for public business entities. Entities are permitted to apply the new revenue standard either retrospectively, subject to some practical expedients, or through an alternative transition method. The Company is currently evaluating the impact of adopting this new accounting guidance.

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INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU addresses the diversity in practice regarding financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of it, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent the deferred tax asset is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with the deferred tax asset. The amendments to this standard are effective for reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this update did not have a material impact on the consolidated financial statements, as it is consistent with the Company’s present practice.

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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, 2013.

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 and adverse global economic conditions, our reliance on a limited number of customers, the lack of spending improvements in the communications 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 Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and in the Company’s other 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 remained flat at $4.2 million for the three months ended September 30, 2014 and 2013. Our communications networking product revenue decreased 10% to $2.8 million for the three months ended September 30, 2014, compared to $3.1 million in the comparable period in the prior year. This decrease is primarily due to a general slowdown in orders from several customers who typically buy products from our older product lines. Our services revenues increased 36% to $1.4 million for the three months ended September 30, 2014, compared to $1 million for the same period in the previous year. This increase was related to increased electronic contract manufacturing services revenue, partially offset by decreased electronic engineering design services revenue. Approximately 80% of the increase in electronic contract manufacturing services revenue was due to a one-time conversion of cash deposits from one customer from deferred revenue into revenue as this customer ceased operations during the quarter. We have no further obligations with respect to this customer. All other revenues decreased to $44,000, compared to $57,000 in the comparable period last year.

Total revenue decreased 3% to $10.9 million for the nine months ended September 30, 2014, compared to $11.3 million for the same period in the prior year. Our communications networking product revenue decreased 25% to $6.3 million for the nine months ended September 30, 2014, compared to $8.4 million in the comparable period in the prior year. Approximately 65% of this decrease is due to a slowdown in orders from one customer resulting from an unusually high order volume in the first half of 2013 for an installation in China and from a general slowdown in orders of products from our older product lines. The remaining decrease is primarily due to revenue from a customer that recently restructured its manufacturing locations and is beginning to again order volumes closer to the levels in 2013. Our services revenues increased 61% to $4.4 million for the nine months ended September 30, 2014, compared to $2.8 million for the same period in the previous year. This increase consisted of increased electronic contract manufacturing services revenue. All other revenues increased to $157,000, compared to $112,000 in the comparable period last year.

During the third quarter of 2014, sales to two customers individually accounted for approximately 27% and 14% of total revenues, respectively. In addition, during the third quarter of 2014, the conversion of cash deposits from deferred revenue to revenue from one customer individually accounted for approximately 13% of total revenues. During the third quarter of 2013, sales to three customers individually accounted for approximately 28%, 14% and 11% of total revenues, respectively. No other customers individually accounted for more than 10% of our consolidated revenues in the periods presented.

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Included in accounts receivable at September 30, 2014 was $815,000, $554,000, $288,000 and $283,000 due individually from four customers, respectively. Included in accounts receivable at December 31, 2013 was $809,000, $491,000, and $404,000, due individually from three customers, 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 31% and 48% for the three months ended September 30, 2014 and 2013, respectively. The decrease in gross margin percentage in the third quarter of 2014 compared to the same period in the prior year was primarily due to a revenue mix shift toward lower margin products, the decreased utilization of our manufacturing facility, and an increase of $147,000 in excess and obsolete inventory charges. We expect our margins to improve in future periods as revenue from penveu begins to impact the business.

Gross margin as a percentage of revenue was 30% and 41% for the nine months ended September 30, 2014 and 2013, respectively. The decrease in gross margin percentage was primarily due to a revenue mix shift toward lower margin products and services, the decreased utilization of our manufacturing facility, and an increase of $81,000 in excess and obsolete inventory charges. We expect our margins to improve in future periods as revenue from penveu begins to impact the business.

Research and Development

Our investment in research and development was $697,000 and $622,000 for the three months ended September 30, 2014 and 2013, respectively. The increase was primarily due to a reduction in professional services activities, as a result of the decrease in electronic engineering design services revenue. 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 an increase in research and development expenses in the third quarter of 2014 compared to the same period in the prior year. As a percentage of revenue, research and development expenses were approximately 17% in the third quarter of 2014 compared to approximately 15% for the same period in the prior year. The increase in research and development expenses as a percentage of total revenue was due to research and development expenses increasing at a higher rate than revenue increased.

Our investment in research and development was approximately $2.0 million and $2.3 million for the nine months ended September 30, 2014 and 2013, respectively. Approximately 53% of the decrease in research and development expenses was due to a decrease in personnel and related expenses. The remaining portion of the decrease primarily related to an increase in professional services activities. 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 in research and development expenses in the nine months ended September 30, 2014 compared to the same period in the prior year. As a percentage of revenue, research and development expenses were approximately 18% for the nine months ended September 30, 2014 compared to approximately 20% for the same period in the prior year. The decrease in research and development expenses as a percentage of total revenue was due to research and development expenses decreasing at a higher rate than revenue decreased. We will continue to monitor the level of our investments in research and development concurrently with actual revenue results.

Sales and Marketing

Sales and marketing expenses were $618,000 and $614,000 for the three months ended September 30, 2014 and 2013, respectively. As a percentage of revenue, sales and marketing expenses were approximately 15% for both the third quarter of 2014 and 2013.

Sales and marketing expenses were approximately $2.0 million for both the nine months ended September 30, 2014 and 2013. As a percentage of revenue, sales and marketing expenses were approximately 18% for both the nine months ended September 30, 2014 and 2013. We will continue to monitor the level of sales and marketing costs concurrently with actual revenue results.

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General and Administrative

General and administrative expenses were $829,000 and $660,000 for the three months ended September 30, 2014 and 2013, respectively. The increase was primarily due to an increase in legal expenses. As a percentage of revenue, general and administrative expenses were approximately 20% for the third quarter of 2014 and 16% 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 increasing at a lower rate than general and administrative expenses.

General and administrative expenses were approximately $2.4 million and $2.2 million for the nine months ended September 30, 2014 and 2013, respectively. The increase was primarily due to an increase in legal expenses. As a percentage of revenue, general and administrative expenses were approximately 22% for the nine months ended September 30, 2014, compared to approximately 20% for the same period in the prior year. We will continue to monitor the level of general and administrative costs concurrently with actual revenue results.

Restructuring Charge

On October 19, 2012, we committed to a plan intended to improve the balance between our communications networking product expenses with the reduced revenue levels of this product line. Under the 2012 restructuring plan, we reduced our workforce by 10 regular full-time positions. As a result of the 2012 restructuring plan, we recorded a restructuring charge of $253,000, classified as an operating expense, in the fourth quarter of 2012 related to future cash expenditures to cover employee severance and benefits. This plan is expected to result in savings of approximately $1.0 million to $1.6 million in annualized operating costs. During the three months ended March 31, 2013, we reduced our restructuring charge by $67,000 related to reduced future cash expenditures related to severance and benefits for a former employee. The former employee’s accepting other employment in April 2013 reduced the amount of severance and benefit payouts by us. These amounts were paid out under the restructuring plan by June 30, 2013. See Note 6 in the notes to the consolidated financial statements for more information regarding the 2012 restructuring plan.

Other Loss, Net

Other loss, net was $9,000 for the three months ended September 30, 2014. There was no other loss or income, net for the three months ended September 30, 2013. Other loss, net was $9,000 for the nine months ended September 30, 2014. Other loss, net was $343,000 for the nine months ended September 30, 2013. The loss for the nine months ended September 30, 2013 was primarily related to the decision of the Labor Court of Boulogne-Billancourt, France on March 22, 2013 related to specific French employment indemnity claims of four former employees. The Court ruled in our favor regarding all other claims brought by the twenty-two former employees. See Part II, Item 1. “Legal Proceedings” below for more information.

