Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
Commission File Number - 001-32217
InfoSonics Corporation
(Exact name of registrant as specified in
its charter)
Maryland
|
|
33-0599368
|
(State or other jurisdiction of
incorporation or organization)
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|
(IRS Employer Identification Number)
|
4350 Executive Drive, Suite #100, San Diego, CA 92121
(Address of principal executive offices
including zip code)
(858) 373-1600
(Registrants 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 Exchange Act 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
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
o
No
o
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
o
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|
Accelerated
filer
o
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|
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|
Non-accelerated
filer
o
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|
Smaller
reporting company
x
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(Do not check if a 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
o
No
x
As of August 16, 2010, the
Registrant had 14,184,146 shares outstanding of its $0.001 par value common
stock.
Table of
Contents
InfoSonics
Corporation
FORM 10-Q
For
quarterly period ended June 30, 2010
Table of
Contents
1
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
InfoSonics
Corporation and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(unaudited)
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|
For the Three Months
Ended June 30,
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For the Six Months
Ended June 30,
|
|
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2010
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2009
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2010
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2009
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|
|
|
|
|
|
|
|
|
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Net sales
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$
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22,353
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$
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61,706
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$
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49,894
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$
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104,331
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|
Cost of sales
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20,784
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57,634
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46,884
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96,904
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|
|
|
|
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|
|
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Gross profit
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1,569
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4,072
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3,010
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7,427
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Operating expenses
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|
|
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|
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Selling, general and administrative
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2,134
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3,549
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4,088
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6,401
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|
Research and development
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227
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10
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|
247
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35
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|
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|
2,361
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3,559
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4,335
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6,436
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|
|
|
|
|
|
|
|
|
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|
Operating income (loss) from
continuing operations
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(792
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)
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513
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|
(1,325
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)
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991
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|
|
|
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|
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Other income (expense):
|
|
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Other income
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3
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|
|
|
2
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|
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|
Interest expense
|
|
|
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(109
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)
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(23
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)
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(137
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)
|
|
|
|
|
|
|
|
|
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|
Income (loss) from continuing
operations before benefit (provision) for income taxes
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(789
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)
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404
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|
(1,346
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)
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854
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|
Benefit (provision) for income
taxes
|
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399
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|
(7
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)
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395
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(17
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)
|
|
|
|
|
|
|
|
|
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|
Income (loss) from continuing
operations
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(390
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)
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397
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|
(951
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)
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837
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|
Income (loss) from discontinued
operations, net of tax (Note 11)
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76
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|
(167
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)
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70
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|
(359
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)
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|
|
|
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|
|
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Net income (loss)
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$
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(314
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)
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$
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230
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$
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(881
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)
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$
|
478
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|
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|
|
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Basic earnings (loss) per
share:
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|
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Continuing operations
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$
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(0.03
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)
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$
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0.03
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$
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(0.07
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)
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$
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0.06
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|
Discontinued operations
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0.01
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|
(0.01
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)
|
0.01
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|
(0.02
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)
|
Net income (loss)
|
|
$
|
(0.02
|
)
|
$
|
0.02
|
|
$
|
(0.06
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)
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$
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0.04
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|
Diluted earnings (loss) per
share:
|
|
|
|
|
|
|
|
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|
Continuing operations
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|
$
|
(0.03
|
)
|
$
|
0.03
|
|
$
|
(0.07
|
)
|
$
|
0.06
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|
Discontinued operations
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0.01
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|
(0.01
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)
|
0.01
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|
(0.02
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)
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Net income (loss)
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|
$
|
(0.02
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)
|
$
|
0.02
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|
$
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(0.06
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)
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$
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0.04
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|
|
|
|
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|
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Basic weighted-average number
of common shares outstanding
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14,184
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14,593
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14,184
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14,737
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Diluted weighted-average number
of common shares outstanding
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14,184
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14,786
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14,184
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14,851
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Accompanying
notes are an integral part of these financial statements
.
2
Table of Contents
InfoSonics
Corporation
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
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|
June 30,
2010
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December 31,
2009
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(unaudited)
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(audited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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12,459
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$
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18,418
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Accounts receivable, net of allowance for doubtful
accounts of $191 and $590
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18,197
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41,914
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|
Accounts receivable other
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1,365
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1,004
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|
Inventory, net of reserves of $99 and $112
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2,330
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3,423
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Prepaid assets
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370
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369
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Assets of discontinued operations
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951
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|
880
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|
Total current assets
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35,672
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66,008
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Property and equipment, net
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304
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|
316
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Other assets
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91
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|
98
|
|
|
|
|
|
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|
Total assets
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$
|
36,067
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|
$
|
66,422
|
|
|
|
|
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LIABILITIES AND
STOCKHOLDERS EQUITY
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|
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Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,655
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|
$
|
9,619
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|
Accrued expenses
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|
3,277
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|
5,666
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|
Line of credit
|
|
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25,494
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Income taxes payable
|
|
95
|
|
91
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|
Liabilities of discontinued operations
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62
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|
724
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|
Total current liabilities
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12,089
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41,594
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Commitments and Contingencies (Note 13)
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Stockholders equity:
|
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Preferred stock, $0.001 par value, 10,000 shares
authorized (no shares issued and outstanding)
|
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Common stock, $0.001 par value, 40,000 shares
authorized; 14,184 shares issued and outstanding as of June 30, 2010 and
December 31, 2009
|
|
14
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|
14
|
|
Additional paid-in capital
|
|
31,769
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|
31,727
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|
Accumulated other comprehensive loss
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|
(18
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)
|
(7
|
)
|
Accumulated deficit
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|
(7,787
|
)
|
(6,906
|
)
|
Total stockholders equity
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|
23,978
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|
24,828
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
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|
$
|
36,067
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|
$
|
66,422
|
|
Accompanying
notes are an integral part of these financial statements.
3
Table of
Contents
InfoSonics
Corporation
Consolidated Statements of Cash Flows
(Amounts in thousands)
(unaudited)
|
|
For the Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(881
|
)
|
$
|
478
|
|
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
|
|
|
|
|
|
Depreciation
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|
152
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|
121
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|
Provision for (recovery of) bad debt
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(399
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)
|
151
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Provision for obsolete inventory
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|
63
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|
Stock-based compensation expense
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42
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|
31
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|
(Increase) decrease in:
|
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|
|
|
|
Accounts receivable
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24,116
|
|
(29,179
|
)
|
Accounts receivable other
|
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(361
|
)
|
3,781
|
|
Inventory
|
|
1,094
|
|
(548
|
)
|
Prepaids
|
|
(1
|
)
|
(43
|
)
|
Other assets
|
|
6
|
|
(90
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
Accounts payable
|
|
(964
|
)
|
(1,129
|
)
|
Accrued expenses
|
|
(2,388
|
)
|
179
|
|
Income tax liabilities
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|
4
|
|
15
|
|
Cash provided by (used in) continuing operations
|
|
20,420
|
|
(26,170
|
)
|
Cash provided by (used in) discontinued operations
|
|
(733
|
)
|
296
|
|
Net cash provided by (used in) operating
activities
|
|
19,687
|
|
(25,874
|
)
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
Purchase of property and equipment
|
|
(141
|
)
|
(51
|
)
|
Net cash used in investing activities
|
|
(141
|
)
|
(51
|
)
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
Net borrowings (payments on) line of credit
|
|
(25,494
|
)
|
17,202
|
|
Cash paid for treasury stock
|
|
|
|
(483
|
)
|
Net cash provided by (used in) financing activities
|
|
(25,494
|
)
|
16,719
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
(11
|
)
|
14
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(5,959
|
)
|
(9,192
|
)
|
|
|
|
|
|
|
Cash and cash equivalents,
beginning of period
|
|
18,418
|
|
24,715
|
|
|
|
|
|
|
|
Cash and cash equivalents, end
of period
|
|
$
|
12,459
|
|
$
|
15,523
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
23
|
|
$
|
137
|
|
Cash paid for taxes
|
|
|
|
|
|
Accompanying
notes are an integral part of these financial statements.
