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UNITED STATES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
x | ||
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the transition period from to
Commission File No. 001-32217
InfoSonics Corporation
(Exact name of registrant as specified in its charter)
Maryland | 33-0599368 | |
(State or other jurisdiction of incorporation) | (IRS Employer Identification No.) |
4350 Executive Drive, Suite 100
San Diego, CA 92121
(Address of principal executive offices including zip code)
858-373-1600
(Registrant'sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | ||||
$0.001 par value common stock | The NASDAQ Stock Market |
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o¨ Yes ýx No
Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o¨ Yes ýx No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ýx Yes o¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive DataDate File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o¨ Yes o¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ox
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“large accelerated filer," "accelerated filer"” “accelerated filer” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act. (Check one):.
Large accelerated filer | ¨ | Accelerated | ¨ | |||||
Non-accelerated filer | smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o¨ Yes ýx No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant'sregistrant’s most recently completed second fiscal quarter was $15,480,133.$5,785,005. This calculation is based upon the closing price of $1.76$0.58 of the stock on June 30, 2009 as reported by The NASDAQ Global Market.2010. Without asserting that any director or executive officer of the registrant, or the beneficial owner of more than five percent of the registrant'sregistrant’s common stock, is an affiliate, the shares of which they are the beneficial owners have been deemed to be owned by affiliates solely for this calculation.
As of March 19, 2010,31, 2011, there were approximately 14,184,146 shares of the registrant'sregistrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Company's 2010Company’s 2011 Annual Meeting of ShareholdersStockholders expected to be held on June 14, 2010.13, 2011.
InfoSonics Corporation
Form 10-K for the Year Ended December 31, 2009
2010
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TableCertain statements in this annual report on Form 10-K constitute “forward-looking statements.” These forward-looking statements involve known or unknown risks, uncertainties and other factors that may or may not be outside our control and that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Specifically, the actions of Contentscompetitors, suppliers and customers are generally outside of our control; and our ability to execute our business plans and to increase revenues and operating income are each dependent upon our ability to continue to expand our current businesses and to enter new business areas, as well as upon general economic conditions and other factors, including some of the factors identified as “Risk Factors” in this annual report and from time to time in our other SEC filings. You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continues,” or the negative of these terms, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We do not intend to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, unless required by law.
In this annual report on Form 10-K, “InfoSonics,” “InfoSonics Corporation,” “the Company,” “we,” “us” and “our” refer to InfoSonics Corporation and our wholly owned subsidiaries on a consolidated basis, unless the context otherwise provides.
Item 1. | Business |
Company Overview
We are one of the premier distributors and providersa provider of wireless handsets and accessories in Centralto carriers, distributors and South America. We provide end-to-end handset and wireless terminal solutions for carriers in those markets. We distribute products of original equipment manufacturers (OEMs), including Samsung(“OEMs”) in Latin America and others.Asia Pacific. We are also involved in the designing, sourcingdesign, develop, source and distributing of asell our proprietary line of products under our owntheverykool®verykool® brand, which includes entry-level, mid-tier and high-end products. We first introduced ourverykool® brand in 2006.
Our corporate headquarters isare in San Diego, California. From ourCalifornia and we maintain a sales facilityoffice in Miami, Florida we operateto serve our Latin American open market customers based in Miami. We have operated a warehouse and distribution center forin Miami, but are now phasing that out as we move more to a build-to-order model and utilize third party logistics operators to conduct the warehousing and logistical aspects of our customers.business. We have wholly owned subsidiaries in Central and South America, which conduct some of our business activities in their respective regions, andas well as subsidiaries in Asia intendedChina and Hong Kong where we conduct research and development of ourverykool® products, oversee production at contract manufacturers, conduct quality control and monitor third party logistics and warehousing for shipment to assist in designour customers.
Prior to March 2011 and manufacturing oversight of our proprietary products.
Our distribution and solution services include product testing, approval and certification, warehousing, logistics services (packing, shipping and delivery), marketing campaigns, warranty services and end-user support. These services arefor the past four years, there were essentially two ways through which we provided for OEMs and ourverykool®-branded wireless handsets and accessories, in order to facilitate sales to network carriers, agents, resellers, distributors, independent dealersaccessories: (1) distribution of wireless handsets supplied by major manufacturers, primarily Samsung, and retailers. In addition, for(2) provision of our own proprietaryverykool®verykool®-branded products, we design, test and contract with manufacturers to build these products.
During 2008, we were impacted by the worldwide economic downturn, especially in our Central American region in the second half of the year. For 2008, our annual unit volume decreased 2% and our average price per unit remained relatively unchanged. Although we began to see a small increase in the demand for handsets in the third quarter of 2009, our annual unit volume decreased 1.2% relative to 2008. Our average selling price, however, increased by 13.4% in 2009. We believe phones that we have established positive relations with manyoriginally sourced from independent design houses and original design manufacturers (“ODMs”). Revenue reached its peak in 2006 when we recorded approximately $241 million of net sales. In 2009, more than 95% of our net sales of approximately $231 million were derived from distribution sales of Samsung product to carriers in both Central and South America, which could assist us as the overall global economy recovers and we continue to develop our proprietary line ofverykool ® wireless handsets and accessories that we first introduced in 2006. However,Argentina. In late 2009, however, a recently enactedstiff import tariff on certain electronic devices, including wireless handsets, was enacted in our largest market of Argentina, will haveArgentina. The tariff had a material adversesignificant negative impact on our sales results of operations and prospects for a return to profitabilitybeginning in the near future.first quarter of 2010, and ultimately resulted in a decrease of 69% of our sales volume in 2010 compared to 2009. Then, in February 2011, Argentina enacted a further import regulation effective March 6, 2011 which essentially resulted in the final conclusion of
our distribution business. Going forward, we expect our business to be centered on ourverykool® product line. Our goal is to replace the lost gross profit from distribution revenues with higher marginverykool® sales through expansion of our product portfolio and entry into new geographic markets in Asia Pacific and Latin America.
Theverykool® brand is now our flagship product. In order to better control the roadmap for this product line, in April 2010 we established an in-house design center in Beijing, China where we are now designing a number of phones in our product portfolio. We are currently evaluatingcontinue to source many of our phones from independent design houses, but expect that eventually the impactmajority of the tariff on our overall business prospectsphones will come from our own design center as our team expands and developing a strategy for addressing the expected significant sales decrease in Argentina.increases its capacity. We contract with electronic manufacturing services (“EMS”) providers to manufacture all of our branded products.
Prior to 2008, we also distributed wireless headsets and accessories in the United States and Mexico. However, beginning in the second quarter of 2008, we began implementing actions necessary to close sales operations in the United States and Mexico. Such closures were substantially completed by the end of 2009.
We incorporated under the laws of the State of California on February 7, 1994, under the name InfoSonics Corporation. On September 11, 2003, we reincorporated under the laws of and into the State of Maryland under the name InfoSonics Corporation. Unless the context otherwise requires, the terms "InfoSonics," "Company," "we," "our," and "us" mean InfoSonics Corporation and its consolidated subsidiaries.
Overview ofGlobal Wireless Telecommunications Industry
Rapid technicaltechnological developments over the last several years within the wireless telecommunications industry have allowed wireless subscribers to talk, send and receive text messages, send and receive e-mails, capture and transmit digital images, send and receive multimedia messages, play games, listen
to music, watch visual content and browse the Internet using all-in-one wireless handsets. Wireless handsets, accessories and services also are being used around the world to provide remote monitoring, point-of-sale transaction processing, inter-device communications, local area networks, location monitoring, sales force automation, and customer relationship management. While current demand is in the early stages for some of these more advanced services and accessoriesfeatures is not as strong in certain of the price-sensitive foreign markets we serve, the cost of producing phones with “smart” features continues to decline and we believe demand will increase in the future as the products become more affordable and worldwide economic conditions improve.
Based on estimates from analysts at Wireless Intelligence, there were over 5.0 billion worldwide wireless connections in mid-2010, with wireless penetration estimated to be approximately 73% of the world’s population. In many regions, penetration exceeds 100%, where there is more than one connection per person in the country. Western Europe, where penetration has reached 130%, is the most highly penetrated region. During 2010, shipments of wireless devices in the global wireless industry increased by approximately 13% to an estimated 1.4 billion wireless devices according to the research firm Strategy Analytics. The replacement cycle remains the single biggest factor driving global wireless device sales demand. Compelling data centric services over fast networks should continue to fuel the future global demand for wireless devices. Ease of use and increased functionality of devices are expected to continue to drive consumer demand for wireless devices and hence the replacement cycle. The convergence of telecommunications, computing and media is further accelerating the replacement cycle and driving demand. Demand for tablet PCs and netbooks is also fueling expansion of wireless application and demand for wireless chipsets. According to estimates from ABI Research, worldwide shipments of wireless connectivity chipsets rose to 2.0 billion units in 2010, a 22% increase over 2009.
The global wireless industry is expected to benefit in the future from a number of trends including the following:
Smartphones and Next Generation Systems.Consumer desire for speed of connectivity has driven continual development of faster chips by chip designers and faster networks by wireless carriers. As a consequence,
analysts believe that one of the key drivers for the growth in volume of replacement devices shipped will be the migration to next generation systems and devices (3G, 3.5G and 4G) with full Internet capabilities. The popularity of smartphones and phones with smartphone-like features including compelling display technologies and touch screen enhancements will further increase market penetration. Push e-mail, mobile data (e.g. mobile music, mobile TV, mobile banking, mobile advertising, and mobile social networking) and the availability of compelling content and enhanced device capabilities will continue to drive the replacement cycle. According to Gartner Research, it is estimated that smartphones comprised approximately 19% of total wireless devices shipped in 2010, a 72% increase from smartphone sales in 2009. Gartner Group also projects continued growth of smartphones to approximately 25% of total devices in 2011.
Increasing Customer Penetration.Although market penetration in some countries such as Brazil is in excess of 100%, there are other geographic markets where subscriber penetration is much lower. Increased wireless service availability and lower cost of wireless service compared to conventional fixed line systems combined with more affordability of wireless handsets is expected to result in an increase in worldwide subscribers. This is particularly true in markets such as Africa, India, China and Eastern Europe, which are expected to significantly increase their number of subscribers. This is one of the reasons that we recently expanded into the Asia Pacific market.
Tablets.The convergence of the wireless handset and the laptop computer gained significant momentum in 2010 as evidenced by the significant presence of tablet devices at the November 2010 Consumer Electronics Show in the United States. Gardner Group estimates that approximately 20 million tablets were sold in 2010, and that approximately 55 million tablets will be sold during 2011. Tablets feature large touchscreens, wireless connectivity, virtual keyboards, application availability, and always-on functionality in a portable device, which has heightened consumer interest. Various personal computer vendors and wireless device manufacturers have introduced tablets into the market, and it is expected that the roll out of upgraded versions of existing tablets and new entrants into the tablet market will increase in coming years.