Income Taxes

Our effective income tax rate was 1.0% for the nine months ended September 30, 2014, compared to an effective income tax rate of 1.5% for the nine months ended September 30, 2013. 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, 2014 and September 30, 2013. For the nine months ended September 30, 2014 and 2013, approximately 70% of the income tax expense was due to tax in a foreign jurisdiction and the remaining portion was due to tax in domestic jurisdictions.

Net (Loss) Income

We reported a net loss of $853,000 for the three months ended September 30, 2014 and a net income of $76,000 for the three months ended September 30, 2013. Basic loss per share was ($0.11) for the three months ended September 30, 2014. Basic and diluted earnings per share for the three months ended September 30, 2013 was $0.01.

We reported a net loss of approximately $3.0 million and $2.2 million for the nine months ended September 30, 2014 and 2013, respectively. Basic loss per share was ($0.41) and ($0.32) for the nine months ended September 30, 2014 and 2013, respectively.

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New Product 

On May 30, 2014 we started shipping 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. 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 market, and it can be used effectively in the corporate training market as well as the enterprise market. penveu is a new alternative to interactive whiteboards. An independent source estimates the new interactive whiteboard installations market to grow to approximately $1.85 billion in revenue by 2017. However, penveu also has the unique ability to turn the estimated over 50 million projectors and 7 million large screen displays that are currently installed worldwide into interactive display devices. The retail price of penveu is less than 25% of the average price of a typical installed interactive whiteboard, and unlike an interactive whiteboard, penveu does not require the time and expense of installation. penveu is being offered and sold through our website, other online distributors, resellers, retailers and catalogs. We recorded nominal revenue from penveu in the third quarter of 2014.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Cash and cash equivalents increased approximately $2.4 million from December 31, 2013 to September 30, 2014 and decreased approximately $1.4 million from December 31, 2012 to September 30, 2013. 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, 2014 and 2013 are generally similar to the trends in our earnings except for the allowance for uncollectible accounts and returns, writedowns of excess and obsolete inventories, depreciation and amortization, amortization of stock-based compensation and the loss on retirement of machinery and equipment. Cash used in operating activities totaled $571,000 for the nine months ended September 30, 2014, compared to net loss of $3.0 million for that period. The allowance for doubtful accounts and returns decreased $2,000 for the nine months ended September 30, 2014 compared to the same period in 2013. Writedowns of excess and obsolete inventories increased $81,000 for the nine months ended September 30, 2014 compared to the same period in 2013. Depreciation and amortization increased $77,000 for the nine months ended September 30, 2014 compared to the same period in 2013. Amortization of stock-based compensation decreased $160,000 for the nine months ended September 30, 2014 compared to the same period in 2013. The loss on retirement of machinery and equipment increased $14,000 for the nine months ended September 30, 2014 compared to the same period in 2013.

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 used in investing activities totaled $339,000 and cash provided by investing activities totaled $529,000 for the nine months ended September 30, 2014 and 2013, 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 approximately $1.5 million for the nine months ended September 30, 2014, compared to $39,000 for the nine months ended September 30, 2013. The additions for the nine months ended September 30, 2014 primarily related to enhancements to our manufacturing equipment through a capital lease and leasehold improvements. The leasehold improvements to our new facility have, for the most part, been reimbursed by our landlord as of September 30, 2014. The additions for the nine months ended September 30, 2013 primarily related to software and equipment purchases for penveu^® and for our manufacturing operations. Purchases of marketable securities were $10.8 million and $10.4 million for the nine months ended September 30, 2014 and 2013, respectively. Proceeds from the sale of marketable securities increased to $12.0 million for the nine months ended September 30, 2014, compared to $11.0 million for the nine months ended September 30, 2013.

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Financing Activities

Net cash provided by financing activities, consisting of proceeds from the private issuance of common stock of approximately $3.3 million and proceeds from the exercise of stock options of $3,000, totaled $3.4 million for the nine months ended September 30, 2014. Net cash provided by financing activities, related to proceeds from the exercise of stock options, totaled $26,000 for the nine months ended September 30, 2013.

Restructuring Charge

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expenses with the reduced revenue levels of this product line. Under the 2012 restructuring plan, we reduced our workforce by 10 regular full-time positions. As a result of the 2012 restructuring plan, we recorded a restructuring charge of $253,000, classified as an operating expense, in the fourth quarter of 2012 related to future cash expenditures to cover employee severance and benefits. During the three months ended March 31, 2013, we reduced our restructuring charge by $67,000 related to reduced future cash expenditures related to severance and benefits for a former employee. The former employee’s accepting other employment in April 2013 reduced the amount of severance and benefit payouts by us. These amounts were paid out under the restructuring plan by June 30, 2013.

Commitments

At September 30, 2014, we had no material commitments to purchase capital assets; however, planned capital expenditures for the remainder of 2014 are estimated at approximately $35,000, which primarily relates to patents and manufacturing equipment. At September 30, 2014, we had approximately $35,000 of non-cancelable purchase commitments for inventory as part of the normal course of business. Our significant long-term obligations are future debt payments, operating leases on our facility and our phone system and a capital lease on our manufacturing equipment. We have not paid any dividends since our inception and do not anticipate paying any dividends in 2014.

Other

Management believes that cash generated from operations, the additional funds raised in the recent private placement of common stock, and the success of various business initiatives, together with cash on hand, will be sufficient to meet our business liquidity needs for working capital, capital expenditures and debt service for the next twelve months. On August 13, 2014 we raised approximately $3.3 million in additional funds, through a private placement of shares of our common stock, that are being used in large part to expedite and expand marketing and product launch activities associated with the introduction of penveu, to continue to support the growth in our services business, for other working capital needs and for general corporate purposes. To the extent our actual operating results or other developments, including the marketing and product launch activities associated with the introduction of penveu, 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 sought, and may in the future seek, to raise additional capital, refinance or restructure indebtedness, issue additional securities, 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, 2013.

Recently Issued Accounting Pronouncements

See Note 10 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.

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Item 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

We are exposed to adverse movements in foreign currency exchange rates because we conduct business on a global basis and, in some cases, in foreign currencies. The Company’s operations in France were transacted in the local currency and converted into U.S. Dollars based on published exchange rates for the periods reported and were therefore subject to risk of exchange rate fluctuations. The Euro to U.S. Dollar translation accounted for charges of $1,000 for the three months ended September 30, 2014. The Euro to U.S. Dollar translation accounted for no charge for the three months ended September 30, 2013. The Euro to U.S. Dollar translation accounted for charges of $4,000 for both the nine months ended September 30, 2014 and 2013.

Market Price Risk

We had no equity hedge contracts outstanding as of September 30, 2014 or December 31, 2013.

Interest Rate Risk

Our investments are subject to interest rate risk. Interest rate risk is the risk that our financial condition and results of operations could be adversely affected due to movements in interest rates. We invest our cash in a variety of interest-earning financial instruments, including bank time deposits, money market funds, and variable rate and fixed rate obligations of corporations and national governmental entities and agencies. Due to the demand nature of our money market funds and the short-term nature of our time deposits and debt securities portfolio, these assets are particularly sensitive to changes in interest rates. We manage this risk through investments with shorter-term maturities and varying maturity dates.

A hypothetical 50 basis point increase in interest rates would result in an approximate decrease of less than 1% in the fair value of our available-for-sale securities at September 30, 2014. This potential change is based on sensitivity analyses performed on our marketable securities at September 30, 2014. Actual results may differ materially. The same hypothetical 50 basis point increase in interest rates would have resulted in an approximate decrease of less than 1% in the fair value of our available-for-sale securities at December 31, 2013.