4
Table of Contents
InfoSonics
Corporation
Condensed Notes to Consolidated Financial Statements
(unaudited)
NOTE 1. Basis of Presentation
The accompanying unaudited
consolidated financial statements and these condensed notes have been prepared
in accordance with accounting principles generally accepted in the United
States (GAAP) for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities Exchange Act of 1934,
as amended (the Exchange Act). Accordingly, they do not include all of the
information and notes required by GAAP for complete financial statements. The
preparation of financial statements requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results are likely to differ from those estimates,
but management does not believe such differences will materially affect the
financial position or results of operations of InfoSonics Corporation (the Company),
although they may. These unaudited consolidated financial statements and
condensed notes should be read in conjunction with the financial statements and
notes as of and for the year ended December 31, 2009 included in the
Companys Annual Report on Form 10-K for the year ended December 31,
2009.
The Companys consolidated
financial statements include assets, liabilities and operating results of its
wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
In the opinion of management, these
unaudited consolidated financial statements reflect all normal recurring
adjustments considered necessary to fairly present the Companys results of
operations, financial position and cash flows as of June 30, 2010 and for
all periods presented. The results
reported in these consolidated financial statements for the three and six
months ended June 30, 2010 are not necessarily indicative of the operating
results, financial condition or cash flows that may be expected for the full
fiscal year of 2010 or for any future period.
NOTE 2.
Stock-Based Compensation
The
Company has three equity incentive plans: the 2006 Equity Incentive Plan (2006
Plan), the 2003 Stock Option Plan (2003 Plan) and the 1998 Stock Option Plan
(1998 Plan). Each of the plans was
approved by our stockholders. As of June 30,
2010, options to purchase 255,000 shares, 12,000 shares and 400,000 shares were
outstanding under the 2006 Plan, the 2003 Plan and the 1998 Plan, respectively,
and a total of 1,088,000 share are available for grant at June 30, 2010
under the 2006 Plan. There are no
options available for grant under the 2003 and the 1998 Plans. The Company is
also a party to non-plan option agreements with several non-employee directors.
The
Companys stock options vest on an annual or a monthly basis. The
Company recognizes stock-based compensation expense on a straight-line basis
over the requisite service period of the award, which is generally the option
vesting term. Such amount may
change as a result of additional grants, forfeitures, modifications in
assumptions and other factors. Income tax effects of share-based payments are
recognized in the financial statements for those awards which will normally
result in tax deductions under existing tax law. During the three and six
months ended June 30, 2010, we recorded an expense of $10,000 and $42,000,
respectively, related to options previously granted. During the three and six
months ended June 30, 2009, we recorded an expense of $18,000 and $31,000,
respectively, related to options previously granted. Under current U.S. federal
tax law, we receive a compensation expense deduction related to non-qualified
stock options only when those options are exercised and vested shares are
received. Accordingly, the financial statement recognition of compensation
expense for non-qualified stock options creates a deductible temporary
difference that results in a deferred tax asset and a corresponding deferred
tax benefit in our consolidated statements of operations.
The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2009 (there have been no grants in 2010):
risk-free interest rate of 0.91% in 2009, based on the U.S. Treasury yields in
effect at the time of grant; expected dividend yields of 0% as the Company has
not, and does not intend to, declare dividends; and expected life of 3 to 6
years based upon the historical life of options. For grants in 2009, the
expected volatility used ranged from 88% to 108%, based on the Companys
historical stock price fluctuations for a period matching the expected life of
the options. As of June 30, 2010,
there was $75,000 of total unrecognized compensation expense related to
non-vested stock options. That expense
is expected to be recognized over the remaining weighted-average period of 3.5
years.
5
Table
of Contents
A summary of option activity
under all of the above plans as of June 30, 2010 and changes during the
six months then ended is presented in the table below (shares in thousands):
|
|
Shares
|
|
Wtd. Avg.
Exercise Price
|
|
Wtd. Avg.
Remaining
Contractual
Life
|
|
Outstanding at December 31, 2009
|
|
1,282
|
|
$
|
1.65
|
|
3.25
|
|
Granted
|
|
|
|
$
|
|
|
|
|
Exercised
|
|
|
|
$
|
|
|
|
|
Forfeited
|
|
615
|
|
$
|
2.35
|
|
|
|
Outstanding at June 30, 2010
|
|
667
|
|
$
|
1.01
|
|
2.41
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
667
|
|
$
|
1.01
|
|
2.41
|
|
Exercisable at June 30, 2010
|
|
489
|
|
$
|
1.14
|
|
1.31
|
|
A
summary of the status of the Companys non-vested options at June 30, 2010
and changes during the six months then ended is presented below (shares in
thousands):
|
|
Shares
|
|
Weighted-average
grant-date fair value
|
|
Non-vested at December 31, 2009
|
|
255
|
|
$
|
0.72
|
|
Granted
|
|
|
|
$
|
|
|
Vested
|
|
(24
|
)
|
$
|
1.77
|
|
Forfeited
|
|
(53
|
)
|
$
|
0.51
|
|
Non-vested at June 30, 2010
|
|
178
|
|
$
|
0.64
|
|
During the quarter ended June 30, 2010, the
Company established a wholly owned subsidiary in Hong Kong to serve as the base
for the Companys sales and marketing efforts of its proprietary line of
verykool®
products
in Asia-Pacific. It also established a wholly owned subsidiary
of the Hong Kong entity in China for the purpose of designing and developing
verykool®
products. The Company funded the combined operations of
these entities with $1.0 million and agreed to invest up to $1.0 million in
additional funding as needed. In order
to provide incentives to the China development team, the Company granted a
warrant exercisable for 38% of the equity ownership of the Hong Kong subsidiary
to a management company for the benefit of the China employees. The Company also committed to reserve up to
5% more to attract additional talent as needed.
The total price of the warrant is $1.00, with vesting to occur one-third
upon the first anniversary of the warrant and the remaining two-thirds to vest
on a monthly basis over the succeeding 24 months. The warrant has a 6-year life, but will not
be exercisable until the third anniversary of its issuance.
The Company evaluated the
warrant on its Hong Kong subsidiary in accordance with ASC 718-50 and concluded
that because the warrants were issued to the management company for allocation
at their discretion, the proper treatment of the warrants was as specified in
ASC 505-50 as equity-based payments to non-employees in exchange for services. The Company also concluded that the estimated
fair value at June 30, 2010 of the warrant based on the cost valuation method
was $365,000. The Company will continue
to record the expense for this warrant based upon the current fair value of the
warrant at each reporting period over the three year performance period. The amount of expense recorded during the
quarter ended June 30, 2010 was $20,000.
The
Companys stock-based compensation is classified in the same expense line items
as cash compensation. Information about stock-based compensation included in
the unaudited results of operations for the three and six months ended June 30,
2010 and 2009 is as follows (in thousands):
|
|
For the Three Months Ended
June 30,
|
|
For the Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Officer compensation
|
|
$
|
4
|
|
$
|
4
|
|
$
|
8
|
|
$
|
3
|
|
Non-employee directors
|
|
|
|
1
|
|
|
|
1
|
|
Sales, general and administrative
|
|
6
|
|
13
|
|
14
|
|
27
|
|
Research and development
|
|
20
|
|
|
|
20
|
|
|
|
Total stock option/warrant expense, included in
total operating expenses
|
|
$
|
30
|
|
$
|
18
|
|
$
|
42
|
|
$
|
31
|
|
6
Table of Contents
NOTE 3. Earnings Per Share
Basic earnings per share are
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding. Diluted earnings per
share is computed similarly to basic earnings per share, except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potential additional common shares that were
dilutive had been issued. Common share equivalents are excluded from the
computation if their effect is anti-dilutive. The Companys common share equivalents
consist of stock options and warrants.
Common
shares from the potential exercise of certain options and warrants have been
excluded from the computation of diluted earnings per share for the three and
six months ended June 30, 2010 because their exercise prices are greater
than the Companys weighted-average stock price for the period. For
the three and six months ended June 30, 2009, the number of
shares excluded was 1,573,000 and 1,654,000, respectively.