Our Business and Strategy
Over the past several years, our business has been concentrated in countries in Latin America. In addition, during that time, the majority of our revenue was derived from distribution sales of Samsung product in Argentina, typically at very thin margins. In 2006, in an effort to begin to lessen our dependency on the distribution business, we began to source wireless handsets from independent design houses under our own proprietaryverykool® brand. This branded business began slowly, but accelerated in late 2007 and 2008 as we cemented relationships with a number of China-based ODMs and expanded our product offering. Then, in late 2009, Argentina enacted a significant import tariff on certain electronic devices, including wireless handsets, that threatened our distribution business and largely eroded our sales during 2010. Our Samsung distribution business substantially concluded at the end of the first quarter of 2011 as the result of Argentina enacting a further import regulation effective March 2011.
Our experience with design houses and contract manufacturers in China led us to believe that China was, and will become even more so in the future, the world leader in both manufacturing and design of cell phones. Furthermore, on the manufacturing front, we believe that Chinese suppliers would ultimately force most other competitors out of the worldwide market with their substantial cost advantage. With a desire to improve our time-to-market, better protect our technology and know-how and improve our cost structure, we began to search for an experienced management team to serve as the core for an in-house design team based in Beijing. In April 2010 we recruited a team of experienced management and technical personnel who now serve as both our design house for all our markets and as this demand further developsthe base for marketing and selling our products in Asia-Pacific. This team currently consists of 37 employees, primarily engineers, located in Beijing. The quarter ended June 30, 2010 was the economy improves over time, we believe end-users will want to take advantagefirst full quarter of new services and will desire handsets with updated technology. We believe consumer adoptionoperation of these advances and new services,our China subsidiary. Its expenses are classified as R&D expenses on our statement of operations, together with an improving economy, could increase the rate of handset replacementany NRE (non-recurring engineering) expenses paid to pre-2008 levels, leadingother design houses. We shipped our first product designed by our China team to increased handset and accessories sales. As these new services and the respective handsets become more readily available for the markets we serve and area customer in more demand by end-users, we China in October 2010. We
expect to continue distributingto use outside design houses to augment the handsets and accessories, including those with these advanced services,efforts of our China development team. All of our manufacturing is done by contract manufacturers in China.
The focal point of our current strategy is our in-house development team. We were highly encouraged by the same mannerinitial product developed by this team. Theverykool® R80™, shipped initially in October 2010 to a customer in China, is a lightly ruggedized, active lifestyle phone that we currently distribute existing products.
In addition to our current distribution services, for some customers we engage in technical and other high-level product customization services. We believe these customization upgrades and services will enable us to continue to offer innovative new products to current and new customers in the geographic regions in which we operate.
Market Trends and Factors
Recent trends in the wireless telecommunications include:
has significant market potential. We believe the attractive industrial design or “feel” of the phone gives it instant appeal and it contains a rather unique combination of features that help to differentiate this product from the competition. With the sunsetting of our historical distribution business, we look to rapidly expand sales of our proprietaryverykool® phones. Our strategy includes the following factors have the most significant influence on the wireless telecommunications industryelements:
• | Expansion of the R80™ wireless handset philosophy, look and feel into a complete line of differentiated phones. |
Incorporation of smartphone features and market, particularly the element most criticalfunctionality into more affordable handsets appropriate to our business, handset sales.target markets.
Expansion into new geographic markets, including continued penetration in Asia Pacific.
Leverage our historical presence and existing infrastructure in Latin America.
Create design partnerships or other relationships to expand our design capabilities and product offerings.
Advances in TechnologyDifferentiated verykool® Product Line.
The worldwide market for wireless handsets is extremely competitive. It is characterized by a large number of providers, often with very similar products, who ultimately compete on price at very thin margins. The capabilities and Functionality. Rapid advances in technology duringfeatures of the past few years have causedphones are primarily a shiftfunction of the chipset manufacturers, and it is difficult to achieve differentiation. However, we do believe that differentiation is possible. The design strength of our newverykool® R80™ seems evident in the handset market. Advanced functionality suchpositive reactions we have received from carriers, OEM customers and distributors. Because of this, we intend to expand the R80 active lifestyle concept into a line ofverykool® phones over the coming year. We will strive for a consistent, attractive industrial design as color displays, embedded cameras, multimedia messaging services, Internet accesswell as a unique combination of features which together will set our phones apart from the competition. We believe this will translate into improved sales volumes, average selling prices and entertainment features such as audio, video and gaming all have increased demand for handset replacement. Additionally, carriers compete for new customers by increasing the functionality of their networks.gross profit margins.
New Activations.Smartphone Features.
Recent technological advances in smartphones are driving the global wireless industry. The mobile handset penetration ratepopularity of smartphones is gaining dramatically in developed countries with broader-based consumer purchasing power. However, in certain geographic regions including Latin America, the populations in the regions where we sell handsets varies greatly. Some countries are as low as 45% penetrationmarket is extremely price sensitive and the highest has 95% penetration. New activations increase handset sales.
Customer Churn. This isprice points of traditional smartphones are beyond the process which takes place when a wirelessreach of most consumers. Our strategy will include an effort to incorporate smartphone-like features, functionality and user replaces service from one carrier with another. Churn increases overall handset sales because wireless handsets may not be compatible across different carrier networks.
Repair Costs. In many cases, the cost of the repair and replacement of components for handsets is prohibitive as compared tointerface into our new phones, without the cost of a new product, thus havingtrue smartphone. With this, we aim to offer a positive effect on handset sales.
Industry Consolidation. Merger and acquisition activity within the carrier community has been driven by improved economies of scale, the opportunity to expand national or multi-national service areas, and efforts to increase revenue and profitability through additional service offerings. Since handsets can be "locked" to a specific carrier, new handsets may be required by carriers' customers as the carriers consolidate their respective subscribers and networks. However, consolidation of carriers generally decreasesdifferentiated phone at an affordable price into our existing and potential customer base. Significant consolidation of carriers in the United States was a factor behind our decision to exit that market in 2008.
Our Strategy
Our strategy is to maintain and grow our unit volumes in the wireless handset industry by:
Leverage Infrastructure and Increase Sales.
Our operations in Miami, Florida, include our distribution center and warehouse, as well as sales representation for Central and South America. We also use contractors within Central and South America to serve our existing and potential customers. We believe that the geographic diversity of this existing infrastructure, together with our established relationships with manufacturers and carriers, enables us to increase our sales with relatively low additional cost. In addition, we have customized and continue to enhance a licensed software package for an information and customer management system that allows our employees to track customer order status from purchase order to delivery. This scalable system also enables tracking and identification of customer and geographic trends, in addition to providing management with real-time information on each individual order. We also use this system to analyze and track our relationships with manufacturers and other suppliers so that we can compare our purchasing trends with the overall market. We will continue to make investments in our products and infrastructure to continually enhance our abilities to serve our customers, increase operational efficiencies and increase sales.new Asia Pacific markets.
Develop Our verykool® Products.Geographic Market Expansion.
During 2006,Historically, our traditional market focus has been Latin America. However, as described above, with the opening of our new development subsidiary in Beijing in April 2010, we created a marketing campaign entitled "verykool®",expanded geographically into Asia Pacific. In the fourth quarter of 2010 we shipped our first products to customers in both China and the reception of that concept prompted us to launch our proprietary line of products under theverykool® brand. At the end of 2009,India, and we had sixverykool® products shippingare currently in Central and South America. We have trademarkedverykool®discussions with potential customers in several Central and South Americanother Asia Pacific countries. We believe that owningourverykool® phones are well positioned relative to feature set and price points for the Asia Pacific market, and these countries have significant populations that have not been penetrated.
Leverage our proprietaryLatin America Presence.
We have worked hard over the past four years to develop theverykool® brand name in Latin America. As we differentiate our product line of products could enable usas described above, we intend to penetrateleverage the brand equity we have built in Latin America to expand our sales to our existing customers, acquire new customers, and new marketsexpand into other Latin America countries where possible. Our goal is to leverage the existing in-country sales and increase our gross margins and operating marginstechnical resources we have in the long term.
Table of ContentsLatin American countries without incurring significant incremental costs.
Outsourced Supply-Chain Services.Design Partnerships.
The pace of technological advancement in the wireless industry continues to accelerate. We are confident in the capabilities of our design team, but recognize that our resources are limited in comparison to some of our competitors. We have used technology partnerships in the past, and intend to seek them out in the future, to leverage our core team and expand our business offeringscapabilities. This is expected to provide additional outsourced supply-chain services to the wireless telecommunications industry. These services may include product approval, testing and certification, inventory management, product fulfillment, preparation of product kits and customized packaging, light assembly, marketing and sales training, warranty and end-user support services. These supply-chain services are designed to provide outsourcing solutions for the carriers, as well as providing opportunities forhelp us to enhance our margins. These services meet our customers' business requirements and support their efforts to add new subscribers and increase system usage and revenues while minimizing their investments in distribution infrastructure.
Market Penetration.
We intend to further penetrate our existing Central and South American markets. Utilizing our relationships with manufacturers and knowledge of these markets, we believe we can increase sales profitably by focusing on the Latin American countries where we already have sales, subject to overall economic and regulatory conditions.
Geographic Expansion.
We expanded geographically into new countries in Central and South America in 2008, and during 2009 we continued to solidify relations with our customers in those countries utilizing in-country representatives, including sales, marketing and point-of-sales support. As we continue to focus on Central and South America, we may add appropriate sales, operational or warehouse locations in Central and South America to serve our customers in the region. These activities are intended to provide us the ability to expand our geographic presence, increase our customer base, improve our product portfolio and addenable us to participate in new capabilities and service offerings. We have established subsidiaries in Central and South America and in 2005 acquired a company doing business in Argentina.
Maintain and Improve Operating Efficiencies.
We constantly monitor our operations to improve our cost structure and productivity and to increase profitability. We continuously look to more effectively monitor returns on invested capital, obtain better purchase terms, utilize our limited capital resources, implement workforce management programs, and centralize back-office operations. For example, during 2008, we shifted some fixed costs to variable,technologies such as replacing employees with contractors, in an attempt to match market conditions and potential opportunities. Further, we discontinued our U.S. sales operations and our Mexico sales and warehousing operations after determining to focus on more profitable market opportunities.the growing tablet market.
Strategic Relationships and Acquisitions.
Our business yields significant benefits from strategic relationships, which we develop based on both existing customers and markets, as well as meeting new potential partners and exploring regions currently outside of our scope of operations. For example, a significant portion of our business is based on relationships with original equipment manufacturers, and we seek to develop distribution relationships with other OEMs as well. We believe that by continuing to develop our existing relationships, and expanding them opportunistically as appropriate, such as by acquisition, we can offer the most innovative product lines, brands and technologies within the markets we serve.