We maintain a $5.0 million revolving bank credit facility maturing December 19, 2016 with an applicable interest rate on any outstanding balances under the credit facility based on London Interbank Offered Rate (“LIBOR”) plus 1.0% to 1.5% applicable margin rate based on certain factors included in our credit agreement. The interest rate on the borrowings under the revolving credit facility was 1.7% at both September 30, 2014 and December 31, 2013. The unused portion of the credit facility is subject to an unused facility fee ranging from .25% to .75% depending on total deposits with the creditor. A hypothetical 50 basis point increase in LIBOR would increase annual interest expense on this credit facility by $17,500. All borrowings under this facility are secured by marketable securities. Subsequent to September 30, 2014 and prior to the Company’s filing of the condensed consolidated financial statements, the outstanding balance on the credit facility was repaid.

Item 4.          CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, under the supervision of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report using the “Internal Control – Integrated Framework (2013)” created by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding disclosure and that information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

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Changes in Internal Controls

The Company maintains a system of internal controls that is designed to provide reasonable assurance that its books and records accurately reflect, in all material respects, the transactions of the Company and that its established policies and procedures are adhered to. From time to time the Company may experience changes to its internal controls due, for example, to employee turnover, re-balancing of workloads, extended absences and promotions of employees. However, there were no changes in our internal controls over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II

OTHER INFORMATION

Item 1.          LEGAL PROCEEDINGS

Twenty-five former employees (“Plaintiffs”) of Interphase SAS, a France domiciled subsidiary of Interphase Corporation, brought suit in France against Interphase SAS alleging various causes of action and rights to damages relating to claims of wrongful dismissal of employment, specific French employment indemnities, general economic losses, and contractual claims relating specifically to their employment relationship and contracts entered into between the individual and Interphase SAS. The lawsuits were filed between November 2010 and April 2011 in the Labor Court of Boulogne-Billancourt, France and the Administrative Court of Cergy-Pontoise, France. The various claims and assertions arose from, and related to, the Plaintiffs’ release from employment as part of the restructuring actions taken during the third quarter of 2010. The updated statement of claim is for an aggregate payment of approximately €2.3 million, which translated to approximately $2.9 million at September 30, 2014. The Company believes that the Plaintiffs’ claims were without merit and has vigorously defended itself in these lawsuits.

On March 22, 2012, a hearing was conducted before the Labor Court of Boulogne-Billancourt, France related to the claims of twenty-three of the twenty-five former employees. On May 31, 2012, the Court reported that the four judges’ votes were split; therefore, another hearing before the Labor Court took place on January 25, 2013. The same four judges heard the case again, along with a professional judge from another court to ensure that a majority decision would be reached.

The decision of the Labor Court regarding the claims of twenty-two former employees was rendered on March 22, 2013. All of those claims were rejected, because the Labor Court ruled that the redundancy procedure was regular and that redundancies were based on valid reasons, except claims from four Plaintiffs based on non-competition indemnity (amounting in total to approximately €265,000, which translated to approximately $340,000 at March 31, 2013). During the three months ended March 31, 2013 and the three months ended December 31, 2013, the Company recorded a charge of approximately $340,000 and $115,000 (to reflect payroll taxes corresponding to the allowed claims), respectively, classified as other loss on its condensed consolidated statements of operations and as a current liability on its condensed consolidated balance sheets in connection with the non-competition indemnity. Regarding the claims of the four Plaintiffs based on non-competition indemnity, one of these Plaintiffs has filed an appeal of the Labor Court’s decision (the part of the judgment dismissing his claims based on the redundancy procedures; the economic and financial justification for the redundancy); therefore, related to this Plaintiff, the Company filed an appeal of the Labor Court’s decision related to the non-compete indemnity. No payment to this Plaintiff is to be made until the appeal process is resolved. The Company is not filing an appeal related to the other three Plaintiffs’ claims based on non-competition indemnity. For these three Plaintiffs, the Company must pay approximately €238,000, which translated to approximately $305,000 at March 31, 2013. Approximately $275,000 of that amount was paid during the three months ended December 31, 2013. One of these three Plaintiffs brought the case before the Labor Court of Boulogne-Billancourt again claiming €5,686.52 (which translated to approximately $7,000 at September 30, 2014) of paid holiday indemnity and procedure costs attached to the non-compete indemnity. The Conciliation hearing before the Labor Court of Boulogne-Billancourt is scheduled for December 15, 2014. Fourteen other former employees also filed an appeal, and the hearing before the Court of Appeal of Versailles took place on October 8, 2014. The judgment of the Court of Appeals of Versailles is scheduled to be rendered on November 19, 2014.

On May 22, 2012, a hearing was conducted before the Labor Court of Boulogne-Billancourt, France related to the claims of one of the twenty-five former employees with non-executive status. On July 31, 2012, the Court reported that the four judges’ votes were split; therefore, the Labor Court decided to join this case to the cases of the other twenty-three former employees described above in order to be heard again at the same hearing. Therefore, this case was heard again at the hearing on January 25, 2013 before the Labor Court. On March 22, 2013, the Labor Court rejected this former employee's claims. This former employee is one of the fourteen other former employees that filed an appeal, as described in the preceding paragraph.

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Among the twenty-five cases described above, two former employees were made redundant related to a decision of the Labor Inspector to authorize their redundancy. Because of their protected status as employee representatives, their redundancy required the prior authorization of the French administration. Each of those former employees also filed a claim before the Administrative Tribunal in order to challenge the decision of the Labor Inspector which authorized their redundancy. Although each such claim or action is directed against the State, Interphase is also a party to these proceedings. The decision of the Administrative Tribunal regarding these two cases was rendered on February 3, 2014. The Administrative Tribunal dismissed these two former employees’ claims challenging the administrative decision authorizing their redundancy. Each of the former employees filed an appeal on April 3, 2014 of the Administrative Tribunal’s decision, and therefore each case will be scheduled and heard anew by the Administrative Court of Appeal of Versailles.

For one of the twenty-five former employees, who was an employee representative, the Labor Court granted the Company’s motion at the January 25, 2013 hearing; the Labor Court rejected the Plaintiff’s claim to hear the case on the merits, regarding the alleged irregularity of the information and consultation procedure, and postponed this case in deference to the pending case before the Administrative Tribunal as described above. This case was heard again on September 27, 2013, and the Labor Court rendered the same decision (to postpone the case to a hearing on September 5, 2014). This case was heard again on September 5, 2014, and the Labor Court rendered the same decision (to postpone the case to a hearing on May 15, 2015). It is likely that the case will not be heard on the merits on that hearing date and will be postponed if the case is still pending before the Administrative Court of Appeal of Versailles at that date, as described above.

On June 12, 2012, a hearing was conducted with the Labor Court of Boulogne-Billancourt, France related to the claims of one of the twenty-five former employees, who was also an employee representative. The Labor Court granted the Company’s motion and rejected the Plaintiff’s claim to hear the case on the merits, regarding the alleged irregularity of the information and consultation procedure, and decided to postpone this case in deference to the pending case before the Administrative Tribunal as described above. This case was heard again on May 28, 2013. The Labor Court rendered the same decision and again postponed the hearing until the Administrative Tribunal makes its decision. This case was heard again on June 17, 2014, and the Labor Court rendered the same decision (to postpone the case to a hearing on June 9, 2015). It is likely that the case will not be heard on the merits on that hearing date and will be postponed if the case is still pending before the Administrative Court of Appeal of Versailles at that date, as described above.

Item 1A.     RISK FACTORS

Other than as described below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

Sales of a significant number of shares of our common stock in the public markets or significant short sales of our common stock, or the perception that such sales could occur, could depress the market price of our common stock and impair our ability to raise capital.