NOTE 4. Income Taxes
The Company made a comprehensive
review of its portfolio of uncertain tax positions in accordance with
applicable standards of the Financial Accounting Standards Board (FASB). In
this regard, an uncertain tax position represents the Companys expected
treatment of a tax position taken in a filed tax return, or planned to be taken
in a future tax return, that has not been reflected in measuring income tax
expense for financial reporting purposes. As a result of this review, the
Company concluded that at this time there are no uncertain tax positions, and
there has been no cumulative effect on retained earnings.
The Company is subject to U.S.
federal income tax as well as income tax in multiple states and foreign
jurisdictions. For all major taxing jurisdictions, the tax years 2004 through
2008 remain open to examination or re-examination. As of June 30, 2010,
the Company does not expect any material changes to unrecognized tax positions
within the next twelve months.
The Company recognizes the amount
of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entitys financial statements or tax returns. Judgment is
required in assessing the future tax consequences of events that have been
recognized in our financial statements or tax returns. Fluctuations in the
actual outcome of these future tax consequences could materially impact the
Companys financial position or results of operations. For the three and six months ended June 30,
2010, deferred income tax assets and the corresponding valuation allowance
increased by $6,000 and $374,000, respectively.
Included
in the income tax provision for both the three and six months ended June 30,
2010 is a $400,000 U.S. federal income tax benefit from the carry back of net
operating losses in 2007 and 2008 to prior years. There was no such benefit in the same period
of the prior year.
NOTE 5. Comprehensive Income (Loss
)
Comprehensive income (loss) for the
Company includes net income (loss) and foreign currency translation
adjustments. Comprehensive income (loss)
was as follows (in thousands):
|
|
For the Three Months Ended
June 30,
|
|
For the Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net profit (loss)
|
|
$
|
(314
|
)
|
$
|
230
|
|
$
|
(881
|
)
|
$
|
478
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(5
|
)
|
(1
|
)
|
(18
|
)
|
14
|
|
Comprehensive income (loss)
|
|
$
|
(319
|
)
|
$
|
229
|
|
$
|
(899
|
)
|
$
|
492
|
|
7
Table of
Contents
NOTE 6. Inventory
Inventory
is stated at the lower of cost (first-in, first-out) or market and consists
primarily of cellular phones and cellular phone accessories. The Company records a reserve against
inventories to account for obsolescence and possible price concessions required
to liquidate inventories below cost. As
of June 30, 2010 and December 31, 2009, the inventory reserve was
$99,000 and $112,000, respectively. From
time to time, the Company has prepaid inventory as a result of payments for
products which have not been received by the balance sheet date. As of June 30, 2010 and December 31,
2009, the prepaid inventory balances were $99,000 and $119,000, respectively,
which are included in prepaid assets in the accompanying consolidated balance
sheets. Inventory consists of the
following (in thousands):
|
|
June 30,
2010
(unaudited)
|
|
December 31,
2009
(audited)
|
|
Finished
goods
|
|
$
|
2,429
|
|
$
|
3,535
|
|
Inventory
reserve
|
|
(
99
|
)
|
(
112
|
)
|
Net
inventory
|
|
$
|
2,330
|
|
$
|
3,423
|
|
NOTE 7. Property and Equipment
Property and equipment are
primarily located in the United States, with the exception of test fixtures and
computer equipment at the Companys development subsidiary in China and certain
tooling and product molds located at outsourced manufacturers in Asia. Fixed assets consisted of the following (in
thousands):
|
|
June 30,
2010
(unaudited)
|
|
December 31,
2009
(audited)
|
|
Machinery and equipment
|
|
$
|
401
|
|
$
|
472
|
|
Furniture and fixtures
|
|
175
|
|
106
|
|
Tooling and molds
|
|
550
|
|
482
|
|
Subtotal
|
|
1,126
|
|
1,060
|
|
Less accumulated depreciation
|
|
822
|
|
744
|
|
Total
|
|
$
|
304
|
|
$
|
316
|
|
Depreciation expense for the three
and six months ended June 30, 2010 was $81,000 and $152,000, respectively,
and for the three and six months ended June 30, 2009 was $47,000 and
$121,000, respectively.
NOTE 8. Accrued Expenses
As
of June 30, 2010 and December 31, 2009, accrued expenses consisted of
the following (in thousands):
|
|
June 30,
2010
(unaudited)
|
|
December 31,
2009
(audited)
|
|
Accrued product costs
|
|
$
|
1,745
|
|
$
|
1,477
|
|
Other accruals (including taxes)
|
|
1,532
|
|
4,189
|
|
Total
|
|
$
|
3,277
|
|
$
|
5,666
|
|
8
Table of Contents
NOTE 9. Borrowings
Pursuant to the Companys Loan, Security and Bulk
Purchase Agreement and a Letter of Credit and Security Agreement (collectively,
the Agreement) with Wells Fargo Trade Capital LLC (Lender), the Lender may
advance up to $45 million to the Company based on the expected collections of
eligible receivables as well as value of the Companys eligible inventory
determined in accordance with the Agreement.
The outstanding advances may not exceed the lesser of (i) $45
million or (ii) the sum of the value of the eligible receivables and
eligible inventory multiplied by their respective advance rates as set forth in
the Agreement.
This credit
facility is secured by all of the assets of the Company. The Agreement
automatically renews annually, and is currently set to expire in April 2011. The interest rate for each borrowing under
the credit facility is, at the option of the Company, either the Wells Fargo
Bank N.A. prime rate minus 0.50% or the LIBOR rate plus 2.00%.
As
of June 30, 2010, there were no advances outstanding under the Agreement,
there were $2.1 million of outstanding letters of credit supported by the
Agreement and the Company was in compliance with all the covenants of the
Agreement. See Note 15 for a description
of a subsequent event related to the Agreement.
NOTE 10. Recent Accounting Pronouncements
Recently
Adopted:
On
January 1, 2010, the Company adopted changes issued by the FASB to
accounting for variable-interest entities. These changes require an enterprise
to perform an analysis to determine whether the enterprises variable interest
or interests give it a controlling financial interest in a variable-interest
entity; to require ongoing reassessments of whether an enterprise is the
primary beneficiary of a variable-interest entity; to eliminate the solely
quantitative approach previously required for determining the primary
beneficiary of a variable-interest entity; to add an additional reconsideration
event for determining whether an entity is a variable-interest entity when any
changes in facts and circumstances occur such that holders of the equity
investment at risk, as a group, lose the power from voting rights or similar
rights of those investments to direct the activities of the entity that most
significantly impact the entitys economic performance; and to require enhanced
disclosures that will provide users of financial statements with more
transparent information about an enterprises involvement in a
variable-interest entity. The adoption of these changes had no impact on the
condensed consolidated financial statements.
On
January 1, 2010, the Company adopted changes issued by the FASB to
accounting for transfers of financial assets. These changes remove the concept
of a qualifying special-purpose entity and remove the exception from the
application of variable interest accounting to variable-interest entities that
are qualifying special-purpose entities; limit the circumstances in which a
transferor derecognizes a portion or component of a financial asset; define a
participating interest; require a transferor to recognize and initially measure
at fair value all assets obtained and liabilities incurred as a result of a
transfer accounted for as a sale; and require enhanced disclosure. The adoption
of these changes had no impact on the condensed consolidated financial
statements.
Effective
January 1, 2010, the Company adopted changes issued by the FASB on
January 6, 2010 for a scope clarification to the FASBs previously issued
guidance on accounting for noncontrolling interests in consolidated financial
statements. These changes clarify the accounting and reporting guidance for
noncontrolling interests and changes in ownership interests of a consolidated
subsidiary. An entity is required to deconsolidate a subsidiary when the entity
ceases to have a controlling financial interest in the subsidiary. Upon
deconsolidation of a subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair
value. The gain or loss includes any gain or loss associated with the
difference between the fair value of the retained investment in the subsidiary
and its carrying amount at the date the subsidiary is deconsolidated. In contrast,
an entity is required to account for a decrease in its ownership interest
of a subsidiary that does not result in a change of control of the subsidiary
as an equity transaction. The adoption of these changes had no impact on the
condensed consolidated financial statements.