Table of ContentsCustomers
Products and Services
Sources of Sales.
We generate revenues by distributing and selling wireless handsets and accessories in Central and South America. An integral part of our sales are the distribution services and solutions we provide to carriers. As a part of our distribution activities, when requested by our customers we perform value-added services that are included in our product price. These services include, but are not limited to, programming, locking, software loading, packaging, and quality assurance testing. We carry higher levels of inventory when we are preparing to enter a new market. In addition, as the manufacturer of theverykool® line of products, we carry higher levels ofverykool® product inventory to meet sales needs.
Customers/Principal Markets/Methods of Distribution.
Our current Central and SouthLatin American customers include carriers, agents, resellers, distributors and retailers. The principal markets forresellers. During the fourth quarter of 2010 we shipped products to our distribution products and services are our current distribution customer bases as well as carriers within the regions we operate. During 2009, we provided products and services to approximately 70 customers. Our three largestfirst two customers in fiscal 2009 represented 28%, 28%Asia Pacific, one in China and 18% ofthe other in India. Both are OEM customers to whom our net sales, respectively. All three of these customers are carriers in South America. In 2010,products were sold on a customer accounting for 28%, has begun significantly reducing its purchases from us as a result of the newly enacted Argentina tariff on wireless handsets, among other electronic devices. Additional Argentina customers are expected to decrease or eliminate their purchases of imported wireless handsets in the coming fiscal quarters.private label basis. We sell our products pursuant to customer purchase orders and ship products by common carrier based on customer-specified delivery dates. During 2010, we sold products to approximately 55 customers. Our three largest customers in 2010 represented 31%, 18% and 11% of our net sales, respectively. All three of these customers are carriers in Argentina. As discussed under Company Overview above, the majority of our revenue over the past three years has come from distribution of Samsung products to carriers in Argentina. In late 2009, however, a stiff import tariff on certain electronic devices, including wireless handsets, was enacted in our largest market of Argentina. The tariff had a significant negative impact on sales beginning in the first quarter of 2010, and ultimately resulted in an erosion of 69% of our sales volume in 2010 compared to 2009. Then, Argentina enacted a further import regulation effective March 6, 2011 which essentially resulted in the conclusion of our Samsung distribution business. We are working diligently now to replace the lost distribution revenues with higher margin sales of ourverykool® products through expansion of our product portfolio and further penetration in Asia Pacific and other Latin American markets.
Information SystemsPurchasing and Suppliers
Our information system, which is based upon licensed software,Over the past three years, Samsung has been our major supplier for our distribution business, primarily in Argentina. Products purchased from Samsung related entities represented 45%, 96% and continues to be, customized by our management to meet the specific needs91% of our business.cost of sales in 2010, 2009 and 2008, respectively. The system allows managementdecline in concentration of Samsung in 2010 relates to access and have control over information relatedthe decline of our distribution business incident to ourthe import tariff enacted by Argentina at the end of 2009. Our Samsung business including customer relationship management, intelligent purchasing, inventory control, inventory flow, back orders, line-item margin control for orders, and weighted-average cost and statistical data for products, customers and suppliers. We believe that our information systems have allowed us to provide better service to customers, which leads to increased customer satisfaction, customer retention and future sales.in Argentina substantially concluded in the first quarter of 2011.
VendorsFor our brandedverykool®
We products, we have established key relationships with severala number of leading contract manufacturers of wireless telecommunications equipment. Certain of these manufacturers are ODMs who design and manufacture wireless handsets to our specifications or based upon their own criteria. Others are contract manufacturers who we use to produce handsets to our specifications as designed and prototyped by our in-house design team. In 2009,2010, we purchased inventoryproducts from more than 10 wireless mobile device and accessory manufacturers and otherseven manufacturers.
We maintain agreements with certain of our significant suppliers. Typically these agreements have been non-exclusive, with the exception of our proprietaryverykool® products which we design or provide the unique specifications, for which we have world-wide exclusive rights. Certain of our suppliers, dependingthe agreements require us to satisfy minimum monthly volumes to secure specified pricing. The supply agreements generally can be terminated on various factors such as manufacturer promotion, product introduction, and sales volume, among others, may provide favorable purchasing terms to us, including price protection, cooperative advertising, volume incentive rebates, stock balancing and marketing allowances. Some of these terms are provided for in our contracts, whereas others are offered from time to time at the manufacturer's discretion. Product manufacturers typically provide limited warranties directly to the end-user.
In 2009, Samsung Electronica Da Amazonia Ltda. and Samsung Electronics Latino America accounted for approximately 95% of our total cost of sales. As a result of the newly enacted Argentina tariff, in 2010, we expect to significantly reduce the purchase of wireless handsets from Samsung Electronica Da Amazonia Ltda. for importation into Argentina.
As of March 31, 2010, we had contracts with some of our suppliers and manufacturers for distribution in Central and South America, including the Samsung affiliates mentioned above. These agreements are subject to certain conditions and exceptions, primarily concerning the retentionshort notice by these suppliers of certain direct accounts, and restrictions of territory regarding our resale of products. In addition, weeither party. We purchase products from other manufacturers and suppliers pursuant to purchase orders placed from time to time in the ordinary course of business forbusiness. Purchase orders are typically filled, based on manufacturing lead times, and shipped to our designated warehouses by common freight carriers. We believe that our relationships with our suppliers are generally good. Any failure or delay by our suppliers in supplying us with products on favorable terms and at competitive prices may severely diminish our ability to obtain and deliver products to be soldour customers on a timely and competitive basis. Although there are a number of such suppliers available to provide or manufacture our products, the establishment of these relationships typically requires a significant investment of time by both parties, and a change in Centralsuppliers could cause a delay in sales and South America. Most ofadversely affect our agreements with suppliers are non-exclusive, with the exception of the suppliers for our proprietaryverykool® products, for which we have world-wide exclusive rights on those proprietary models. Although we do not have written agreements with all of our manufacturers and suppliers, we believe we will have adequate product flows to fulfill our reasonably foreseeable product requirements.results.
Sales and Marketing
We believe that direct selling and one-on-one relationships, as well as in-depth product and competitive landscape knowledge, are important factors in the marketing of the products that we sell. Accordingly, in our business-to-business environment, we promote relationship building and maintenance through personal customer contact by our in-country sales and advertisingmarketing professionals. Additionally, in order to promote ourverykool® brand, we advertise in certain of the geographies where we do business in industry publications, both print and online, on billboards and by attending industry trade shows. Our suppliersFurther, we may participate in co-op advertising sponsored by our carrier customers in radio and customers use a variety of methods to promote their products and services directly to consumers, including print and other media advertising.newspaper ads.
As of December 31, 2009,2010, we employed or contracted with 1912 sales and marketing professionals involved in distribution and marketing to existing and potential customers in their respectivewho are assigned specific geographic territories, through in-person meetings, telephone and e-mail interaction, and notificationmost of special promotions. Potential new customers are located primarily through our database, as well as industry publications and journals.whom reside in-country. Each salesperson is generally compensated with a base salary or retainer plus a commission or bonus based on sales in his or her territory.
Research and Development
In April 2010 we formed an in-house development team consisting primarily of seasoned wireless handset sales, customer acquisition and retention, and profitability.
In 2009, 100% of our net sales were to customers outside the United States, consisting of 91%engineers in South America and 9% in Central America. In 2009, Argentina represented 87% of our net sales, with no other country accounting for more than 10% of our net sales. In 2008, 100% of our net sales were to customers outside the United States, consisting of 76% in South America and 24% in Central America. In 2008, Argentina represented 67% of our net sales, with no other country accounting for more than 10% of our net sales. In 2007, approximately 88% of our net sales were to customers outside the United States, consisting of 58% in South America and 30% in Central America. In 2007, Argentina, Guatemala and El Salvador, represented 54%, 13% and 10%, respectively, of our net sales. In addition, beginning in the second quarter of 2008, we began implementing actions necessary to close sales operations in the United States and Mexico, which we substantially completed by the end of 2009.
Since December 31, 2008, all of our long-lived assets have been in the United States or in Asia.Beijing, China. At December 31, 2007,2010, the team had 37 employees who are engaged in the design and development of our proprietary line ofverykool® phones. Our product roadmap is determined and monitored by close coordination between our Beijing team and corporate product management. In the fourth quarter of 2010, we shipped the first product designed by our China team, theverykool® R80, to customers in China and India. We expect to continue to use outside design houses to augment the efforts of our China development team and sometime incur outside non-recurring engineering fees, which are also had long-lived assetsclassified as R&D expense. R&D expenses in Mexico.the year ended December 31, 2010 amounted to $977,000.
Financial and Other Information about Our Business
Other information, including financial, customer, competitive and geographic information, as well as a further discussion of the impact of a potentialthe Argentina tariff, is incorporated by reference herein from Items 1A and 7 hereof and Note 11 to our Consolidated Audited Financial Statements.
Seasonality
Our operations may be influenced by a number of seasonal factors in the countries and markets in which we operate. Our business historically has experienced increased sales during the third quarter of the calendar year due to holidayspre-ordering for the Christmas holiday season in some regions where we have customers. If unanticipated events occur at timesIn 2010, the fourth quarter experienced relative strength as customers decided to limit their inventory exposure to a narrower time frame rather than making holiday purchases in the third quarter. On the supply side of peak sales, includingour business, because all manufacturing of our brandedverykool® phones is done in China, the first quarter of the calendar year can be a difficult time during closure of factories due to the Chinese New Year. We strive to manage around the closure, but if factories have difficulty starting back up, we could experience delays in securing adequate inventories of competitive products,
or we experience significant decreases in sales during these periods,getting product and satisfying customer orders, which could have a material decrease inadverse effect on our revenues, together with losses or lower profits, could result.results.
Competition
The industry and markets where we operate are highly competitive and such competition may increase in the future. Wireless handsets are subject to price competition and price erosion over the lives of the products. We compete on a number of factors, including product design and features, product pricing, level of services offered, market and product knowledge, customer service, product availability and overall value provided to our customers. Our competitors often possess substantially greater financial, technological, marketing, personnel and other resources than we do, which could enable them to withstand substantial price competition, launch new products and implement extensive advertising and promotional campaigns. Historically, the barriers to entry have been relatively low for the distribution of wireless handsets. Our ability to continue to compete successfully is largely dependent on our ability to anticipate and respond to various competitive and other factors affecting the industry, including new or changing outsourcing requirements, new information technology requirements, new product introductions, inconsistent or inadequate supply of product, changes in consumer preferences, demographic trends, regional and local economic conditions, and discount pricing strategies and promotional activities by competitors.