Sales of a substantial number of shares of our common stock or other equity-related securities in the public markets, could depress the market price of our common stock. If there are significant short sales of our stock, the price decline that could result from this activity may cause the share price to decline more so, which, in turn, may cause long holders of the common stock to sell their shares, thereby contributing to sales of common stock in the market. Such sales also may impair our ability to raise capital through the sale of additional shares in the future at a time and price that our management deems acceptable, if at all.

We may not be able to maintain effectiveness of the resale registration statement for a recent private investor, which could obligate us to make certain payments or impact the liquidity of our common stock.

As required by the registration rights agreement that we entered into on August 13, 2014 with Hodges Small Cap Fund, the purchaser of 1,367,000 shares of our common stock from us in a private placement, we filed a registration statement with the Securities and Exchange Commission (the “SEC”) under the Securities Act to permit the purchaser (the “Selling Shareholder”) to publicly resell those shares from time to time, and the registration statement was declared effective by the SEC for such resale. In the registration rights agreement, we also agreed to use our commercially reasonable efforts to maintain the continuous effectiveness of the registration statement, but there is a risk we will not be able to do so. We cannot assure that we will not be required to suspend or cease sales under the registration statement, that the SEC will not issue any stop order to suspend the effectiveness of the registration statement or that, if such a stop order is issued, we will be able to amend the registration statement to respond to the stop order to permit sales to be made under the registration statement. Under the registration rights agreement, if the effectiveness of the registration statement is suspended for certain specified time periods, then, subject to certain exceptions, we may be obligated to pay certain liquidated damages to the Selling Shareholder. Also, to the extent the registration statement is not effective, the Selling Shareholder’s ability to sell the shares of common stock may be limited, which could (depending on the extent of the Selling Shareholder’s selling activity) have a material adverse effect on the liquidity of our common stock.

20

Item 2.            UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The private placement of shares of our common stock on August 13, 2014 was disclosed in our Current Report on Form 8-K filed on August 18, 2014.

Item 3.            DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.           MINE SAFETY DISCLOSURES

None.

Item 5.           OTHER INFORMATION

None.

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.
101.INS	XBRL Instance Document. *
101.SCH	XBRL Taxonomy Extension Schema Document. *
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document. *
101.LAB	XBRL Taxonomy Extension Label Linkbase Document. *
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document. *
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document. *

* Furnished electronically herewith, but (in accordance with Rule 406T of Regulation S-T) not deemed “filed”.

21

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	INTERPHASE CORPORATION
	(Registrant)
Date: November 6, 2014	By:/s/ Thomas N. Tipton Jr.
	Thomas N. Tipton Jr.
	Chief Financial Officer, Secretary, Vice President of Finance and Treasurer
	(Principal Financial and Accounting Officer)

22

EX-31

Exhibit 31(a)

CERTIFICATION PURSUANT TO RULE 13a-14(a) and 15d-14(a)

I, Gregory B. Kalush, certify that:

1.	I have reviewed this report on Form 10-Q of Interphase Corporation (the “Company”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4.	The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
	(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)  Designed such internal control over financial reporting, or caused such an internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c)  Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d)  Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5.	The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:
	(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
	(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date:	November 6, 2014	Signature:	/s/ Gregory B. Kalush
			Chief Executive Officer

EX-31

 Exhibit 31(b)

CERTIFICATION PURSUANT TO RULE 13a-14(a) and 15d-14(a)

I, Thomas N. Tipton, Jr., certify that:

1.	I have reviewed this report on Form 10-Q of Interphase Corporation (the “Company”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4.	The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
	(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)  Designed such internal control over financial reporting, or caused such an internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c)  Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d)  Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5.	The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:
	(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
	(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date:	November 6, 2014	Signature:	/s/ Thomas N. Tipton, Jr.
			Chief Financial Officer

EX-32

Exhibit 32(a)

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Interphase Corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory B. Kalush, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Gregory B. Kalush          

Gregory B. Kalush

Chief Executive Officer

November 6, 2014

EX-32

Exhibit 32(b)

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Interphase Corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas N. Tipton, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Thomas N. Tipton, Jr.

Thomas N. Tipton, Jr.

Chief Financial Officer

November 6, 2014

XML

Note 9 - Segment Information (Details) - Geographic Revenue Related to North America and Foreign Regions (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Revenues:
Revenues	$ 4,212	$ 4,168	$ 10,907	$ 11,266
North America [Member]
Revenues:
Revenues	2,127	2,167	6,472	5,908
Pacific Rim [Member]
Revenues:
Revenues	1,815	1,493	3,605	3,255
Europe [Member]
Revenues:
Revenues	$ 270	$ 508	$ 830	$ 2,103

XML

Note 2 - Stock-Based Compensation (Details) - Nonvested Restricted Stock Units Activity (Restricted Stock [Member], USD $)	9 Months Ended
	Sep. 30, 2014
Restricted Stock [Member]
Note 2 - Stock-Based Compensation (Details) - Nonvested Restricted Stock Units Activity [Line Items]
Nonvested restricted stock at December 31, 2013	61,656
Nonvested restricted stock at December 31, 2013	$ 3.21
Granted	0
Granted	$ 0
Vested	(30,836)
Vested	$ 3.21
Cancelled/Forfeited	(1,665)
Cancelled/Forfeited	$ 1.82
Nonvested restricted stock at September 30, 2014	29,155
Nonvested restricted stock at September 30, 2014	$ 3.29

XML

Note 3 - Marketable Securities

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE 3. - MARKETABLE SECURITIES

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:

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.

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.

Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, and significant to the overall fair value measurement.

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 accompanying condensed consolidated balance sheets. 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 were included in other comprehensive income (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.

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

		September 30, 2014						December 31, 2013
	Fair Value Hierarchy	Cost		Unrealized Gain		Fair Value		Cost		Unrealized Gain		Fair Value
Asset Backed	Level 2	$	369	$	-	$	369	$	455	$	1	$	456
Corporate Bonds	Level 2		162		-		162		164		1		165
US Treasuries	Level 2		3,400		-		3,400		4,500		-		4,500
Total		$	3,931	$	-	$	3,931	$	5,119	$	2	$	5,121

XML

Note 6 - Restructuring Charge (Details) (USD $)	3 Months Ended		9 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2013
Restructuring and Related Activities [Abstract]
Restructuring and Related Cost, Number of Positions Eliminated		10
Restructuring Charges		$ 253,000	$ (67,000)
Restructuring Reserve, Accrual Adjustment	$ 67,000

XML

Note 4 - Inventories (Details) - Inventory (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Inventory [Abstract]
Raw Materials	$ 2,207	$ 2,108
Work-in-Process	878	903
Finished Goods	284	321
Total	$ 3,369	$ 3,332

XML

Note 7 - Credit Facility (Details) (Revolving Credit Facility [Member], USD $) In Millions, unless otherwise specified	1 Months Ended	9 Months Ended
	Oct. 31, 2014 Subsequent Event [Member]	Sep. 30, 2014 London Interbank Offered Rate (LIBOR) [Member] Minimum [Member]	Sep. 30, 2014 London Interbank Offered Rate (LIBOR) [Member] Maximum [Member]	Sep. 30, 2014 Minimum [Member]	Sep. 30, 2013 Maximum [Member]	Sep. 30, 2014	Dec. 31, 2013
Note 7 - Credit Facility (Details) [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity (in Dollars)						$ 5.0
Debt Instrument, Basis Spread on Variable Rate		1.00%	1.50%
Long-term Line of Credit (in Dollars)						3.5	3.5
Repayments of Long-term Lines of Credit (in Dollars)	$ 3.5
Line of Credit Facility, Interest Rate at Period End						1.70%	1.70%
Line of Credit Facility, Unused Capacity, Commitment Fee Percentage				0.25%	0.75%