Effective
January 1, 2010, the Company adopted changes issued by the FASB on
January 21, 2010 to disclosure requirements for fair value measurements.
Specifically, the changes require a reporting entity to disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers. The changes also
clarify existing disclosure requirements related to how assets and liabilities
should be grouped by class and valuation techniques used for recurring and
nonrecurring fair value measurements. The adoption of these changes had no
impact on the condensed consolidated financial statements.
Effective
January 1, 2010, the Company adopted changes issued by the FASB on
February 24, 2010 to accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or
available to be issued, otherwise known as subsequent events. Specifically,
these changes clarified that an entity that is required to file or furnish its
financial statements with the SEC is not required to disclose the date through
which subsequent events have been evaluated. Other than the elimination of
disclosing the date through which management has performed its evaluation for
subsequent events (see Note 12), the adoption of these changes had no impact on
the condensed consolidated financial statements.
9
Table of
Contents
ISSUED
(Not adopted yet):
In
October 2009, the FASB issued changes to revenue recognition for
multiple-deliverable arrangements. These changes require separation of
consideration received in such arrangements by establishing a selling price
hierarchy (not the same as fair value) for determining the selling price of a
deliverable, which will be based on available information in the following
order: vendor-specific objective evidence, third-party evidence, or estimated
selling price; eliminate the residual method of allocation and require that the
consideration be allocated at the inception of the arrangement to all
deliverables using the relative selling price method, which allocates any
discount in the arrangement to each deliverable on the basis of each
deliverables selling price; require that a vendor determine its best estimate
of selling price in a manner that is consistent with that used to determine the
price to sell the deliverable on a stand-alone basis; and expand the
disclosures related to multiple-deliverable revenue arrangements. These changes
become effective for the Company on January 1, 2011. Management has
determined that the adoption of these changes will not have an impact on the
condensed consolidated financial statements, as the Company does not currently
have any such arrangements with its customers.
In
January 2010, the FASB issued changes to disclosure requirements for fair
value measurements. Specifically, the changes require a reporting entity to
disclose, in the reconciliation of fair value measurements using significant
unobservable inputs (Level 3), separate information about purchases, sales,
issuances and settlements (i.e., on a gross basis rather than as a single net
number). These changes become effective for The Company beginning
January 1, 2011. Other than the additional disclosure requirements,
management has determined these changes will not have an impact on the
condensed consolidated financial statements.
In
March 2010, the FASB issued changes related to existing accounting
requirements for embedded credit derivatives. Specifically, the changes clarify
the scope exception regarding when embedded credit derivative features are not
considered embedded derivatives subject to potential bifurcation and separate
accounting. These changes become effective for the Company on July 1,
2010. Management has determined these changes will not have an impact on the
condensed consolidated financial statements.
NOTE 11. Discontinued Operations
During
the quarter ended June 30, 2008, the Company assessed its business in the
United States and Mexico. Due to the
changing environment and consolidation in the United States of the smaller
regional cellular carriers (the Companys target market) into larger national
carriers, along with the Companys inability to penetrate the Mexico market due
to challenges of fostering sales relations with the dominant cellular carriers
there, management determined that it was necessary to take decisive actions to mitigate
further losses. The Company implemented
actions necessary to close sales operations in both of those countries, which
actions were substantially completed by the end of 2009. The results of the unaudited discontinued
operations are as follows (in thousands):
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net sales
|
|
$
|
40
|
|
$
|
236
|
|
$
|
64
|
|
$
|
483
|
|
Gross profit
|
|
39
|
|
(156
|
)
|
63
|
|
(312
|
)
|
Operating income (loss)
|
|
76
|
|
(167
|
)
|
70
|
|
(360
|
)
|
Identifiable assets
|
|
951
|
|
3,026
|
|
951
|
|
3,026
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Table of
Contents
Liabilities
of discontinued operations consist primarily of accounts payable. Assets of discontinued operations are as
follows (in thousands):
|
|
June 30, 2010
(unaudited)
|
|
December 31,2009
(audited)
|
|
Accounts receivable
|
|
$
|
36
|
|
$
|
13
|
|
Prepaid taxes
|
|
842
|
|
851
|
|
Other assets
|
|
73
|
|
16
|
|
Total
|
|
$
|
951
|
|
$
|
880
|
|
As
of June 30, 2010, the discontinuance of the domestic and Mexican
businesses is essentially complete.
However, the Company is currently working to obtain a refund of the VAT
tax prepaid in Mexico and expects to continue to record adjustments and
expenses through discontinued operations as necessary until they are completely
wound down.
The
Company re-evaluated its discontinued operations as of June 30, 2010 in
accordance with applicable FASB guidance due to the Companys remaining
discontinued operations being outstanding for more than one year since the
declaration to discontinue. As discussed above, the prepaid taxes are in the
process of being recovered from a foreign government, with the ability to
settle beyond the Companys control. As this matter is beyond the Companys
control, classification as discontinued operations is still deemed appropriate.
NOTE 12. Geographic
Information
The
Company currently operates in one business segment. All fixed assets are located in Company or
third-party facilities in the United States and Asia. The unaudited net sales
by geographical area for the three and six months ended June 30, 2010 and
2009 were (in thousands):
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
|
June 30, 2010
|
|
June 30, 2009
|
|
June 30, 2010
|
|
June 30, 2009
|
|
Central America
|
|
$
|
3,672
|
|
$
|
5,624
|
|
$
|
5,167
|
|
$
|
8,738
|
|
South America
|
|
18,681
|
|
56,082
|
|
44,727
|
|
95,593
|
|
Total
|
|
$
|
22,353
|
|
$
|
61,706
|
|
$
|
49,894
|
|
$
|
104,331
|
|
NOTE 13. Commitments and Contingencies
LG Electronics Litigation
On July 1, 2009, the Company filed suit in the
Superior Court of the State of California, County of San Diego (Case No. 37-2009-00092797-CU-BT-CTL)
against defendants LG Electronics, Inc., LG Electronics USA, Inc., LG
Electronics Panama S.A., LG Electronics Inc. Chile LTDA, LG Electronics
Guatemala S.A. de C.V. and DOES 1-10.
The complaint alleges claims for interference with contractual
relations/inducing breach of contract, intentional interference with prospective
economic relations, negligent interference with prospective economic relations,
breach of contract, breach of implied covenant of good faith and fair dealing,
unjust enrichment, fraud, promissory estoppel and violation of California
Business and Professions Code §§ 17200, et seq.
The Company is seeking in excess of $5 million in damages On July 31,
2009, the defendants removed the case to federal court in San Diego, CA. On April 23, 2010, the Company filed an
amended complaint.
The Company may become involved in
certain other legal proceedings and claims which arise in the normal course of
business. Other than as described above, as of the filing date of this report,
the Company did not have any significant litigation outstanding.
11
Table
of Contents
NOTE 14. Fair Value of Financial Instruments
The Companys financial instruments
include cash and cash equivalents, accounts receivable, prepaid expenses,
accounts payable and accrued expenses. The book value of all other financial
instruments is representative of their fair values.
Cash and cash equivalents
are the Companys only financial instruments required to be measured at fair
value and are measured using quoted prices for identical assets in an identical
market.
NOTE
15. Subsequent Event
As described in Note 9, the Company
is party to a
Loan, Security and Bulk
Purchase Agreement and a Letter of Credit and Security Agreement (collectively,
the Agreement) with Wells Fargo Trade Capital LLC (Lender).
Section 6.2 of the
Agreement provides that the Agreement may be terminated for convenience by
either party with 60 days written notice.
Although the Company is currently in compliance with all of its
covenants under the Agreement, on July 22, 2010, it received a notice from
the Lender of its election to terminate the Agreement on September 22,
2010, the end of the 60-day notice period.
It is the Companys belief that the principal reasons for the Lenders
actions are the decreased utilization of the facility by the Company, the high
level of capital reserves required by the Lender to support the facility and
the Companys lack of profitability. The
Company believes that its current cash resources and working capital are
sufficient to fund its operations for the foreseeable future. In addition, the Company is considering other
alternatives, including replacing the facility with another lender.