We compete for sales of wireless handsets and accessories with well-established carriers, distributors and in some cases our current contract manufacturers. Manufacturers, including our own suppliers, sell their products directly to some large carriers, and as these carriers grow in size, they may pose more of a competitive threat to our business by bypassing our distribution system in favor of doing business directly with manufacturers. Our competitors in Central and SouthLatin America include wireless OEMs, wireless equipment manufacturers, carriers and other dedicated wireless distributors such as BrightPoint, Inc. and Brightstar Corporation. Our competition in Asia Pacific is very fragmented and includes a large number of Asia-based ODMs.
Information Systems
Our information systems are comprised of a standard licensed accounting and general ledger software system plus a licensed data base program that has been customized to meet our specific needs. The data base system allows management to exercise real-time control over many elements of our business including customer relationship management, purchasing, inventory management and control, sales order control and pricing management. It also provides management with many reports and statistical analysis relating to products, customers and suppliers. We believe that our information systems are currently adequate, although the two systems are discreet systems that do not interface with each other. As a result, there is a significant amount of duplicate data entry required to record all transactions in the accounting system. In the future, we may decide to license and implement a more complete and integrated ERP system.
Employees
As of December 31, 2009,2010, we had 3870 employees and contractors. Of these employees two (2)and contractors, 2 were in management positions, 1912 were engaged in sales and marketing, four (4)37 were in research and development, 7 were in service operations, seven (7)5 were in finance and administration (including information technology employees), and six (6)7 were in engineeringproduct development and product development.field engineering. From time to time, we utilize temporary employees to perform warehouse functions. Our employees and contractors are not covered by a collective bargaining agreement. We believe that our relations with our employees and contractors are good.
Available Information
Our website atwww.infosonics.com provides a link to the Securities and Exchange Commission'sCommission’s website where our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports (as well as exhibits and supplementary schedules) filed with or furnished to the SEC can be accessed free of charge. Our website also provides links to the charters for our Audit, Compensation and Nominating & Governance Committees as well as our Codes of Business Conduct and of Ethics, which can be accessed free of charge athttp://www.infosonics.com/corporate_governance.aspx.corporate_governance.aspx.
Forward-Looking Statements
Certain statements in this annual report constitute "forward-looking statements." These forward-looking statements involve known or unknown risks, uncertainties and other factors that may or may not be outside our control and that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Specifically, the actions of competitors, suppliers and customers are generally outside of our control; and our ability to execute our business plans and to increase revenues and operating income are each dependent upon our ability to continue to expand our current businesses and to enter new business areas, as well as upon general economic conditions and other factors, including some of the factors identified as "Risk Factors" in this annual report and from time to time in our other SEC filings. You can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues," or the negative of these terms, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We do not intend to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, unless required by law.
Item 1A. | Risk Factors |
Risks Relating to Our Business
A recently passedThe major portion of our business relating to distribution of Samsung products in Argentina has ended as a result of a tariff mayenacted by Argentina in 2009 and a related regulation effected in 2011 which substantially increaseincreased the cost at the point of sale for certain imported electronics, including the products we sell, and thus will have a material adverse impact on our sales in Argentina.we may not be able to replace those sales.
Argentina, one of the countriescountry where we currently sellhave historically sold a significant amount of OEM products and where we generated 87% of our net sales in 2009, passed a new tariff in November 2009 affecting certain imported electronics, including wireless handsets. From the information we have obtained, this new tariff will impact the pricing at the pointAs a consequence, much of salethat business was lost in excess of 30%,2010 and we expect it will reduce significantly the overall OEM sales volume in Argentina. We believe that this tariff will have a material adverse effect on our sales results of operations and prospects for our OEM products in Argentina.
We buy2010 declined by 69% compared to 2009. Then, in February 2011, Argentina enacted a significant amountfurther import regulation effective March 6, 2011 which essentially resulted in the final conclusion of our Samsung distribution business. We are working diligently now to replace the lost distribution revenues with higher margin sales of ourverykool®products from a limited numberthrough expansion of suppliers, who may not provide us with competitive products at reasonable prices whenour product portfolio and entry into new geographic markets in Asia Pacific and Latin America. However, there can be no assurance that we need themwill be successful 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 onthis effort or whether it can be accomplished in 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 twelve months ended December 31, 2009, one vendor, Samsung Electronics de Amazonia, S.A., accounted for 89% 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 termsmanner 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 one 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
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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 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 financial results.
Our three largest customers for the year ended December 31, 2010, all Samsung distribution carrier customers in 2009, all carriers in South America,Argentina, represented 28%31%, 28%18% and 18%11% of our net sales in fiscal 2009. In 2010, a customer accounting for 28%, has begun significantly reducing its purchases from us as a resultduring 2010. As discussed above, we expect that business to conclude by the end of the newly enacted Argentina tariff on wireless handsets, among other electronic devices. Additional Argentina customers are expected to decrease or eliminate their purchases of imported wireless handsetsfirst quarter in 2011. In addition, the coming fiscal quarters. The markets we serve and are targeting for future business are subject to significant price competition. Additionally,competition and our customers are not contractually obligated to purchase products from us. For these and other reasons, such as competitive pricing and competitive 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.
We have been experiencing net losses and expect that net losses maywill continue for the near future.an uncertain period. If we continue to operate at a loss, our business may not be financially viable.
For the year ended December 31, 2009,2010, our net loss was $1.5$3.6 million. Although we had positive income from continued operations in 2009, we experienced losses and negative cash flows for the year ended 2008.We have now reported four consecutive loss years with an aggregate net loss of $17.1 million. As of December 31, 2009,2010, our cash balance was $12.5 million, we had net working capital of $24.4 million.$20.9 million and we had no outstanding debt. Given the continued economic slowdown and contraction in the wideruncertainty of most global markets, including the Central and South American markets that we serve and generally globally, we cannot adequately evaluate the financial viability of our business andor our long-term prospects.prospects with any certainty. While our business plan includes a number of objectives to achieve profitability, if we do not succeed in these objectives, our business might continue to experience losses and may not be sustainable in the future.
We may not succeed in our development, introduction and establishment of proprietary products in our markets.
The development, introduction and establishment of new products such asin our proprietaryverykool®verykool® line in our markets requires a significant investment in research and product development, manufacturing and marketing. These effortsOur newly-formed development team in Beijing China has had some success with certain product design and development, but has also encountered delays and design challenges, and may depress sales of existing not be successful in developing the differentiated
products andwe need to ultimately implement our strategy successfully. In addition, our new products may not be well received by our carrier customers and consumers.or the end-users. Further, failure to adequately carry out our product marketing, sales and delivery strategy or otherwise be successful in establishingpromoting ourverykool®verykool® brand may result in significant inventory obsolescence, including inventory which we have built up in anticipation of market acceptance of our newer products. If any of these events occur, our financial condition and operating results would likely be negatively impacted.
Our operating results may vary significantly, which may cause our stock price to fluctuate.
Our operating results are influenced by a number of factors whichthat may cause our sales and operating results to fluctuate greatly.significantly from quarter to quarter. These factors include:
product availability and cost, including our internally developed products;
market competition and selling prices;
the cost of promotions, price protection and subsidies;
foreign government policies and stability;
the timing of introduction of new products by our suppliers and competitors;
purchasing patterns of customers in different markets;
general economic conditions;
Our operating performance may cause our stock price to fluctuate. Between January 1, 2010 and subsidies; and
For example, the closingMarch 30, 2011, our stock price of our common stock has fluctuated between $2.51$1.60 and $0.10 from January 1, 2009 through March 19, 2010,$0.50 per share, and we anticipate that significant volatility in suchour stock price towill continue for the foreseeable future.
Our ability to borrow underThe termination of our secured credit facility may be limited.in the fall of 2010 has restricted the availability of liquidity.
UnderHistorically, one of our primary sources of liquidity has been borrowing from bank lines of credit. Our secured bank credit facility with Wells Fargo Century, Inc. may advance us upTrade Capital LLC terminated on September 22, 2010. While we believe that our current cash resources and working capital are sufficient to $45,000,000 based onfund our operations for the expected collectionsforeseeable future, we do not currently have a permanent letter of eligible receivables as well as the value of our eligible inventory as determined in accordance with the terms of the facility. Any significant decrease in our level of eligible accounts receivable or inventory will reduce our ability to borrow additional funds under the credit facility, andwhich may impede our procurement operations. Failure to secure a replacement bank credit facility on acceptable terms could adversely affect our ability to adequately finance our operations and expansion strategies. Further, if we violate our loan covenants, default on our obligations or become subject to a change of control, our indebtedness would become immediately due and payable. In addition, the terms of our credit facility restrict us from incurring certain additional indebtedness, which could limit our ability to expand our operations. Some of our loan covenants subject us to, among other things, limits on our ability to sell certain assets and make certain payments, including, but not limited to, dividends, repurchases of common stock and other payments outside the normal course of business, as well as prohibits us regarding merging or consolidating with another corporation or selling all or substantially all of our assets. An inability to borrow needed funds under our credit facility could adversely affect our business' financial condition or operating results.
Our ability to attainsupport future profitability depends on our ability to increase existing margins, including through increased net sales, which we may not be able to do.
The gross margins that we realize on sales of wireless handsets may not increase or could be reduced due to, among other things, increased competition, tariffs, taxes and other government regulations, and a growing industry and customer emphasis on cost containment, thereby limiting our ability to regain profitability. Our future profitability will continue to depend on our ability to increase our margins through increased sales (either through a higher volume of sales of wireless handset products or a higher average price per wireless handset product) or lower our cost of sales. However, we may not be able to increase existing margins for products or services we offer. Our ability to generate sales is based on demand for wireless handset products that we can deliver and our having an adequate supply of these products to cover demand. Even if our sales rates increase, the gross margins that we receive from our sales may not be sufficient to make our future operations profitable as our cost of sales may increase at higher rates. For example, in 2008, although we had higher sales, we were not profitable due to lower gross margins, as well as, among other things, higher operating expenses. If we cannot improve gross margins or increase sales in a profitable manner in the future, our financial results will be adversely affected and our stock price will likely decline.
Our business depends on the continued tendency of wireless handset manufacturers and carriers to outsource aspects of their business to us.
Our business depends in large part on wireless handset manufacturers and carriers outsourcing some of their business functions to us. We provide functions such as product approval and testing, inventory management, product fulfillment, preparation of product kits, and customized packaging, light assembly and end-user support services. Certain wireless handset manufacturers and carriers have elected, and others may elect, to undertake these services internally. Additionally, our customer service levels, industry consolidation, competition, deregulation, technological changes or other factors could reduce the degree to which members of the wireless handset industry rely on outsourced services. We may not be able to effectively competegrowth in our industry if consolidation of carriers continues or a change in product delivery routing occurs. Any significant change in the market for these services could have a material adverse effect on our current and planned business.