XML

Note 8 - Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended		0 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Aug. 13, 2014 Private Placement [Member] Hodges Small Cap Fund [Member]	Aug. 13, 2014 Private Placement [Member] Hodges Small Cap Fund [Member]
Note 8 - Earnings Per Share (Details) [Line Items]
Stock Issued During Period, Shares, New Issues (in Shares)			1,367,000
Common Stock, Par or Stated Value Per Share	$ 0.10	$ 0.10		$ 0.10
Proceeds from Issuance of Private Placement (in Dollars)	$ 3,349		$ 3,300
Share Price				$ 2.45
Percentage of the Total Common Stock Issued and Outstanding				19.50%

XML

Note 2 - Stock-Based Compensation

9 Months Ended

Sep. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

NOTE 2. - STOCK-BASED COMPENSATION

Stock Options

The Interphase Corporation 2014 Long-Term Stock Incentive Plan has been adopted by the Company’s Board of Directors and approved by its shareholders. Awards granted during the three months ended September 30, 2014 have been made under that plan. All other awards outstanding were made under the Interphase Corporation 2004 Long-Term Stock Incentive Plan, which expired on May 5, 2014 (so that no new awards could be made or granted under the Interphase Corporation 2004 Long-Term Stock Incentive Plan).

During the nine months ended September 30, 2014, the Company issued 8,000 stock options that vest over a three year period and expire ten years from date of grant. The weighted average exercise price of these stock options is $4.00. During the nine months ended September 30, 2013, the Company issued 26,000 stock options that vest over a four year period and expire ten years from date of grant. The weighted average exercise price of these stock options is $4.16. Compensation expense related to stock options without performance-based vesting conditions was $41,000 and $71,000 for the three months ended September 30, 2014 and 2013, respectively. Compensation expense related to stock options without performance-based vesting conditions was $132,000 and $274,000 for the nine months ended September 30, 2014 and 2013, respectively.

During the nine months ended September 30, 2014, the Company issued 136,000 stock options with performance-based vesting conditions for the years ended December 31, 2014, 2015, and 2016, the achievement of which would result in pro rata vesting per year in March 2015, 2016, and 2017, respectively. The weighted average exercise price of these stock options is $5.49. During the nine months ended September 30, 2013, the Company issued 102,500 stock options with performance-based vesting conditions related to revenue objectives for the year ended December 31, 2014, the achievement of which would result in vesting in February 2015. The weighted average exercise price of these stock options is $5.40. All stock options with performance-based conditions expire ten years from date of grant. Of the unvested stock options outstanding at September 30, 2014, 1,074,950 are subject to the achievement of certain performance conditions. The performance conditions related to approximately 74,000 and 66,000 of these stock options were deemed probable as of September 30, 2014 and 2013, respectively. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was approximately $72,000 and $62,000 for the three months ended September 30, 2014 and 2013, respectively. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was approximately $192,000 and $174,000 for the nine months ended September 30, 2014 and 2013, respectively. The performance conditions related to the remaining options were not deemed probable at September 30, 2014; therefore no compensation expense related to these options has been recorded.

The weighted-average remaining contractual life of stock options outstanding and exercisable at September 30, 2014 and 2013 was 6.70 years and 5.58 years, respectively.

As of September 30, 2014, there were 1,187,450 unvested options expected to vest over a weighted-average period of 8.5 years. As of December 31, 2013, there were 1,586,076 unvested options expected to vest over a weighted-average period of 8.9 years.

The following table summarizes the combined stock option activity under both of the plans:

	Number of Options			Weighted Average Option Price
Balance, December 31, 2013		2,187,019		$	4.11
Granted		144,000			5.41
Exercised		(625	)		4.37
Cancelled		(497,891	)		5.66
Balance, September 30, 2014		1,832,503		$	3.79

Option Valuation

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with weighted-average assumptions based on the grant date.

	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Risk free interest rate range		2.63	%		2.63	%		2.63 – 2.70	%		1.86 – 2.63	%
Weighted average life (in years)		10			10			10			10
Weighted average volatility		66.18	%		68.13	%		65.47	%		67.97	%
Volatility range		66.18	%		68.13	%		65.30 – 66.18	%		66.10 – 68.13	%
Expected dividend yield		-			-			-			-
Weighted average grant-date fair value per share of options granted	$	3.02		$	4.06		$	4.06		$	3.87

Restricted Stock

The Interphase Corporation 2014 Long-Term Stock Incentive Plan provides, and the Interphase Corporation 2004 Long-Term Stock Incentive Plan provided, for grants of bonus stock awards (“restricted stock”) to the Company’s directors and certain employees at no cost to the recipient. Holders of restricted stock are entitled to cash dividends, if declared, and to vote their respective shares. Restrictions limit the sale or transfer of these shares during a predefined vesting period, currently ranging from three to six years. There were no shares of restricted stock issued during the nine months ended September 30, 2014 or 2013. Upon issuance of restricted stock under a plan, unearned compensation equivalent to the market value at the date of grant is recorded as a reduction to shareholders’ equity and subsequently amortized to expense over the respective restriction periods. Compensation expense related to previously granted restricted stock was $14,000 and $24,000 for the three months ended September 30, 2014 and 2013, respectively. Compensation expense related to previously granted restricted stock was $44,000 and $80,000 for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, there was $77,000 of total unamortized compensation cost related to unvested restricted stock remaining to be recognized. The expense is expected to be recognized over a weighted-average period of less than 1 year. As of December 31, 2013, there was $124,000 of total unamortized compensation cost related to unvested restricted stock remaining to be recognized. The expense is expected to be recognized over a weighted-average period of 1.2 years. The following table summarizes the restricted stock activity for the nine months ended September 30, 2014:

	Restricted Stock Shares			Weighted Average Grant Date Value
Nonvested restricted stock at December 31, 2013		61,656		$	3.21
Granted		-			-
Vested		(30,836	)		3.21
Cancelled/Forfeited		(1,665	)		1.82
Nonvested restricted stock at September 30, 2014		29,155		$	3.29

XML

Note 8 - Earnings Per Share (Details) - Earnings Per Share (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Basic net (loss) income per share:
Net loss (in Dollars)	$ (853)	$ 76	$ (2,997)	$ (2,229)
Weighted average common shares outstanding	7,694	7,009	7,239	7,005
Weighted average common shares outstanding – assuming dilution	7,694	7,238	7,239	7,005
Diluted net (loss) income per share (in Dollars per share)	$ (0.11)	$ 0.01	$ (0.41)	$ (0.32)
Basic net (loss) income per share (in Dollars per share)	$ (0.11)	$ 0.01	$ (0.41)	$ (0.32)
Stock Compensation Plan [Member]
Basic net (loss) income per share:
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive	424	577	343	664
Employee Stock Option [Member]
Basic net (loss) income per share:
Dilutive stock options		229

XML

Condensed Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
ASSETS
Cash and cash equivalents	$ 3,915	$ 1,478
Marketable securities	3,931	5,121
Trade accounts receivable, less allowances of $41 and $45, respectively	2,562	2,679
Inventories	3,369	3,332
Prepaid expenses and other current assets	479	1,041
Total current assets	14,256	13,651
Machinery and equipment	6,988	6,064
Leasehold improvements	587	380
Furniture and fixtures	152	425
	7,727	6,869
Less-accumulated depreciation and amortization	(6,086)	(6,552)
Total property and equipment, net	1,641	317
Capitalized software, net	46	96
Other assets	387	345
Total assets	16,330	14,409
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	1,753	1,475
Deferred revenue	85	652
Accrued liabilities	1,681	1,513
Accrued compensation	218	231
Total current liabilities	3,737	3,871
Deferred lease obligations	1,288	16
Long-term debt	3,500	3,500
Total liabilities	8,525	7,387
Commitments and Contingencies
Common stock, $0.10 par value; 100,000,000 shares authorized; 8,377,106 and 7,011,146 shares issued and outstanding, respectively	838	701
Additional paid in capital	50,025	46,442
Accumulated deficit	(42,193)	(39,196)
Cumulative other comprehensive loss	(865)	(925)
Total shareholders' equity	7,805	7,022
Total liabilities and shareholders' equity	$ 16,330	$ 14,409