12
Table
of Contents
Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and
Other General Information
This discussion and analysis of
financial condition and results of operations should be read in conjunction
with the accompanying unaudited consolidated financial statements and condensed
notes thereto and other information included in this report and our Annual Report
on Form 10-K for the year ended December 31, 2009 (including our 2009
audited consolidated financial statements and related notes thereto and other
information). Our discussion and analysis of financial condition and results of
operations are based upon, among other things, our unaudited consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The preparation of
financial statements in conformity with GAAP requires us to, among other
things, make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosures of contingent liabilities as of the
date of our most recent balance sheet, and the reported amounts of revenues and
expenses during the reporting periods. We review our estimates and assumptions
on an ongoing basis. Our estimates are based on our historical experience and
other assumptions that we believe to be reasonable under the circumstances.
Actual results are likely to differ from these estimates under different
assumptions or conditions, but we do not believe such differences will
materially affect our financial position or results of operations, although
they may. Our critical accounting policies, the policies we believe are most
important to the presentation of our financial statements and require the most
difficult, subjective and complex judgments are outlined below in Critical
Accounting Policies. All references to
results of operations in this discussion generally are to results from
continuing operations, unless otherwise noted.
We decided during the second
quarter of 2008 to discontinue our operations in Mexico and the U.S. Although we have essentially completed this
process, we are currently working to obtain a refund of the $842,000 of VAT tax
prepaid in Mexico and expect to continue to record adjustments required in the
financial statements, which affects certain amounts of our results of
operations and the classifications on the balance sheet, statement of
operations and statement of cash flows for prior periods, and as of prior
dates, as well as our disclosure in this report, including managements
discussion and analysis. The amounts
related to our discontinued operations are shown separate from our continuing
operations in our consolidated financial statements.
Safe Harbor Statement
This report contains forward-looking
statements, including, without limitation, statements about future impacts of
a new Argentina tariff and possible actions to be taken in response, customer
relationships, marketing of our
verykool
®
products, sales levels, cost reductions, operating efficiencies and
profitability, that are based on current management expectations and which
involve certain risks and uncertainties.
These risks and uncertainties, in whole or in part, could cause such
expectations to fail to be achieved and have a material adverse effect on our
business, financial condition and results of operations, and include, without
limitation: (1) intense competition internationally, including competition
from alternative business models, such as manufacturer-to-carrier sales, which
may lead to reduced prices, lower sales, lower gross margins, extended payment
terms with customers, increased capital investment and interest costs, bad debt
risks and product supply shortages; (2) dependency on sales in Argentina
which have been and will continue to be significantly reduced or eliminated as
a result of the recently adopted import tariff in that country; (3) the
ability of the Companys new China R&D group to develop new
verykool
® handsets and successfully
introduce them into new emerging markets; (4) extended general economic
downturn in world markets; (5) inability to secure adequate supply of
competitive products on a timely basis and on commercially reasonable terms; (6) foreign
exchange rate fluctuations, devaluation of a foreign currency, adverse
governmental controls or actions, political or economic instability, or
disruption of a foreign market, including, without limitation, the imposition,
creation, increase or modification of tariffs, taxes, duties, levies and other
charges and other related risks of our international operations, such as the
recently adopted tax/duty change in Argentina on certain electronics (including
cellular phones) which could significantly increase selling prices to our
customers and end-users; (7) the ability to attract new sources of
profitable business from expansion of products or services or risks associated
with entry into new markets, including geographies, products and services; (8) an
interruption or failure of our information systems or subversion of access or
other system controls may result in a significant loss of business, assets, or
competitive information; (9) significant changes in supplier terms and
relationships or shortages in product supply; (10) continued consolidation
in the wireless handset carrier market; (11) loss of business from one or more
significant customers; (12) customer and geographical accounts receivable
concentration risk and other related risks; (13) rapid product improvement and
technological change resulting in inventory obsolescence; (14) uncertain
political and economic conditions internationally, including terrorist or
military actions; (15) the loss of a key executive officer or other key
employees and the integration of new employees; (16) changes in consumer demand
for multimedia wireless handset products and features; (17) our failure to
adequately adapt to industry changes and to manage potential growth and/or
contractions; (18) seasonal buying patterns; (19) the resolution of any
litigation for or against the Company; (20) the recent loss of the Companys
bank line of credit and the ability of the company to have access to adequate
capital to fund its operations; and (21) the ability of the Company to generate
taxable income in future periods. Reference
is also made to other factors detailed from time to time in our periodic
reports filed with the Securities and Exchange Commission. These forward-looking
statements speak only as of the date of this release and we undertake no
obligation to publicly update any forward-looking statements to reflect new
information, events or circumstances after the date of this release.
13
Table of Contents
We have instituted in the
past, and continue to institute, changes to our strategies, operations and
processes to address risks and uncertainties and to mitigate their impacts on
our results of operations and financial condition. However, no assurances can
be given that we will be successful in these efforts. For a further discussion
of significant risk factors to consider, see Risk Factors below in this
report and Item 1A. Risk Factors of our Annual Report on Form 10-K for
the year ended December 31, 2009. In addition, other risks or
uncertainties may be detailed from time to time in our future SEC filings.
Overview
We are a leading distributor
and provider of wireless handsets and accessories in Latin America. We provide
end-to-end handset and wireless terminal solutions for carriers in Latin
America, and we distribute products of several key original equipment
manufacturers (OEMs) such as Samsung. We
are also involved in the design, development, sourcing and sale of a
proprietary line of products under our own
verykool®
brand, which includes entry-level, mid-tier and high-end products.
The wireless business is
extremely competitive. We must develop
and deliver a constant flow of new and innovative products and foster close
relationships with carriers and other customers. We also focus on cost and operational
efficiencies so that our products can be price-competitive in the marketplace. It is important for us to manage our supply
chain closely to provide timely delivery of product to our customers and to
minimize exposure to inventory levels.
We provide distribution and solution services, including integration and
product testing, approval and certification, warehousing, logistics services
(packing, shipping and delivery), marketing campaigns, warranty services and
end-user support.
In 2010 we took a
significant strategic step in our business as we launched our own development team
in China. Previous to this, the design
and development of our
verykool®
phones were contracted out to third parties.
Bringing design and engineering resources in-house will provide us the
opportunity to focus entirely on our own branded products, accelerate
time-to-market, be more responsive to our customer base and reduce our costs
and expenses to improve our gross margins and profitability. The production of our
verykool®
phones continues to be
outsourced to EMS contract manufacturers in Asia, to which our development team
is in close proximity. We recruited a
team of very experienced management and technical personnel who will serve as
both our design house for all markets and as the base for marketing and selling
our products in Asia-Pacific. The team
consists of 34 employees located in Beijing.
The quarter ended June 30, 2010 was the first full quarter of
operation of our China subsidiary. Its
expenses are classified as R&D expenses on our statement of
operations. We expect to generate initial
revenue in Asia-Pacific in the third quarter of 2010.
Industry and Market Trends and
Risks
Since
2008, a rapid decline in wireless handset sales in the Central and South
American markets we serve has negatively impacted and could continue to
negatively impact our sales. Some of the countries in the regions where we
operate, particularly in Central America, have close economic relations with
the United States, and we believe that weak economic conditions in the United
States have adversely impacted consumer demand for the wireless handsets we
sell in those countries. Excess supply
conditions and the extended effects of the recent global economic downturn have
reduced and may continue to reduce demand for our products and the market
prices of the products we sell. These
reductions affect our ability to generate sales, margins and gross profit at
expected levels and could continue to affect the value of our inventory, as
well as customer payment trends. Conversely, should manufacturers be unable to
respond to an unanticipated increase in demand as the global economy recovers
on a timely basis, we, along with others in our industry, could experience
supply constraints that would affect our ability to deliver products. We are
unable to quantify these effects, as it is difficult to predict future supply
conditions and demand patterns that affect our ability to meet customer demand
or sell handsets at an acceptable gross profit.