We have and could continue to lose existing customers or orders and potential customers as a result of consolidation in the wireless telecommunications carrier industry.
The past several years have witnessed a consolidation within the wireless carrier community, most notably in the United States, which was a factor in the recent discontinuation of our U.S. sales business, but also in the Latin American markets where we now focus our business. Consolidation has caused extreme price competition and reduced our number of customers and potential customers, and future consolidations could erode our current and potential markets. This could lead to, among other things, reduced sales volume and margins and greater fluctuations in our quarterly results as well as the carrying value of our inventory. If this trend continues, it also could result in a reduction or elimination of promotional activities by the remaining wireless carriers as they seek to reduce their expenditures which could, in turn, result in decreased demand for our products or services. Wireless carriers may also change their policies regarding sales to their agents by independent distributors, such as requiring those agents to purchase products from the carrier or manufacturer, rather than from distributors such as us. This type of requirement, or other competitive pressures resulting from consolidation, could have a material adverse effect on our business and results of operations.
We face many risks relating to intellectual property rights.
Our business will be harmed if:if we and/or our manufacturers are found to have infringed intellectual property rights of third parties, or if our intellectual property protection is inadequate to protect proprietary rights used in ourverykool® ® product line.
Because our proprietaryverykool®® products are comprised of complex technology, we may be subject to or impacted by litigation regarding intellectual property rights. Third parties may assert intellectual property infringement claims against us and against our manufacturers. Defending claims may be expensive and divert the time and efforts of our management and employees. Increasingly, third parties have sought broad injunctive relief in our industry, which could ultimately limit our ability to sell ourverykool®® products. If any litigation arises and we do not succeed in such litigation, we could be required to expend significant resources to pay damages, develop non-infringing intellectual property or to obtain licenses to the intellectual property that is the subject of such litigation. However, we cannot be certain that any such licenses, if available at all, will be available to us on commercially reasonable terms. In some cases, we might be forced to stop delivering certain or all of ourverykool® ® products if we or our manufacturers are subject to a final injunction or other restrictions.
We attempt to negotiate favorable intellectual property indemnities with our manufacturers for infringement of third-party intellectual property rights, but we may not be successful in our negotiations. Also, any manufacturer'smanufacturer’s indemnity may not cover all damages and losses suffered by us due to a potentially infringing verykool®verykool® product, and a manufacturer may not choose to accept a
license or to modify or replace its products with non-infringing products, which would otherwise mitigate such damages and losses. Further, we may not be able to participate in intellectual property litigation involving a manufacturer or influence any ultimate outcome that may adversely impact our sales, such as an injunction or other restrictions that relating to ourverykool®® products.
In addition, it may be possible for a third party to obtain and use our or our manufacturers'manufacturers’ proprietary information or develop similar technology relating to our verykool®verykool® products independently. Furthermore, effective patent, copyright, trademark and trade secret protection may be unavailable or limited, includingespecially in certain foreign countries.countries, such as China where adherence to enforcement of intellectual property rights is not as prevalent or available as in other countries, such as the United States. Unauthorized use of our or our manufacturers'manufacturers’ intellectual property rights by third parties and the cost of any litigation necessary to enforce our or our manufacturers'manufacturers’ intellectual property rights could have an adverse impact on our business.
Our sales and inventory risk may be materially affected by fluctuations in regional demand patterns and economic factors for which we cannot plan.
The demand for our products and services has fluctuated and may continue to vary substantially within the regions served by us. We believe the roll-out of third generation, or 3G, wireless telephone systems and other new technologies has had and will continue to have a beneficial effect on overall subscriber growth and wireless handset replacement demand, both factors that tend to favor our business plan. However, the continued worldwide economic slowdown has impacted the regions served by us, led to changes in promotional programs offered by wireless carriers or customer preferences and lowered consumer demand for our products, all of which have been negative factors for our gross and operating margins, particularly in 2008. In 2008, we also faced substantial inventory risk, resulting in the sale of some products at a considerable loss, and in 2009, we suffered a one-time loss on discontinued inventory. Though we have seen an increase in the demand for handsets beginning in the third quarter of 2009, there can be no assurance that this trend will continue and it is difficult to predict future demand patterns.
All of our revenues from continuing operations during the fiscal year ended December 31, 20092010 were generated outside of the United States in countries that may have volatile currencies or other risks.
We now engage in all of our significant sales activities in territories and countries outside of the United States, specifically in CentralLatin America and South America.Asia Pacific. All our sales transactions are completeddenominated in U.S. dollars and therefore may be impacted by changes in the strength of the U.S. dollar.dollar relative to the foreign economies where we conduct business. Further, the fact that we distribute a substantial amountsell all of our products into, and have developed and manufactured products in, a number of territories and countries other than the United States exposes us to, among other things, increased credit risks, customs duties, import quotas and other trade restrictions, potentially greater and more unpredictable inflationary and currency pressures, labor risks and shipping delays. Changes may occur in social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently distributedevelop and sell products. United States laws and regulations relating to investment and trade in foreign countries could also change to our detriment. Any of these factors could have material adverse effects on our business and operations. Also, although we purchase and sell products and services in U.S. dollars and do not engage in exchange swaps, futures or options contracts or other hedging techniques, fluctuations in currency exchange rates could reduce demand for products sold in U.S. dollars. We cannot predict the effect that future exchange rate fluctuations will have on our operating results or financial position. We may in the future engage in currency hedging transactions, which could result in our incurring significant additional financial risks, including increased costs and losses resulting from these transactions.
We may not be able to adequately respond to rapid technological changes in the wireless handset industry, which could cause us to lose customers.
The technology relating to wireless handsets changes rapidly, resulting in product obsolescence or short product life cycles. We are required to anticipate future technological changes in our industry and to continually identify, obtain and market new products that will satisfy evolving industry and customer requirements. While our top vendors have historically kept their products competitive, andAlthough we aimare now making significant investments in R&D to keep our proprietaryverykool® products competitive in terms of technological changes,technology and features, there is no guarantee they or we will continue to do so,have success with this, which could materially affect our business. Competitors or manufacturers of wireless handsets may market products which have perceived or actual advantages over products that we market or which otherwise render those products obsolete or less marketable. We have made and continue to make significant capital investments in accordance with evolving industry and customer requirements, including maintaining levels of inventories of currently popular products that we believe are necessary based on current market conditions. This utilization of capital for product development and inventory buildup of this nature increases our risk of loss due to possible product obsolescence. Furthermore, if we do not adequately anticipate future technological changes, we may not have established adequateestablish appropriate supplier relationships with suppliers or performedperform appropriate product development. These factors all pose significant risks ofto loss of customers and decreased sales and impairment of inventory assets.profitability.
Substantial defaults by our customers on accounts receivables could have a significant negative impact on our cash flow and financial condition.
We offer open account terms to certain of our customers, both large and small, which may subject us to credit risks, particularly to the extent that our receivables represent sales to a limited number of customers or are concentrated in particular geographic markets. Although we have an accounts receivable insurance policy, this policy carries a substantial deductibledoes not cover all accounts and may not cover our liability in all instances. We also rely on our accounts receivable-based100% of the credit facility to reduce our working capital requirements. The extent of our ability to use our accounts receivable-based credit facility is dependent on the amount of and collection cycle of our accounts receivable. Adverse changes in our ability to use accounts receivable financingwe extend. A substantial default by a major customer could have a material adverse effect on our financial position, cash flowsflow and results of operations.
We rely on our suppliers to provide favorable terms, including payment terms, in order for us to make appropriate product purchases, and without such terms, our ability to procure products could be impacted.
Much of our business is dependent on our ability to obtain adequate supplies of currently popular products on favorable pricing and other terms. Our ability to fund our product purchases is dependent on our principal suppliers providing favorable payment terms that allow us to maximize the efficiency of our capital usage. The payment terms we receive from our suppliers are dependent on several factors, including, but not limited to, our payment history with the supplier, the suppliers' credit granting policies, contractual provisions, our overall credit rating as determined by various credit rating agencies, industry conditions, our recent operating results, financial position and cash flows, and each supplier's ability to obtain credit insurance on amounts that we owe them. Adverse changes in any of these factors, certain of which may not be wholly in our control, could have a material adverse effect on our business and operations.
We rely on our information technology systems to function efficiently, without interruptions, and if it doesthey do not, customer relationships could be harmed.
We have focused on the application ofare dependent upon our information technology systems to provide customized servicesmanage our business and to wireless handset manufacturers and carriers. Our abilitybe responsive to meet our customers' technical and performance requirements is highly dependent on the effective functioning of our information
technologycustomers needs. These systems which may experience interruptions, including interruptions of related services from third-party providers which may be beyond our control. TheseSuch business interruptions could cause us to fail to meet customer requirements and could result in the loss of business relationships. Some of our information technology systems are managed and operated by third-party providers. All information technology systems, both internal and external, are potentially vulnerable to damage or interruption from a variety of sources, including, without limitation, computer viruses, security breaches, energy blackouts, natural disasters, terrorism, war and telecommunication failures, as well as third-party provider failures. We have implemented various measures to manage our risks related to system and network disruptions, but a systems failure or security breach or other problem with our information technology systems could negatively impact our operations and financial results.
We face risks related to our dependence on third parties to manufacture the products we distribute, including our proprietary verykool® verykool®products.
ProductOur third party manufacturers typically provide limited or no warranties on their products, whether directly to us or to the end consumer.products. We generally pass through any warranties received from our manufacturers to our customers, and in absence of such warranties, we are solely responsible for the products. If a product we distributesource from a manufacturer has delivery, quality or performance problems, our ability to provide satisfactory products to our customers could be disrupted (including, for example, during and after Chinese New Year) and our reputation could be impaired. We also may not be able to sell these products before payment is due our manufacturesmanufacturers or at prices above our cost. These risks are magnified for ourverykool® products, which are manufactured exclusively for us, and for which we carry greater financial risk of the inventory. Any of these risks could have a negative impact on our business and operations.
The wireless handset industry is intensely competitive and we may not be able to continue to compete against well-established competitors with greater resources.
We compete for sales of wireless handsets and accessories with numerous well-established manufacturers, carriers and distributors, and manufacturers,sometimes including our own suppliers.suppliers and customers. Many of our competitors possess greater financial and other resources than we do and may market similar products or services directly to our customers or potential customers. Distribution of wireless handsets and accessories has generally had low barriers to entry. As a result, additional competitors may choose to enter our industry in the future. The markets for wireless handsets and accessories are characterized by intense price competition and significant price erosion over the life of a product. Many of our competitors have the financial resources to withstand substantial price competition and to implement extensive advertising and promotional programs, both generally and in response to efforts by additional competitors to enter into new markets or introduce new products. Our ability to continue to compete successfully will depend largely on our ability to maintain our current industry relationships, with both manufacturers and carrier customers.customers, as well as differentiate our verykool® branded products from the competition. We may not be successful in anticipating and responding to competitive factors affecting our industry or these relationships, including introduction of new products, changes in consumer preferences, demographic trends, new or changing outsourcing requirements, the entry of additional well-capitalized competitors, introduction of new products, changes in consumer preferences, demographic trends, international, national, regional and local economic conditions, and competitors'competitors’ discount pricing
and promotion strategies. As wireless telecommunications markets mature, and as we seek to enter into new markets in the CentralAsia Pacific and South American regionLatin America and offer new products, the competition that we face may change and grow more intense.