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Cash flows from operating activities:
Net loss	$ (2,997)	$ (2,229)
Allowance for doubtful accounts and returns	13	15
Writedowns of excess and obsolete inventories	182	101
Depreciation and amortization	247	170
Amortization of stock-based compensation	368	528
Loss on retirement of machinery and equipment	14
Change in assets and liabilities:
Trade accounts receivable	104	(629)
Inventories	(219)	(1,049)
Prepaid expenses and other current assets	532	(359)
Other assets	(47)	(101)
Accounts payable, deferred revenue and accrued liabilities	(27)	1,706
Accrued compensation	(13)	(26)
Deferred lease obligations	1,272	(65)
Net cash used in operating activities	(571)	(1,938)
Cash flows from investing activities:
Purchases of property and equipment	(1,525)	(30)
Purchases of capitalized software	(10)	(9)
Proceeds from the sale of marketable securities	12,006	11,007
Purchases of marketable securities	(10,810)	(10,439)
Net cash (used in) provided by investing activities	(339)	529
Cash flows from financing activities:
Borrowings under credit facility	10,500	10,500
Payments on credit facility	(10,500)	(10,500)
Proceeds from the issuance of common stock	3,349
Proceeds from the exercise of stock options	3	26
Net cash provided by financing activities	3,352	26
Effect of exchange rate changes on cash and cash equivalents	(5)	(4)
Net increase (decrease) in cash and cash equivalents	2,437	(1,387)
Cash and cash equivalents at beginning of period	1,478	3,949
Cash and cash equivalents at end of period	$ 3,915	$ 2,562

XML

Note 2 - Stock-Based Compensation (Details) (USD $)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross (in Shares)			144,000
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price (in Dollars per share)			$ 5.41
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number (in Shares)	1,832,503		1,832,503		2,187,019
Share-based Compensation Arrangement by Share-based Payment Award, Options, Nonvested, Number of Shares (in Shares)	1,187,450		1,187,450		1,586,076
Employee Stock Option [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross (in Shares)			8,000	26,000
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			3 years	4 years
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			10 years	10 years
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price (in Dollars per share)			$ 4.00	$ 4.16
Stock Options without Performance-Based Vesting Condition [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Allocated Share-based Compensation Expense	$ 41,000	$ 71,000	$ 132,000	$ 274,000
Performance Shares [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross (in Shares)			136,000	102,500
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			10 years
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price (in Dollars per share)			$ 5.49	$ 5.40
Allocated Share-based Compensation Expense	72,000	62,000	192,000	174,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number (in Shares)	1,074,950		1,074,950
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, Number (in Shares)	74,000	66,000	74,000	66,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term			6 years 255 days	5 years 211 days
Restricted Stock [Member] | Minimum [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			3 years
Restricted Stock [Member] | Maximum [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			6 years
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition			1 year
Restricted Stock [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Allocated Share-based Compensation Expense	14,000	24,000	44,000	80,000
Share-based Compensation Arrangement by Share-based Payment Award, Shares Issued in Period (in Shares)			0	0
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options					124,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition					1 year 73 days
Restricted Stock Units (RSUs) [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options	$ 77,000		$ 77,000
Expected to Vest Only [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, Weighted Average Remaining Contractual Term			8 years 6 months		8 years 328 days

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Note 2 - Stock-Based Compensation (Details) - Share-based Payment Award, Stock Options, Valuation Assumptions (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Note 2 - Stock-Based Compensation (Details) - Share-based Payment Award, Stock Options, Valuation Assumptions [Line Items]
Risk free interest rate range	2.63%	2.63%
Weighted average life (in years)	10 years	10 years	10 years	10 years
Weighted average volatility	66.18%	68.13%	65.47%	67.97%
Volatility range	66.18%	68.13%
Expected dividend yield	0.00%	0.00%	0.00%	0.00%
Weighted average grant-date fair value per share of options granted (in Dollars per share)	$ 3.02	$ 4.06	$ 4.06	$ 3.87
Minimum [Member]
Note 2 - Stock-Based Compensation (Details) - Share-based Payment Award, Stock Options, Valuation Assumptions [Line Items]
Risk free interest rate range			2.63%	1.86%
Volatility range			65.30%	66.10%
Maximum [Member]
Note 2 - Stock-Based Compensation (Details) - Share-based Payment Award, Stock Options, Valuation Assumptions [Line Items]
Risk free interest rate range			2.70%	2.63%
Volatility range			66.18%	68.13%

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Note 1 - Basis of Presentation

9 Months Ended

Sep. 30, 2014

Disclosure Text Block [Abstract]

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

NOTE 1. - BASIS OF PRESENTATION

Interphase Corporation and its subsidiaries (“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 offers products and services from embedded computing solutions, engineering design services, and contract manufacturing services to a new line of embedded computer vision products.

Embedded solutions include communications networking products for connectivity, interworking and packet processing. Clients for this product line include Alcatel-Lucent, GENBAND, Hewlett Packard, and Samsung.

The engineering design and manufacturing services serve a wide variety of industries within the electronics market, from machine-to-machine (“M2M”) and Internet of Things (“IoT”) designs utilizing Cellular, GPS and Wi-Fi tracking solutions to cost-saving redesigns for manufacturability. Interphase Productization services provide customers with the full suite of rapid design and manufacturing services required to quickly take a project from design concept to full production in the marketplace.

The penveu® product line, from the embedded computer vision line of business, addresses both the education and enterprise markets. penveu® is a handheld device that adds interactivity to projectors and large screen displays, turning flat surfaces into an interactive display.

Founded in 1974, the Company is located in Carrollton, Texas, with sales offices in the United States and Europe. See Note 9 for information regarding the Company’s revenues related to North America and foreign regions.

The accompanying condensed consolidated financial statements include the accounts of Interphase Corporation and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. While the accompanying condensed consolidated financial statements are unaudited, they have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. 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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2013.

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Condensed Consolidated Balance Sheets (Unaudited) (Parentheticals) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Trade accounts receivable, allowances (in Dollars)	$ 41	$ 45
Common stock par value (in Dollars per share)	$ 0.10	$ 0.10
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	8,377,106	7,011,146
Common stock, shares outstanding	8,377,106	7,011,146

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Note 2 - Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

	Number of Options			Weighted Average Option Price
Balance, December 31, 2013		2,187,019		$	4.11
Granted		144,000			5.41
Exercised		(625	)		4.37
Cancelled		(497,891	)		5.66
Balance, September 30, 2014		1,832,503		$	3.79

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Risk free interest rate range		2.63	%		2.63	%		2.63 – 2.70	%		1.86 – 2.63	%
Weighted average life (in years)		10			10			10			10
Weighted average volatility		66.18	%		68.13	%		65.47	%		67.97	%
Volatility range		66.18	%		68.13	%		65.30 – 66.18	%		66.10 – 68.13	%
Expected dividend yield		-			-			-			-
Weighted average grant-date fair value per share of options granted	$	3.02		$	4.06		$	4.06		$	3.87

Schedule of Nonvested Restricted Stock Units Activity [Table Text Block]