Although
we began to experience a small increase in the demand for handsets in certain
markets in the third quarter of 2009, we have also begun to observe a decrease
in some subsidies offered by operators in the region, which increases the
handset price to the consumer, reducing overall handset volumes. We also see more low-cost manufacturers
gaining traction with entry-level products, which is negatively affecting both
our OEM and
verykool
®
sales in the entry-level segment.
Most
significantly, Argentina passed a new tariff in November 2009
affecting certain imported electronics, including wireless
handsets. This tariff often increases the pricing at the point of
sale of wireless handsets imported into Argentina by more than 30%, thereby
rendering them non-competitive with similar products produced within the
country. This is particularly
challenging for us because our sales are largely concentrated in Argentina,
which country represented 87% of our sales in 2009. This barrier has resulted in a significant
erosion of our sales for the first half of 2010, and we expect that it will continue
to have a material adverse impact on our sales, results of operations and
prospects in Argentina in the second half of 2010. During the first three months of 2010, sales
to customers in Argentina comprised 88% of our sales, but declined to 68% of sales
in the second quarter of 2010.
As
indicated above, our new long-term strategy is to open new markets in
Asia-Pacific and to leverage our
verykool®
proprietary line of products in these new markets, as well as our existing
Latin American markets.
14
Table of
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Results
of Operations
The following table sets forth
certain financial data as a percentage of net sales:
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of sales
|
|
93.0
|
%
|
93.4
|
%
|
94.0
|
%
|
92.9
|
%
|
Gross profit
|
|
7.0
|
%
|
6.6
|
%
|
6.0
|
%
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
9.5
|
%
|
5.8
|
%
|
8.2
|
%
|
6.2
|
%
|
Research and development
|
|
1.0
|
%
|
0.0
|
%
|
0.5
|
%
|
0.0
|
%
|
|
|
10.5
|
%
|
5.8
|
%
|
8.7
|
%
|
6.2
|
%
|
Operating income (loss) from
continuing operations
|
|
-3.5
|
%
|
0.8
|
%
|
-2.7
|
%
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest expense (net)
|
|
0.0
|
%
|
-0.2
|
%
|
0.0
|
%
|
-0.1
|
%
|
Other income (expense), net
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Income (loss) from continuing
operations before income taxes.
|
|
-3.5
|
%
|
0.6
|
%
|
-2.7
|
%
|
0.8
|
%
|
Benefit (provision) for income taxes
|
|
1.8
|
%
|
0.0
|
%
|
0.8
|
%
|
0.0
|
%
|
Income (loss) from continuing operations
|
|
-1.7
|
%
|
0.6
|
%
|
-1.9
|
%
|
0.8
|
%
|
Loss from discontinued operation, net of tax
|
|
0.3
|
%
|
-0.2
|
%
|
0.1
|
%
|
-0.3
|
%
|
Net income (loss)
|
|
-1.4
|
%
|
0.4
|
%
|
-1.8
|
%
|
0.5
|
%
|
Three months ended June 30, 2010 compared with three months ended June 30,
2009
Net
Sales
For the three months ended June 30,
2010, our net sales from continuing operations amounted to $22.4 million, a
decrease of 64% from $61.7 million in the same period last year. The principal reason for the decline was the
negative impact of the recently enacted import tariff in Argentina, where our
sales fell 72% in the second quarter compared to the prior year. As a result,
the geographic mix of net sales shifted significantly in the current year
quarter as sales in South America fell from 91% last year to 84% this
year. Conversely, our net sales in
Central America rose from 9% last year to 16% this year. We expect the pressure in Argentina to continue
in the second half of 2010.
We also saw a decrease in
the average selling price of wireless handsets sold in the three months ended June 30,
2010. In comparison to the prior year,
we sold 46% fewer units and the average selling price declined 33%. This reflects a combination of continued
price pressure, due primarily to the slower global economy, which continues to
result in increased volumes of lower-priced handsets, including some of our
verykool®
and OEM products.
Cost of
Sales, Gross Profit and Gross Margin
For
the three months ended June 30, 2010, our gross profit margin increased
from 6.6% of net sales in the prior year to 7.0% of net sales in the current
year quarter. The improvement in our
gross margin was the result of a shift in product mix, including increased
sales of our proprietary
verykool®
products
and declining sales of our distribution business.
15
Table of
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Operating
Expense
For
the three months ended June 30, 2010, operating expense amounted to $2.4
million, a decrease of 34% compared to $3.6 million in the same period
last year. However, as a percentage of
net sales from continuing operations, operating expense increased to 10.6% in
the three months ended June 30, 2010, compared with 5.8% for the same
period last year. The dollar decrease in
total operating expense reflects continued efforts by management to reduce
fixed operational costs to match current revenue levels. Such actions are expected to continue in the
second half of 2010. These expense
reductions were partially offset by an increase of $227,000 in research and
development costs from our new China development center. We believe that the investment in the China
operation will ultimately result in improved products at lower costs, which
will contribute to increased sales and gross profit in future periods.
Other Expense
For
the three months ended June 30, 2010, we incurred no interest expense,
compared with $109,000 for the same period last year. This year we had no borrowings during the
second quarter on our line of credit, resulting from, among other things,
positive cash flow from the contraction of our business as described below in Liquidity
and Capital Resources.
Provision for Income Taxes
For the three months ended June 30,
2010, we recorded a $400,000 benefit from federal income taxes as a result of a
carry back of net operating losses in 2007 and 2008 to prior tax years in which
we reported profitability. The related
receivable is shown on the balance sheet in Accounts Receivable Other. After a small provision for local taxes, our
net tax benefit for the quarter was $399,000.
For the three months ended June 30, 2009, we recorded a small
provision for local taxes of $7,000.
Income (Loss) from Discontinued
Operations (net of tax)
The
discontinuance and closure of our operations in the U.S. and Mexico that began
in the second quarter of 2008 is substantially complete. During the three months ended June 30,
2010, we reported net income from discontinued operations of $76,000 from the
sale of obsolete inventory above our carrying value. In the same period last year, we reported a
loss of $167,000 from discontinued operations as the closure was in process. We expect to continue to record adjustments
and expenses through discontinued operations as necessary until all related
assets and liabilities are liquidated.
Six months ended June 30, 2010 compared with six months ended June 30,
2009
Net
Sales
For the six months ended June 30,
2010, our net sales from continuing operations amounted to $49.9 million, a
decrease of 52% from $104.3 million in the same period last year. The principal reason for the decline was the
negative impact of the recently enacted import tariff in Argentina, where our
sales fell 57% in the first half of 2010 compared to the prior year. We expect the pressure in Argentina to
continue in the second half of 2010.
We also saw a decrease in
the average selling price of wireless handsets sold in the six months ended June 30,
2010. In comparison to the prior year,
we sold 30% fewer units and the average selling price declined 31%. This reflects a combination of continued
price pressure, due primarily to the slower global economy, which continues to
result in increased volumes of lower-priced handsets, including some of our
verykool®
and OEM products.
Cost of
Sales, Gross Profit and Gross Margin
For
the six months ended June 30, 2010, net sales declined 52% compared to the
same period last year, and gross profit declined 60%. As a result, our gross profit margin
decreased from 7.1% of net sales in the prior year to 6% of net sales in the
current year first half. The decline in
gross margin was the result of a shift in product mix during the first quarter
of 2010 that resulted in a higher level of sales of lower-margin products.
16
Table of
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Operating
Expense
For
the six months ended June 30, 2010, operating expense amounted to $4.3
million, a decrease of 33.0% compared to $6.4 million in the same period
last year. However, as a percentage of
net sales from continuing operations, operating expense increased to 8.7% in
the six months ended June 30, 2010, compared with 6.2% for the same period
last year. The decrease in total
operating expense from the prior year reflects continued efforts by management
to reduce fixed operational costs to match declining revenue levels. Such actions are expected to continue in the
second half of 2010. These expense
reductions were partially offset by an increase of $227,000 in research and
development costs from our new China development center.
Other Expense
For
the six months ended June 30, 2010, we incurred interest expense of
$23,000, compared with $137,000 for the same period last year. This year we had no borrowings during the
second quarter of 2010 on our line of credit, resulting from, among other
things, positive cash flow from the contraction of our business.