We rely on trade secret laws and agreements with our key employees and other third parties to protect our proprietary rights, which may not afford adequate protection.
We rely on trade secret laws to protect our proprietary knowledge, particularly, our database of customers and suppliers, business terms such as pricing, and the information and technology related to our verykool®verykool® brand. brand, our database of customers and suppliers and business terms such as pricing. In general, we also have non-disclosure agreements with our key employees and
limit disclosure of our trade secrets and other proprietary information. These measures may prove difficult to enforce and may not prove adequate to prevent misappropriation of our proprietary information.
We are dependent on a small number of personnel.
Our success depends in large part on the abilities and continued service of our executive officers, particularly Joseph Ram, our CEO and largest stockholder upon whom we maintain a key-man life insurance policy, and other key employees.employees, including ourverykool® design team members in China. In 2009 we experienced the departure of two executive officers, and replaced our Chief Financial Officer in July 2010. If we are currently seeking to hire a permanent Chief Financial Officer. We may be unable to replace senior management with qualified individuals or retain the services of other key employees. The loss ofour executive officers or other key personnel, it could impede our ability to fully and timely implement our business plan and future growth strategy. In addition, in order to support our continued growth, we will be required to effectively recruit, develop and retain additional qualified management. Competition for such personnel is intense, and there can be no assurance that we will be able to successfully attract, assimilate or retain sufficiently qualified personnel. The failure to retain and attract necessary personnel could also delay or prevent us from executing our planned growth strategy.
We may become subject to lawsuits alleging medical risks associated with our wireless handsets, the cost of which could be substantial.
Lawsuits or claims have been filed or made against manufacturers of wireless handsets alleging possible medical risks, including brain cancer, associated with the electromagnetic fields emitted by wireless handsets. There has been only limited relevant research in this area, and this research has not been conclusive as to what effects, if any, exposure to electromagnetic fields emitted by wireless handsets has on human cells. Substantially all of our revenues are derived, either directly or indirectly, from sales of wireless handsets. We may become subject to lawsuits filed by plaintiffs alleging various health risks from our products. If any future studies find possible health risks associated with the use of wireless handsets, or if any damages claimclaimed against us or a business partner is successful, it could have a material adverse effect on our business. Even an unsubstantiated perception that health risks exist could adversely affect our ability or the ability of our customers to market wireless handsets.
Risks Related To Our Common Stock
The market for our common stock is volatile and our stock price could decline.
An active trading market for our common stock may not be sustained, which could affect the ability of our stockholders to sell their shares and could depress the market price of their shares. The stock market in general, including the market for telecommunications-related stocks in particular, has been highly volatile. For example, the closing price of our common stock has fluctuated between $2.51$1.60 and $0.10$0.50 from January 1, 20092010 through March 19, 2010.30, 2011.
The market price of our common stock has been and is likely to remain volatile, and investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects, resulting in a substantial loss on their investment.
We may be delisted from The NASDAQ Stock Market if we do not satisfy continued listing requirements.
In 2008 and 2009,At various times over the last several years we faced potential delisting from The NASDAQ Global Market for failure to maintain the minimum $1.00 bid price per share requirement for continued listing. If in the future we failBecause of our failure to comply with the continued listing standards ofthis requirement, on May 4, 2010 we were afforded a 180-day compliance period by The NASDAQ GlobalStock Market includingto regain compliance. We later elected to transfer our listing to The NASDAQ Capital Market, which transfer was effective on November 4, 2010. This afforded us an additional 180-day compliance period until May 2, 2011 to demonstrate compliance. In January 2011, after the closing bid price of our stock had been at $1.00 per share or greater for 10 consecutive business days, we were notified by The NASDAQ Stock Market on February 1, 2011 that we had regained compliance.
However, since the February NASDAQ notification, the closing bid price of our stock has been below $1.00 per share at various times. If the closing bid price of our stock does not rise to $1.00 or above by April 4, 2011, we would once again be notified by The NASDAQ Stock Market of our non-compliance and be afforded a 180-day period to demonstrate compliance. There is no assurance that we could regain compliance with the minimum bid price requirement, and our common stock would be delisted from that market.
If we are delisted from The NASDAQ Global Market, we may apply to transfer our common stock to The NASDAQ Capital 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 wouldcould 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 theOTC Pink, SheetsOTCQX, OTCQB 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"“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 shareholdersstockholders to borrow against or "margin"“margin” low-priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because brokers'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 shareholderstockholder 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.
The ability of our stockholders to control our policies or effect a change in control of our company is limited, which may not be in our stockholders'stockholders’ best interests.
Some provisions of our charter and bylaws and the General Corporation Law of Maryland, under which we are incorporated, may delay or prevent a change in control of our company or other transactions that could provide our common stockholders with a premium over the then-prevailing market price of our common stock or that might otherwise be in the best interests of our stockholders. These include the ability of our Board of Directors to authorize the issuance of preferred stock without stockholder approval, which preferred stock may have voting provisions that could delay or prevent a change in control or other transaction that might involve a
premium price or otherwise be in the best interests of our stockholders. Maryland law imposes restrictions on some business combinations and requires compliance with statutory procedures before some mergers and acquisitions can occur. These provisions of Maryland law may have the effect of discouraging offers to acquire us even if the acquisition would be advantageous to our stockholders.
Stockholders have been and may be diluted as a result of past or future offerings or other financings or equity grants.
We have raised and may in the future raise additional capital through one or more public offerings, private placements or other financings involving our securities and have made or may make stock option and other equity incentive grants. As a result of these financings or grants, ownership interests in us may be diluted, potentially substantially.
Our largest stockholder may have strategic interests that differ from those of our other stockholders, and can significantly influence important corporate matters.
As of March 19,31, 2010, our Chief Executive Officer Joseph Ram, beneficially owned approximately 30% of our outstanding common stock. As a result, Mr. Ram may be able to significantly influence corporate actions relating to:
controlling the composition of our board of directors;
controlling our management and policies;
determining the outcome of significant corporate transactions, including changes in control that may not be beneficial to other stockholders; and
acting in his own interest, which may conflict with, or be different from, the interests of other stockholders.
Item 1B. Unresolved Staff Comments—None.
Item 1B. | Unresolved Staff Comments. |
Not Applicable.
Item 2. | Properties. |
Our corporate headquarters office is located in San Diego, California. We provide ourhave provided certain distribution and other value-added services from our sales and operations center in Miami, Florida, but expect to eliminate that distribution center after the end of the lease term which also serves asis March 31, 2011. Ourverykool® R&D facility is located in Beijing, China and we have a small quality control office located in Shenzhen, China, close to our sales and executive office for Central and South America. Thesecontract manufacturers. All of these facilities are occupied pursuant to operating leases. The table below summarizes information about our sales and operations centers:
| Aggregate Square Footage | Approximate Monthly Rent | Lease term | |||||||
---|---|---|---|---|---|---|---|---|---|---|
San Diego, California | 7,000 | $ | 22,000 | Oct 2008 to Sept 2012 | ||||||
Miami, Florida* | 23,000 | $ | 14,000 | Mar 2008 to Mar 2011 |
Aggregate Square Footage | Approximate Monthly Rent | Lease term | ||||||||||
San Diego, California | 7,000 | $ | 22,000 | Oct 2008 to Sept 2012 | ||||||||
Miami, Florida | 23,000 | 14,000 | Mar 2008 to Mar 2011 | |||||||||
Beijing, China | 1,600 | 7,000 | Apr 2010 to Apr 2012 | |||||||||
Shenzhen, China | 250 | 1,000 | Aug 2010 to Aug 2011 |
We believe that these facilities are adequate for our current requirements and that suitable alternative or additional space will be available as needed for alternative space or to accommodate future expansion of our operations.
Item 3. | Legal Proceedings. |
In the normal course of our business, we may be a party to legal proceedings. Except as disclosed below, we are not currently a party to any material legal proceedings other than ordinary routine litigation incidental to our business.
The discussionsdiscussion of "Securities Class Actions," "Derivative Action" and "LG Litigation"the “LG Litigation” in Item 8, Note 8 to our Consolidated Audited Financial Statements, areis incorporated by reference herein.
Item 4. | [Removed and Reserved.] |
Table of ContentsPART II
We may become involved in certain other legal proceedings and claims which arise in the normal course of business. Other than as described above and in Note 8 to our Consolidated Audited Financial Statements, as of December 31, 2009, we did not have any significant litigation outstanding.
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock commenced trading on June 17, 2004 on the American Stock Exchange under the symbol "IFO." Effective August 3, 2006, our Common Stock ceased trading on the American Stock Exchange and commenced tradingtrades on The NASDAQ StockCapital Market under the symbol "IFON," where it has traded since such date.“IFON.” The following table sets forth, for the periods indicated, the high and low trading prices of our Common Stock as reported by The NASDAQ Stock Market:
Fiscal Year 2009 | High | Low | |||||
---|---|---|---|---|---|---|---|
First Quarter | $ | 0.34 | $ | 0.10 | |||
Second Quarter | $ | 1.99 | $ | 0.16 | |||
Third Quarter | $ | 2.51 | $ | 1.03 | |||
Fourth Quarter | $ | 1.60 | $ | 0.77 |
2010 | High | Low | ||||||
First Quarter | $ | 1.60 | $ | 0.90 | ||||
Second Quarter | $ | 0.88 | $ | 0.50 | ||||
Third Quarter | $ | 0.69 | $ | 0.52 | ||||
Fourth Quarter | $ | 0.98 | $ | 0.60 | ||||
2009 | High | Low | ||||||
First Quarter | $ | 0.34 | $ | 0.10 | ||||
Second Quarter | $ | 1.99 | $ | 0.16 | ||||
Third Quarter | $ | 2.51 | $ | 1.03 | ||||
Fourth Quarter | $ | 1.60 | $ | 0.77 |
Fiscal Year 2008 | High | Low | |||||
---|---|---|---|---|---|---|---|
First Quarter | $ | 1.85 | $ | 0.90 | |||
Second Quarter | $ | 1.11 | $ | 0.77 | |||
Third Quarter | $ | 0.79 | $ | 0.44 | |||
Fourth Quarter | $ | 0.50 | $ | 0.21 |
As of March 19, 201030, 2011 the closing price of our common stock on The NASDAQ GlobalCapital Market was $0.98$0.95, and there were approximately nine shareholderseleven stockholders of record.