	Restricted Stock Shares			Weighted Average Grant Date Value
Nonvested restricted stock at December 31, 2013		61,656		$	3.21
Granted		-			-
Vested		(30,836	)		3.21
Cancelled/Forfeited		(1,665	)		1.82
Nonvested restricted stock at September 30, 2014		29,155		$	3.29

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Document And Entity Information	9 Months Ended
	Sep. 30, 2014	Oct. 29, 2014
Document and Entity Information [Abstract]
Entity Registrant Name	INTERPHASE CORP
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		8,377,106
Amendment Flag	false
Entity Central Index Key	0000728249
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Sep. 30, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q3

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Note 3 - Marketable Securities (Tables)

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Fair Value, Assets Measured on Recurring and Nonrecurring Basis [Table Text Block]

		September 30, 2014						December 31, 2013
	Fair Value Hierarchy	Cost		Unrealized Gain		Fair Value		Cost		Unrealized Gain		Fair Value
Asset Backed	Level 2	$	369	$	-	$	369	$	455	$	1	$	456
Corporate Bonds	Level 2		162		-		162		164		1		165
US Treasuries	Level 2		3,400		-		3,400		4,500		-		4,500
Total		$	3,931	$	-	$	3,931	$	5,119	$	2	$	5,121

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Condensed Consolidated Statements of Operations (Unaudited) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Revenues:
Product	$ 2,804,000	$ 3,136,000	$ 6,462,000	$ 8,509,000
Service	1,408,000	1,032,000	4,445,000	2,757,000
Total revenues	4,212,000	4,168,000	10,907,000	11,266,000
Cost of sales:
Product	1,907,000	1,450,000	3,982,000	4,601,000
Service	997,000	733,000	3,624,000	2,015,000
Total cost of sales	2,904,000	2,183,000	7,606,000	6,616,000
Gross margin	1,308,000	1,985,000	3,301,000	4,650,000
Research and development	697,000	622,000	1,952,000	2,309,000
Sales and marketing	618,000	614,000	1,956,000	2,022,000
General and administrative	829,000	660,000	2,350,000	2,239,000
Restructuring benefit				(67,000)
Total operating expenses	2,144,000	1,896,000	6,258,000	6,503,000
(Loss) income from operations	(836,000)	89,000	(2,957,000)	(1,853,000)
Other loss, net	(9,000)		(9,000)	(343,000)
(Loss) income before income tax	(845,000)	89,000	(2,966,000)	(2,196,000)
Income tax provision	8,000	13,000	31,000	33,000
Net (loss) income	$ (853,000)	$ 76,000	$ (2,997,000)	$ (2,229,000)
Basic (in Dollars per share)	$ (0.11)	$ 0.01	$ (0.41)	$ (0.32)
Diluted (in Dollars per share)	$ (0.11)	$ 0.01	$ (0.41)	$ (0.32)

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Note 6 - Restructuring Charge

9 Months Ended

Sep. 30, 2014

Restructuring and Related Activities [Abstract]

Restructuring and Related Activities Disclosure [Text Block]

NOTE 6. - RESTRUCTURING CHARGE

On October 19, 2012, the Company committed to a plan intended to improve the balance between the Company’s communications networking product expenses with the reduced revenue levels of this product line. Under the 2012 restructuring plan, the Company reduced its workforce by 10 regular full-time positions. As a result of the 2012 restructuring plan, the Company recorded a restructuring charge of $253,000, classified as an operating expense, in the fourth quarter of 2012 related to future cash expenditures to cover employee severance and benefits. During the three months ended March 31, 2013, the Company reduced its restructuring charge by $67,000 related to reduced future cash expenditures related to severance and benefits for a former employee. The former employee’s accepting other employment in April 2013 reduced the amount of severance and benefit payouts by the Company. These amounts were paid out under the restructuring plan by June 30, 2013.

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Note 5 - Income Taxes

9 Months Ended

Sep. 30, 2014

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

NOTE 5. - INCOME TAXES

The Company records a valuation allowance when it is “more likely than not” that all or a portion of a deferred tax asset will not be realized. Management reviews all available positive and negative evidence, including the Company’s current and past performance, the market environment in which the Company operates, the utilization of past tax credits, length of carry back and carry forward periods, existing contracts or sales backlog that will result in future profits, as well as other factors. The Company continues to maintain a valuation allowance on all of the net deferred tax assets for the periods presented. Until an appropriate level of profitability is sustained, the Company expects to continue to record a full valuation allowance on future tax benefits except for those that may be generated in foreign jurisdictions. The effective income tax rates for the periods presented differ from the U.S. statutory rate as the Company continues to provide a full valuation allowance for the net deferred tax assets at September 30, 2014 and 2013.

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Note 2 - Stock-Based Compensation (Details) - Summary of Combined Stock Option Activity (USD $)	9 Months Ended
	Sep. 30, 2014
Summary of Combined Stock Option Activity [Abstract]
Balance, December 31, 2013	2,187,019
Balance, December 31, 2013	$ 4.11
Balance, September 30, 2014	1,832,503
Balance, September 30, 2014	$ 3.79
Granted	144,000
Granted	$ 5.41
Exercised	(625)
Exercised	$ 4.37
Cancelled	(497,891)
Cancelled	$ 5.66

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Note 4 - Inventories (Tables)

9 Months Ended

Sep. 30, 2014

Inventory Disclosure [Abstract]

Schedule of Inventory, Current [Table Text Block]

	September 30, 2014		December 31, 2013
Raw Materials	$	2,207	$	2,108
Work-in-Process		878		903
Finished Goods		284		321
Total	$	3,369	$	3,332

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Note 9 - Segment Information

9 Months Ended

Sep. 30, 2014

Segment Reporting [Abstract]

Segment Reporting Disclosure [Text Block]

NOTE 9. - SEGMENT INFORMATION

Interphase 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 offers products and services from embedded computing solutions, engineering design services, and contract manufacturing services to a new line of embedded computer vision products.

Except for revenues, which are monitored by product line, the chief operating decision-makers review financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to have only a single reporting segment.

Geographic revenue related to North America and foreign regions is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2014		2013		2014		2013
Revenues:
North America	$	2,127	$	2,167	$	6,472	$	5,908
Pacific Rim		1,815		1,493		3,605		3,255
Europe		270		508		830		2,103
Total	$	4,212	$	4,168	$	10,907	$	11,266

Additional information regarding revenue by product line is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2014		2013		2014		2013
Product Revenues:
Communications networking	$	2,760	$	3,079	$	6,305	$	8,397
Services		1,408		1,032		4,445		2,757
Other		44		57		157		112
Total	$	4,212	$	4,168	$	10,907	$	11,266

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Note 7 - Credit Facility

9 Months Ended

Sep. 30, 2014

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

NOTE 7. - CREDIT FACILITY

The Company maintains a $5.0 million revolving bank credit facility maturing December 19, 2016. The applicable interest rate on outstanding balances is LIBOR plus 1.0% to 1.5% based on certain factors included in the credit agreement. At both September 30, 2014 and December 31, 2013, the Company’s interest rate on the $3.5 million outstanding balance was 1.7%. The unused portion of the credit facility is subject to an unused facility fee ranging from .25% to .75% depending on total deposits with the creditor. All borrowings under this facility are secured by marketable securities. The outstanding balance of $3.5 million as of September 30, 2014 and December 31, 2013 was classified as long-term debt on the Company’s condensed consolidated balance sheets. Subsequent to September 30, 2014 and prior to the Company’s filing of the condensed consolidated financial statements, the outstanding balance on the credit facility was repaid.