Provision for Income Taxes
For the six months ended June 30,
2010, we reported a net tax benefit of $395,000, including a $400,000 federal
tax benefit in the second quarter of 2010 as a result of a carry back of net
operating losses in 2007 and 2008 to prior tax years in which we reported
profitability. The $400,000 receivable
is shown on the June 30, 2010 balance sheet in Accounts Receivable Other. For the six months ended June 30, 2009,
we recorded a small provision for local taxes of $17,000.
Income (Loss) from Discontinued
Operations (net of tax)
During
the six months ended June 30, 2010, we reported net income from
discontinued operations of $70,000, including $76,000 from the sale of obsolete
inventory in the second quarter of 2010 above our carrying value. In the same period last year, we reported a
loss of $360,000 from discontinued operations as the closure was in process.
Liquidity and Capital
Resources
Historically, our primary sources
of liquidity have been cash generated from operations, lines of credit (bank
and vendor) and, from time to time, sale and exercise of securities to provide
capital needed to support our business.
However, we have incurred losses for the last three fiscal years and
negative cash flow from operations for two of those years. In the six months ended June 30, 2010,
the contraction in our business has allowed us to reduce our working capital
needs, decrease balances in accounts receivable by $24.1 million and
inventories by $1.1 million, reduce accounts payable and accrued expenses by
$3.4 million and generate $19.7 million in cash flow from operations
during the period. This cash flow,
together with our existing cash balances, enabled us to retire all $25.5
million outstanding under our bank line of credit, and at June 30, 2010 we
had $12.5 million in cash and no outstanding debt.
During
the six months ended June 30, 2010, we spent $141,000 on capital
expenditures, compared to $51,000 in the prior-year period. The spending this year includes the set-up of
our new development operation in China.
Because we outsource all the manufacturing of our proprietary
verykool®
products, our business is not capital
intensive. We expect that continued
minor investments will be made in the form of tooling and molds for new
products.
As described in Notes 9 and 15 to
our financial statements, the Company is party to a
Loan,
Security and Bulk Purchase Agreement and a Letter of Credit and Security
Agreement (collectively, the Agreement) with Wells Fargo Trade Capital LLC (Lender).
Section 6.2 of the
Agreement provides that the Agreement may be terminated for convenience by
either party with 60 days written notice.
Although the Company is currently in compliance with all of its
covenants under the Agreement, on July 22, 2010, it received a notice from
the Lender of its election to terminate the Agreement on September 22,
2010, the end of the 60-day notice period.
It is the Companys belief that the principal reasons for the Lenders
actions are the decreased utilization of the facility by the Company, the high
level of capital reserves required by the Lender to support the facility and
the Companys lack of profitability. The
Company believes that its current cash resources and working capital are
sufficient to fund its operations for the foreseeable future. In addition, the Company is considering other
alternatives, including replacing the facility with another lender.
17
Table of
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Critical Accounting Policies
There
have been no material changes to our critical accounting policies and estimates
affecting the application of those accounting policies since our Annual Report
on Form 10-K for the year ended December 31, 2009.
Item 3. Quantitative and
Qualitative Disclosures about Market Risk
The
primary objective of the following information is to provide forward-looking
quantitative and qualitative information about our potential exposure to market
risks. The term market risk for us refers to the risk of loss arising from
adverse changes in interest rates and various foreign currencies. The
disclosures are not meant to be precise indicators of expected future losses,
but rather indicators of reasonably possible losses. This forward-looking
information provides indicators of how we view and manage our ongoing market
risk exposures.
Interest
Rate Risk
Historically
we have been exposed to market risk from changes in interest rates on
outstanding balances under our revolving line of credit. However, at June 30,
2010, we had no balances outstanding under the line.
Market Risk
Almost
all of our sales and expenses are transacted in markets outside the United
States. However, all sales transactions
and accounts receivable are denominated in U.S. dollars. As a result of our
international sales, our future operating results could be adversely affected
by a variety of factors, including changes in specific countries political,
economic or regulatory conditions, and trade protection measures. Our market risk management includes an
accounts receivable insurance policy for our sales. However, there can be no assurance that our
insurance policy will substantially offset the impact of fluctuations in
currency exchange rates, political, economic or regulatory conditions on our
results of operations and financial position. We do not believe that foreign
currency fluctuations had a material impact on our financial results during the
three and six month periods ended June 30, 2010. See Consolidated Statements of
Comprehensive Operations in our financial statements included in this report.
Item 4. Controls and Procedures
Disclosure Controls
An
evaluation was performed pursuant to Rule 13a-15(b) of the Securities
Exchange Act of 1934 (the Exchange Act) under the supervision and with the
participation of our management, including the Chief Executive Officer and
President and the Chief Financial Officer, of the effectiveness of the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act) as of the end of the period covered by this
quarterly report. These disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in the reports
it files or submits under the Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in the SECs rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that this information is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. Based on the evaluation,
the Chief Executive Officer and President and the Chief Financial Officer
concluded that the Companys disclosure controls and procedures were effective
as of the end of the period covered by this quarterly report.
Changes in Internal Control over Financial Reporting
There
was no change in our internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during our second quarter ended June 30, 2010, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
18
Table of
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
LG Electronics Litigation
On July 1, 2009, the Company filed suit in the
Superior Court of the State of California, County of San Diego (Case No. 37-2009-00092797-CU-BT-CTL)
against defendants LG Electronics, Inc., LG Electronics USA, Inc., LG
Electronics Panama S.A., LG Electronics Inc. Chile LTDA, LG Electronics
Guatemala S.A. de C.V. and DOES 1-10.
The complaint alleges claims for interference with contractual relations/inducing
breach of contract, intentional interference with prospective economic
relations, negligent interference with prospective economic relations, breach
of contract, breach of implied covenant of good faith and fair dealing, unjust
enrichment, fraud, promissory estoppel and violation of California Business and
Professions Code §§ 17200, et seq. The
Company is seeking in excess of $5 million in damages. On July 31, 2009, the defendants removed
the case to federal court in San Diego, CA.
On April 23, 2010, the Company filed an amended complaint.
We may become involved in certain
other legal proceedings and claims which arise in the normal course of
business. Other than as described above, as of June 30, 2010, we did not
have any significant litigation outstanding.
Item 1A. Risk Factors
In addition to the risk
factors included below and other information set forth in this report, you
should carefully consider the factors discussed in Part I. Item 1A. Risk
Factors in our Annual Report on Form 10-K for the year ended December 31,
2009, which factors and information could materially affect our business,
financial condition or operating results. The risk factors and uncertainties
described in our last Annual Report on Form 10-K and this report are not
the only risks and uncertainties facing us. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may
materially affect our business, financial condition or operating results. Except as set forth below, there have been no
material changes to the risk factors included in our last Annual Report on Form 10-K.
A recently passed
Argentina tariff has substantially increased the cost at the point of sale for
certain imported electronics, including the products we sell, and this has had
a material adverse impact on our sales in Argentina.
Argentina,
one of the countries where we have historically and continue to sell a
significant amount of OEM products and where we generated 68% of our net
sales in the three months ended June 30, 2010, passed a new
tariff in November 2009 affecting certain imported
electronics, including wireless handsets. This new tariff impacts
the pricing at the point of sale in excess of 30% and has reduced
significantly our overall OEM sales
volume in Argentina. This tariff had a material adverse impact
on our sales, results of operations and prospects for our OEM products in
Argentina in the first six months of 2010. We believe that this tariff will continue
to have a material adverse impact on our sales, results of operations and
prospects for our OEM products in Argentina on an ongoing basis.
The loss or reduction in orders from
principal customers or a reduction in prices we are able to charge these
customers will have a negative impact upon our revenues and could cause our
stock price to decline.
Our three largest customers
in the three months ended June 30, 2010, all carriers in South America,
represented 36%, 18% and 15% of our net sales during that period. In 2010, a customer accounting for 28% of our
net sales for 2009 began significantly reducing its purchases from us as a
result of the newly enacted Argentina tariff.