We have not paid any cash dividends and do not expect to pay any cash dividends in the foreseeable future. We are also prohibited from paying cash dividends pursuant to our credit facility. For complete details see
The information regarding equity compensation plans is incorporated by reference into Item 8, Note 6 to the Consolidated Audited Financial Statements and "Borrowings" in Item 712 of this report.Form 10-K, which incorporates by reference the information set forth in the Company’s Definitive Proxy Statement in connection with the 2011 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the 2010 fiscal year.
Unregistered IssuancesIssuances.
In October 2008, we issued 100,000 shares of unregistered common stock in exchange for a temporary change to a revenue sharing agreement. For complete details see Item 8, Note 9 to the Consolidated Audited Financial StatementsNot Applicable.
Issuer Repurchases of Equity Securities.
On December 15, 2008, we announced a share buyback program, authorizing up to $500,000 to be used for stock repurchases. As of December 31, 2009 and December 31, 2008, we had purchased in aggregate, 826,661 and 54,537 shares, respectively, at a total cost of $499,994 and $16,955, respectively. During the twelve months ended December 31, 2009, the Company retired 826,661 shares of stock. The retirement reduced treasury stock and increased the accumulated deficit by $499,168.Not Applicable.
During the twelve months ended December 31, 2009, we repurchased 772,124 shares of our common stock at a total cost (including brokerage commissions) of $483,040 at an average price per share of $0.63. During December 2008, we repurchased 54,537 shares of our common stock at a total cost (including brokerage commissions) of $16,955, at an average price per share of $0.31. Such shares
were purchased by us in the open market in accordance with Commission Rule 10b-18. We have authorized the repurchase of up to $500,000 worth of shares of our common stock under this previously announced plan. During fiscal 2009, we retired 826,661 shares of stock.
The following table summarizes information regarding shares repurchased during the twelve months ended December 31, 2009 and 2008:
| Total Number of Shares Repurchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of the Publicly Announced Repurchase Programs | Maximum Approximate Dollar Value of Shares That May Yet be Purchased Under the Programs | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1/01/09 - 12/31/09 | 772,124 | $ | 0.63 | 772,124 | $ | 6 | ||||||||
12/01/08 - 12/31/08 | 54,537 | $ | 0.31 | 54,537 | ||||||||||
Total | 826,661 | $ | 0.60 | 826,661 | $ | 6 | ||||||||
Item 6. | Selected Financial Data. |
Item 6. Selected Financial Data.
Not Applicable.
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
ThisOur management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our accompanying Consolidated Audited Financial Statements and related notes, as well as the "Risk Factors"“Risk Factors” and other information contained in this annual report. Our management'sThe discussion and analysis of financial condition and results of operations areis based upon, among other things, our Consolidated Audited 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 at the financial statement dates 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 those 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 could. 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“Critical Accounting Policies."” All references to results of operations in this discussion are references to results of continuing operations, unless otherwise noted.
Overview and Recent Developments
We are one of the premier distributors and providersa provider of wireless handsets and accessories to carriers, distributors and OEMs in CentralLatin America and South America.Asia Pacific. We provide end-to-end handsetdesign, develop, source and wireless terminal solutions for carriers in both Central and South America. We distribute products of original equipment manufacturers (OEMs), including Samsung and others. We are also involved in designing, sourcing and distributing asell our proprietary line of products under our owntheverykool®verykool® brand, which includes entry-level, mid-tier and high-end products. We first introduced theverykool®
As an integral part brand in 2006. Prior to March 2011 and for the past four years, much of our customers' supply chain,business was distribution of wireless handsets supplied by major manufacturers, primarily Samsung and primarily in Argentina.
Historically, the majority of our revenues have come from our distribution business. Revenue reached its peak in 2006 when we perform value-added services and solutions, includingrecorded $241 million of net sales. In 2009, 90% of our net sales of $231 million were derived from distribution sales of Samsung product approval and certification, light assembly, warehousing, logistics services (packing,
shipping and delivery), marketing campaigns, warranty services and end-user support. We provide these services for wireless handset manufacturers to facilitate sales to carriers agents, resellers, distributors,in Argentina. In late 2009, however, a stiff import tariff on certain electronic devices, including wireless handsets, was enacted in Argentina. The tariff had a significant negative impact on our sales beginning in the first quarter of 2010, and ultimately resulted in a decrease of 69% of our sales volume in 2010 compared to 2009. Then, in February 2011, Argentina enacted a further import regulation effective March 6, 2011 which essentially resulted in the conclusion of our distribution business. Going forward, we expect our business to be centered on ourverykool® product line. Our goal is to replace the lost gross profit from distribution revenues with higher marginverykool® sales through expansion of our product portfolio and entry into new geographic markets in Asia Pacific and Latin America.
Prior to 2010 we sourced all ourverykool® phones from independent dealersdesign houses and retailersoriginal design manufacturers in CentralChina. In late 2009, with a desire to improve our time-to-market, better protect our technology and South America.know-how and improve our cost structure, we began to search for an experienced management team to serve as the core for an in-house design team based in Beijing. In April 2010 we recruited a team of very experienced management and technical personnel who now serve as both our design house for all our markets and as the base for marketing and selling our products in Asia-Pacific. This team currently consists of 37 employees, primarily engineers, 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, together with any NRE (non-recurring engineering) expenses paid to other design houses. We introducedshipped our proprietary linefirst product designed by our China team to a customer in China in October 2010. We expect to continue to use outside design houses to
augment the efforts of handsets and accessories under our ownverykool® brandChina development team. All of our manufacturing continues to be done by contract manufacturers in 2006.China.
Areas of Management Focus and Performance Indicators
We focus on the needs of our customers, developing and maintainingsourcing new and innovative products, fostering close relationships with manufacturers, and expanding our business in our current markets and entering into new geographic markets, and sourcing and developing new and innovative products,all while maintaining close attention to operational efficiencies and costs. We are particularly focused on increasing shippingsales volumes and improving efficienciesof higher margin products in a cost effective manner to achieve higher levels ofenable us to return to profitability, and earnings growth, as well as monitoring and managing levels of accounts receivable and inventory. We provide distribution and other services for OEMs, such as Samsung, and our own proprietary line ofverykool® handsets.inventory to minimize risk. Performance indicators that are important for the monitoring and management of our business include operating and net income,top line sales growth, cost of sales and gross margin percentage, operating expenses in absolute dollars and as a percent of revenues and overalloperating and net sales growth.income (loss). We make extensive use ofrely upon our customized informationin-house software management system to closely monitor all aspectsexercise real-time control over many elements of our business including customer relationship management, intelligent purchasing, inventory management and control, inventory flow, line-item marginsales order control for every order, and weighted-average cost and statistical data for products, customers and suppliers, as deemed appropriate. We believe a strong focus on providing better service to customers leads to increased customer satisfaction and retention and potential increases in sales.pricing management.
Management and employees spend a significant amount of time traveling to Latin America and Asia Pacific with the purpose of spending time with our Beijing design team, key customers, suppliers and employees. We believe that these relationships are vital to our success and we will continue to dedicate a significant amount of time to this area.
Industry 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 net sales. Excess supply conditions and the extended 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 net sales, margins and gross profit at expected levels and could continue to affect the value of our inventory, as well as customer payment trends. For example, the second half of 2008 and the first quarter of 2009 generally saw a decrease in handset demand globally, including our sales regions, and an increase in carrier inventory, which both had a negative impact on our financial results during 2008 and 2009 and created a more difficult sales environment, requiring additional operating expenses to help maintain and increase our sales. We saw these trends begin to ease in the second quarter of 2009 in the regions we serve. 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.
During the second half of 2008, and continuing through the period of this report, our industry has been impacted by the worldwide economic slowdown. We believe that some of the countries in the regions where we operate, particularly in Central America, have close economic relations with, and therefore have been impacted by weak economic conditions in the United States. We believe this adversely impacted consumer demand for the wireless handsets we sell, and as a result our overall operations, including net sales, during the first half of 2009. We began to experience a small increase in the demand for handsets in the third quarter of 2009, which positively affected our net sales for the
third and fourth quarters. 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, and this has reduced overall handset volumes. We are also beginning to see more low-cost manufacturers gaining traction with entry-level products, which is negatively affecting both our OEM andverykool™ sales in the entry-level segment.
Company Specific Trends and Risks
Our long-term strategy incorporates overall market growth elements for our business, which we hope will result in future growth as global economic conditions recover. Ourverykool® proprietary line of products, for which we had several models selling as of December 31 2009, continued to show increased orders and sales during 2009 and is expected to become an increasing part of our overall business in the future.
Ourverykool® products continue to increase product diversification in Central and South America, which we believe should contribute to profitability. We have more control over the production and supply of ourverykool® line of products than the OEM products we distribute. We were able to increase our gross margins to 6.6% for the twelve months ended December 31, 2009, compared to 4.7% for the twelve months ended December 31, 2008. These results were primarily due to a product mix shift, including increased sales of higher-margin products (including ourverykool® products), better product sourcing for ourverykool® line of products and beneficial purchasing opportunities.
Argentina, one of the countries where we currently sell a significant amount of OEM products and where we generated 87% of our net sales in 2009, passed a new tariff in November 2009 impacting certain imported electronics, including wireless handsets. From the information we have obtained, this new tariff could impact the pricing at the point of sale in excess of 30%, and we expect that it will reduce significantly our overall OEM sales volume in Argentina. We believe that this tariff will have a material adverse impact on our sales, results of operations and prospects for our OEM products in Argentina.
During 2009, we provided products and services to approximately 70 customers. Our three largest customers in fiscal 2009 represented 28%, 28% and 18% of our net sales, respectively. All three of these customers are carriers in South America. In 2010, a customer accounting for 28%, has begun significantly reducing its purchases from us as a result of the newly enacted Argentina tariff on wireless handsets, among other electronic devices. Additional Argentina customers are expected to decrease or eliminate their purchases of imported wireless handsets in the coming fiscal quarters
Results of Operations:
Year Ended December 31, 2009 Compared With Year Ended December 31, 2008
Net Sales
For the year ended December 31, 2009, our net sales from continuing operations of $231.3 million was 8% higher than our net sales from continuing operations of $213.2 million for 2008. The average selling price of wireless handsets sold in 2009 increased 13.4% relative to 2008, due primarily to increased volume of higher-priced handsets, including some of ourverykool® and OEM products. The increase in average selling price was partially offset by a 1.2% decrease in overall wireless handset sales volume. The geographic mix of net sales shifted slightly in the twelve months ended December 31, 2009 as sales in South America were more than 91% of net sales, compared to 76% of net sales for 2008.