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Note 8 - Earnings Per Share

9 Months Ended

Sep. 30, 2014

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

NOTE 8. - EARNINGS PER SHARE

Basic earnings per share are computed by dividing reported earnings available to common shareholders by weighted average common shares outstanding.  Diluted earnings per share give effect to dilutive potential common shares. Earnings per share are calculated as follows (in thousands, except per share data):

	Three months ended					Nine months ended
	September 30,					September 30,
	2014			2013		2014			2013
Basic net (loss) income per share:
Net (loss) income	$	(853	)	$	76	$	(2,997	)	$	(2,229	)
Weighted average common shares outstanding		7,694			7,009		7,239			7,005
Basic net (loss) income per share	$	(0.11	)	$	0.01	$	(0.41	)	$	(0.32	)
Diluted net (loss) income per share:
Net (loss) income	$	(853	)	$	76	$	(2,997	)	$	(2,229	)
Weighted average common shares outstanding		7,694			7,009		7,239			7,005
Dilutive stock options		-			229		-			-
Weighted average common shares outstanding – assuming dilution		7,694			7,238		7,239			7,005
Diluted net (loss) income per share	$	(0.11	)	$	0.01	$	(0.41	)	$	(0.32	)
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive		424			577		343			664

On August 13, 2014, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Hodges Small Cap Fund (“Hodges”) pursuant to which the Company issued and sold on that date 1,367,000 shares (the “Shares”) of the Company’s common stock, $0.10 par value per share (the “Common Stock”), to Hodges in a private placement for an aggregate purchase price of approximately $3.3 million in cash. The purchase price for the Shares under the Purchase Agreement, as determined by negotiations between the Company and Hodges, was approximately $2.45 per Share. The Shares constituted approximately 19.5% of the total of issued and outstanding shares of Common Stock immediately before the execution of the Purchase Agreement and the closing of the purchase and sale of the Shares thereunder.

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Note 10 - Recently Issued Accounting Pronouncements

9 Months Ended

Sep. 30, 2014

Accounting Changes and Error Corrections [Abstract]

Accounting Changes and Error Corrections [Text Block]

NOTE 10. - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. The International Accounting Standards Board (“IASB”) issued International Financial Reporting Standard 15 with the same title. The standard represents the culmination of the FASB and IASB efforts to improve revenue recognition guidance. ASU 2014-09 creates a new, principles-based revenue recognition framework that will affect nearly every revenue-generating entity. ASU 2014-09 also creates a new topic in the Codification, Topic 606. Accounting Standards Codification (“ASC”) 606 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific aspects of revenue recognition, and expands and improves disclosures about revenue. ASC 606 is effective for public business entities for annual reporting periods beginning after December 15, 2016, including interim periods therein. Early application is not permitted for public business entities. Entities are permitted to apply the new revenue standard either retrospectively, subject to some practical expedients, or through an alternative transition method. The Company is currently evaluating the impact of adopting this new accounting guidance.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU addresses the diversity in practice regarding financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of it, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent the deferred tax asset is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with the deferred tax asset. The amendments to this standard are effective for reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this update did not have a material impact on the consolidated financial statements, as it is consistent with the Company’s present practice.

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Note 9 - Segment Information (Details) - Additional Information Regarding Revenue by Product Line (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Product Revenues:
Revenues	$ 4,212	$ 4,168	$ 10,907	$ 11,266
Telecommunications and Enterprise [Member]
Product Revenues:
Revenues	2,760	3,079	6,305	8,397
Services [Member]
Product Revenues:
Revenues	1,408	1,032	4,445	2,757
Other Segments [Member]
Product Revenues:
Revenues	$ 44	$ 57	$ 157	$ 112

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Note 9 - Segment Information (Tables)

9 Months Ended

Sep. 30, 2014

Segment Reporting [Abstract]

Revenue from External Customers by Geographic Areas [Table Text Block]

	Three months ended				Nine months ended
	September 30,				September 30,
	2014		2013		2014		2013
Revenues:
North America	$	2,127	$	2,167	$	6,472	$	5,908
Pacific Rim		1,815		1,493		3,605		3,255
Europe		270		508		830		2,103
Total	$	4,212	$	4,168	$	10,907	$	11,266

Revenue from External Customers by Products and Services [Table Text Block]

	Three months ended				Nine months ended
	September 30,				September 30,
	2014		2013		2014		2013
Product Revenues:
Communications networking	$	2,760	$	3,079	$	6,305	$	8,397
Services		1,408		1,032		4,445		2,757
Other		44		57		157		112
Total	$	4,212	$	4,168	$	10,907	$	11,266

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Note 3 - Marketable Securities (Details) - Fair Value, Financial Assets Measured by Level within the Fair Value Hierarchy (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Note 3 - Marketable Securities (Details) - Fair Value, Financial Assets Measured by Level within the Fair Value Hierarchy [Line Items]
Cost	$ 3,931	$ 5,119
Unrealized Gain	0	2
Estimated Fair Value	3,931	5,121
Asset-backed Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Note 3 - Marketable Securities (Details) - Fair Value, Financial Assets Measured by Level within the Fair Value Hierarchy [Line Items]
Cost	369	455
Unrealized Gain	0	1
Estimated Fair Value	369	456
Corporate Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Note 3 - Marketable Securities (Details) - Fair Value, Financial Assets Measured by Level within the Fair Value Hierarchy [Line Items]
Cost	162	164
Unrealized Gain	0	1
Estimated Fair Value	162	165
US Treasury Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Note 3 - Marketable Securities (Details) - Fair Value, Financial Assets Measured by Level within the Fair Value Hierarchy [Line Items]
Cost	3,400	4,500
Unrealized Gain	0	0
Estimated Fair Value	$ 3,400	$ 4,500

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Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Net (loss) income	$ (853)	$ 76	$ (2,997)	$ (2,229)
Other comprehensive income (loss):
Foreign currency translation adjustment	49	(31)	53	(23)
Unrealized holding gain (loss) arising during period, net of tax	7		7	(4)
Other comprehensive income (loss)	56	(31)	60	(27)
Comprehensive (loss) income	$ (797)	$ 45	$ (2,937)	$ (2,256)

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Note 4 - Inventories

9 Months Ended

Sep. 30, 2014

Inventory Disclosure [Abstract]

Inventory Disclosure [Text Block]

NOTE 4. - INVENTORIES

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

	September 30, 2014		December 31, 2013
Raw Materials	$	2,207	$	2,108
Work-in-Process		878		903
Finished Goods		284		321
Total	$	3,369	$	3,332

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. The Company’s reserve requirements increased by $168,000 and $21,000 during the three months ended September 30, 2014 and 2013, respectively. The Company increased reserve requirements by $182,000 and $101,000 during the nine months ended September 30, 2014 and 2013, respectively.

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Note 4 - Inventories (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Inventory Disclosure [Abstract]
Inventory Valuation Reserves, Increase	$ 168,000	$ 21,000	$ 182,000	$ 101,000

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Note 8 - Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2014

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three months ended					Nine months ended
	September 30,					September 30,
	2014			2013		2014			2013
Basic net (loss) income per share:
Net (loss) income	$	(853	)	$	76	$	(2,997	)	$	(2,229	)
Weighted average common shares outstanding		7,694			7,009		7,239			7,005
Basic net (loss) income per share	$	(0.11	)	$	0.01	$	(0.41	)	$	(0.32	)
Diluted net (loss) income per share:
Net (loss) income	$	(853	)	$	76	$	(2,997	)	$	(2,229	)
Weighted average common shares outstanding		7,694			7,009		7,239			7,005
Dilutive stock options		-			229		-			-
Weighted average common shares outstanding – assuming dilution		7,694			7,238		7,239			7,005
Diluted net (loss) income per share	$	(0.11	)	$	0.01	$	(0.41	)	$	(0.32	)
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive		424			577		343			664