Additional Argentina customers are expected to decrease or eliminate
their purchases of imported wireless handsets in the coming fiscal quarters.
The markets we serve are
subject to significant price competition. Additionally, our customers are not
contractually obligated to purchase products from us. For these and other
reasons, such as competitive pricing and pressures, customers may seek to
obtain products or services from us at lower prices than we have been able to
charge in the past, and they could terminate our relationship or reduce their
purchases from us in favor of lower-priced alternatives. In addition, we have
experienced losses of certain customer bases through industry consolidation, a
trend that may increase in our markets, and in the ordinary course of business.
The further loss of any of our principal customers, a reduction in the amount
of product or services our principal customers order from us or the inability
to maintain current terms, including price, with these or other customers could
have an adverse effect on our financial condition, results of operations and
liquidity and could cause our stock price to decline.
19
Table of Contents
We buy a significant amount of our
products from a limited number of suppliers, who may not provide us with
competitive products at reasonable prices when we need them in the future.
We purchase wireless
handsets and accessories principally from wireless communications OEMs and
distributors. We depend on these suppliers to provide us with adequate
inventories of currently popular brand-name products on a timely basis and on
favorable pricing and other terms, as well as on these suppliers quality
products and services and financial stability.
For
the period ended June 30, 2010, one vendor, Samsung Electronics de
Amazonia, S.A., accounted for 83% of our total cost of sales
. We currently have one exclusive and several
non-exclusive agreements with our principal suppliers, which can be terminated
on short notice and provide for certain territorial restrictions. Our suppliers
may not offer us competitive products on favorable terms or with timely
delivery. The increased costs on importation of wireless handsets and other
products into Argentina resulting from the recently enacted tariff will
significantly reduce our supply of competitive products for Argentina. In
addition, new products from other manufacturers could impact the demand for
products from manufacturers we represent. From time to time, we have been
unable to obtain sufficient product supplies. Any failure or delay by our
suppliers, particularly our single primary vendor, in supplying us with
products on favorable terms may severely diminish our ability to obtain and
deliver products to our customers on a timely and competitive basis. If we lose
any of our principal suppliers, or if these suppliers are unable to fulfill our
product needs, or if any principal supplier imposes substantial price increases
and alternative sources of supply are not readily available, it would have a
material adverse effect on our results of operations and financial condition.
The termination of our secured credit facility may affect our
liquidity.
Historically,
one of our primary sources of liquidity has been borrowing from bank lines of
credit. Our secured bank credit facility
with Wells Fargo Trade Capital LLC will terminate on September 22,
2010. While we presently have no
borrowings under this facility, and we believe that our current cash resources
and working capital are sufficient to fund our operations for the foreseeable
future, we had $2.1 million of outstanding letters of credit at June 30, 2010 supported
by this facility that will need to be refinanced or otherwise
collateralized. Any failure to secure a
replacement bank credit facility on acceptable terms could adversely affect our
business liquidity, financial condition or operating results.
We have
recently experienced net losses and net losses may continue in the future. If
we continue to operate at a loss, our business may not be financially viable.
We experienced losses for
the six months ended June 30, 2010 and the year ended December 31,
2009. Given the impact of the recently passed Argentina tariff, the extended
effects of the economic slowdown and contraction in the Central and South
American markets that we serve, and general economic instability globally, we
cannot adequately evaluate the financial viability of our business or our
long-term prospects.
To achieve profitability, we
must, among other things:
·
increase gross
profits while controlling operational expenses;
·
generate sales and
consumer demand for our
verykool®
products; and
·
continue to work
with our OEM vendors for increased margin opportunities.
If we do not succeed in
these objectives, our business, among other things, will continue to experience
losses and may not be sustainable in the future.
We may be delisted from The NASDAQ Stock Market if we do not satisfy
continued listing requirements.
On
May 4, 2010, we received a Nasdaq Staff Deficiency letter indicating that
for the prior thirty consecutive business days the bid price for our common
stock had closed below the minimum $1.00 per share requirement for continued
listing on The NASDAQ Global Market under Nasdaq Marketplace Rule 5450(a)(1).
In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we were provided
an initial period of 180 calendar days, or until November 1, 2010, to
regain compliance. The letter stated
that the Nasdaq staff would provide written notification that we had achieved
compliance with Rule 5450(a)(1) if at any time prior to November 1,
2010, the bid price of our common stock closed at $1.00 per share or more for a
minimum of ten consecutive business days.
20
Table of
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If
compliance with Nasdaq Marketplace 5450(a)(1) cannot be demonstrated by November 1,
2010, the staff of The Nasdaq Stock Market Listing Qualifications department is
expected to deliver a written notification to us that our common stock will be
delisted from The NASDAQ Global Market.
If we receive a delisting notice, we may appeal the Nasdaq staffs
determination to a Listing Qualifications Panel. Alternatively, we may apply to
transfer the listing of our common stock to The NASDAQ Capital Market or
another exchange or trading market.
However, our application may not be granted if we do not satisfy the
applicable listing requirements for The NASDAQ Capital Market at the time of
the application. Even if we successfully
transfer our common stock to The NASDAQ Capital Market, but are unable to
satisfy the minimum bid price requirement or any of the other continued listing
standards of The NASDAQ Capital Market, our common stock would be delisted from
The NASDAQ Capital Market.
If our common stock were delisted from The NASDAQ Stock Market, you may
find it difficult to dispose of your shares and our share price may be
adversely affected.
If
our common stock were to be delisted from The NASDAQ Global Market and we could
not satisfy the listing standards of The NASDAQ Capital Market, trading of our
common stock most likely would be conducted in the over-the-counter market on
an electronic bulletin board established for unlisted securities such as the
OTCQX marketplace or the OTC Bulletin Board.
Such trading would reduce the market liquidity of our common stock. As a result, an investor would find it more
difficult to dispose of, or obtain accurate quotations for the price of, our
common stock, thereby negatively impacting the share price of our common stock.
If
our common stock is delisted from The NASDAQ Global Market and we could not
satisfy the listing standards of The NASDAQ Capital Market and the trading
price remains below $5.00 per share, trading in our common stock might also
become subject to the requirements of certain rules promulgated under the
Securities Exchange Act of 1934, which require additional disclosure by
broker-dealers in connection with any trade involving a stock defined as a penny
stock (generally, any equity security not listed on a national securities
exchange or quoted on The NASDAQ Stock Market that has a market price of less
than $5.00 per share, subject to certain exceptions). Many brokerage firms are
reluctant to recommend low-priced stocks to their clients. Moreover, various
regulations and policies restrict the ability of shareholders to borrow against
or margin low-priced stocks, and declines in the stock price below certain
levels may trigger unexpected margin calls. Additionally, because brokers
commissions on low-priced stocks generally represent a higher percentage of the
stock price than commissions on higher priced stocks, the current price of the
common stock can result in an individual shareholder paying transaction costs
that represent a higher percentage of total share value than would be the case
if our share price were higher. This factor may also limit the willingness of
institutions to purchase our common stock. Finally, the additional burdens
imposed upon broker-dealers by these requirements could discourage
broker-dealers from facilitating trades in our common stock, which could
severely limit the market liquidity of the stock and the ability of investors
to trade our common stock, thereby negatively impacting the share price of our
common stock.
Item 6. Exhibits
Exhibit
Number
|
|
Description of Exhibit
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification
of Chief Executive Officer (+).
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification
of Chief Financial Officer (+).
|
32.1
|
|
Section 1350
Certification of Chief Executive Officer and Chief Financial Officer (+).
|
21
Table of
Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
InfoSonics Corporation
|
|
|
|
|
|
|
|
|
Date:
|
August 16, 2010
|
By:
|
/s/ Joseph Ram
|
|
|
|
Joseph Ram
|
|
|
|
President and Chief Executive
Officer
|
|
|
|
|
|
|
|
|
Date:
|
August 16, 2010
|
By:
|
/s/ Vernon A. LoForti
|
|
|
|
Vernon A. LoForti
|
|
|
|
Chief Financial Officer
|
22
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