Sales in Central America decreased to 9% of total net sales in the twelve months ended December 31, 2009, as compared to 24% for 2008. These regional shifts in net sales resulted from the factors discussed below.
| For the Year Ended December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2009 | 2008 | |||||
| (Dollar amounts in thousands) | ||||||
Net sales | $ | 231,310 | $ | 213,223 | |||
Units sold, increase (decrease) over prior year | (1.2 | )% | (2.4 | )% | |||
Average selling price, increase (decrease) over prior year | 13.4 | % | (0.1 | )% |
In South and Central America, we have continued to expand our customer base and geographic presence by seeking new customers and additional business with existing customers for both our OEM andverykool® line of products. In South America, net sales were $210.7 million for the twelve months ended December 31, 2009, a 30% increase from 2008. This increase was primarily due to increased sales in existing countries where we sell products, primarily Argentina. In Central America, net sales decreased 59% to $20.6 million for the twelve months ended December 31, 2009, which was primarily due to the continuing low demand during the year, which we believe was related to the worldwide and regional economic downturn. Despite the year-over-year decline, we have seen sequential quarterly improvement in Central America in the second and third quarters of 2009. The second quarter of 2009 increased 81% over the first quarter of 2009 and the third quarter of 2009 increased 124% over the first quarter of 2009. A seasonal decrease in sales resulted in a smaller increase in the fourth quarter of 2009 of 58% over the first quarter of 2009.
Our sales in Argentina, where we generated 87% of our net sales in 2009, will be materially adversely affected by the new tariff and loss of a customer described above. While we have not yet experienced a significant decrease in sales to Argentina at the date of this report, we believe that in the coming quarters, the full impact of the tariff will necessitate significant steps by us in response. Such steps may include, without limitation, establishing relationships in Argentina that are tariff-compliant and consequently eliminate the tariff on our OEM and proprietary products, focusing on increasing sales in other countries and aligning our cost structure with the level of sales.
We do not believe that inflation had a significant impact on our results of operations for the periods reported in our Consolidated Audited Financial Statements.
Net Sales by Geographic Region
| For the Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2009 | 2008 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Central America | $ | 20,647 | $ | 50,617 | (59 | )% | ||||
South America | 210,663 | 162,606 | 30 | % | ||||||
Total | $ | 231,310 | $ | 213,223 | 8 | % | ||||
Cost of Sales, Gross Profit and Gross Margin
For the year ended December 31, 2009, cost of sales was $216.0 million, or 93.4% of net sales, and gross margin was 6.6%, as compared with $203.2 million, or 95.3% of net sales, and 4.7% for gross margin for the year ended December 31, 2008. The increase in gross margin was due to a product mix
shift, including increased sales of higher-margin products (including ourverykool® products), improved product sourcing for ourverykool® line of products and beneficial purchasing opportunities.
For the twelve months ended December 31, 2009, our gross profit increased 53% to $15.3 million from $10.0 million for 2008. This increase in gross profit was primarily the result of the increased net sales and of the factors which increased our gross margin as described above.
| For the Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2009 | 2008 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Net sales | $ | 231,310 | $ | 213,223 | 8 | % | ||||
Cost of sales | 216,003 | 203,210 | 6 | % | ||||||
Gross profit | $ | 15,307 | $ | 10,013 | 53 | % | ||||
Gross margin | 6.6 | % | 4.7 | % | 40 | % |
Operating Expense and Operating Income (Loss) from Continuing Operations
For the year ended December 31, 2009, operating expense increased 4%, to $14.5 million, from 2008. As a percentage of net sales from continuing operations, operating expense decreased to 6.2% in the year ended December 31, 2009, compared with 6.5% for 2008. The total increase in operating expense was related to the opening of a new market in South America and other support required in additional markets due to the global and regional economic downturn. It also included the write-off of intangible assets related to our Argentina business described in Item 8, Note 5 to the Consolidated Audited Financial Statements. Operating expense decreased as a percentage of net sales as we took action to reduce fixed operational costs to match current market conditions. Our management continues to review expenses in an effort to better match operational costs with the future business opportunities, by shifting expenses from fixed to variable components when possible, among other approaches. We believe such measures will assist us as we strive to achieve profitability in the current volatile market. Operating expense for the year ended December 31, 2009 included non-cash expense related to stock options of $61,000, compared to $127,000 in the year ended December 31, 2008.
For the year ended December 31, 2009, our operating income from continuing operations was $0.9 million, as compared with an operating loss of $3.9 million for the year ended December 31, 2008. As a percentage of net sales, operating income from continuing operations was 0.4% for the year ended December 31, 2009, compared to an operating loss of 1.8% for the year ended December 31, 2008.
| For the Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2009 | 2008 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Net sales | $ | 231,310 | $ | 213,223 | 8 | % | ||||
Operating expense | $ | 14,454 | $ | 13,900 | 4 | % | ||||
Percentage of net sales | 6.2 | % | 6.5 | % | (4 | )% |
Operating Income (Loss) from Continuing Operations
| For the Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2009 | 2008 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Net sales | $ | 231,310 | $ | 213,223 | 8 | % | ||||
Operating income (loss) from continuing operations | $ | 853 | $ | (3,887 | ) | 122 | % | |||
Percentage of net sales | 0.4 | % | (1.8 | )% | 120 | % |
Other Income
During 2009 we incurred $342,000 of interest expense compared to $545,000 for 2008, due to lower interest rates. During 2008, we settled an outstanding claim against a former service provider in which we received a gross amount of $655,000, of which $87,000 represented reimbursement for legal fees, and also had a gain from an insurance settlement. We expect to regularly utilize our credit facility, which will impact our interest expense in future periods, depending on applicable interest rates and amounts drawn from the line.
| Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2009 | 2008 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Other Income (expense) | $ | 7 | $ | 583 | (99 | )% | ||||
Interest expense | (342 | ) | (545 | ) | (37 | )% | ||||
Other income, total | $ | (335 | ) | $ | 38 | (982 | )% |
Income (Loss) from Continuing Operations
During the year ended December 31, 2009, our income from continuing operations was $484,000, compared to loss from continuing operations of $6.3 million for the year ended December 31, 2008. The net income from continuing operations was primarily due to the increased gross margin and gross profit discussed above. Included in the loss for 2008 is a non-cash valuation allowance of $3.2 million related to our deferred tax assets (see Note 10- Income Taxes to our Consolidated Audited Financial Statements), in addition to the $2.5 million of inventory write-downs taken during the year, which enabled us to significantly reduce inventory levels and the associated carrying costs.
| For the Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2009 | 2008 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Net sales | $ | 231,310 | $ | 213,223 | 8 | % | ||||
Net income (loss) from continuing operations | $ | 484 | $ | (6,309 | ) | 108 | % | |||
Percentage of net sales | 0.2 | % | (3.0 | )% | 107 | % |
Loss from Discontinued Operations
During the second quarter of 2008, we assessed opportunities in the United States and Mexico and decided to implement actions necessary to close sales operations in both of those countries, which we substantially completed in the second half of the year. For the year ended December 31, 2009, we incurred a loss of $2.0 million from discontinued operations, as compared to a loss of $4.1 million for the year ended December 31, 2008. The loss was a result of very low sales in the U.S. and Mexico during 2009 and 2008, as we wound down our business in these areas, as well as the other matters discussed in Item 8, Note 2 to the Consolidated Audited Financial Statements. As of December 31, 2009, our plans for the discontinued operations were substantially completed; however, we will continue to record adjustments and expenses through the discontinued operations as necessary.
Net Loss
During the year ended December 31, 2009, our net loss was $1.5 million, compared to net loss of $10.4 million in 2008. The loss was attributable to our loss from discontinued operations as we continued to wind down business in the United States and Mexico. The loss in the twelve months ended December 31, 2008 was related to the general economic downturn and other factors such as inventory write-downs, marketing, engineering and tolling expenses, as well as the non-cash valuation allowance for deferred tax assets described above.
| For the Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2009 | 2008 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Net sales | $ | 231,310 | $ | 213,223 | 8 | % | ||||
Net income (loss) | $ | (1,528 | ) | $ | (10,415 | ) | 85 | % | ||
Percentage of net sales | (0.7 | )% | (4.9 | )% | 86 | % |
Year Ended December 31, 2008 Compared With Year Ended December 31, 2007
Net Sales
For the year ended December 31, 2008, our net sales from continuing operations of $213.2 million were generally consistent with our net sales from continuing operations of $214.5 million for 2007. Average selling price of wireless handsets sold in 2008 remained relatively constant compared to 2007. However, we experienced a 2% decrease in overall wireless handset sales volume, due primarily to the impact of the worsening economic slowdown in the markets we serve, most notably in Central America, during the second half of 2008. The geographic mix of net sales shifted in 2008 as sales in South America increased to more than 76% of net sales, compared to 66% of net sales in 2007. Sales in Central America decreased to 24% of total net sales in 2008, compared to 34% in 2007. These regional shifts in net sales were the result of the factors discussed below. Further, we discontinued our operations in the United States and Mexico in 2008.
| For the Year Ended December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2008 | 2007 | |||||
| (Dollar amounts in thousands) | ||||||
Net sales | $ | 213,223 | $ | 214,462 | |||
Units sold, increase (decrease) over prior year | (2.4 | )% | 20 | % | |||
Average selling price, (decrease) over prior year | (0.1 | )% | (15 | )% |
In South America, net sales were $162.6 million for 2008, a 15% increase from 2007. This increase was primarily due to increased sales in existing countries, most notably Argentina, and the addition during the first half of 2008 of a new carrier relationship in Colombia. In Central America, net sales decreased 31% to $50.6 million for 2008, which was primarily due to the continuing unusually low demand during the third and fourth quarters of 2008. We believe the worldwide economic downturn impacted that region also, especially during the second half of 2008.
Net Sales by Geographic Region
| For the Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2008 | 2007 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Central America | $ | 50,617 | $ | 73,282 | (31 | )% | ||||
South America | 162,606 | 141,180 | 15 | % | ||||||
Total | $ | 213,223 | $ | 214,462 | (1 | )% | ||||
Cost of Sales, Gross Profit and Gross Margin
For the year ended December 31, 2008, cost of sales was $203.2 million, or 95.3% of net sales, and gross margin was 4.7%, compared with $202.8 million, or 94.6% of net sales, and 5.4% for gross margin for the year ended December 31, 2007. The increase in both our total cost of sales and as a percentage of net sales and decrease in gross margin were primarily due to inventory write-downs, sales of some products at or below cost and a product mix shift, including increased sales of low-margin products. Inventory write-downs during 2008 were approximately $2.5 million, or 1.2% of cost of sales, and in addition, we sold product below our cost in order to reduce inventory levels and incurred costs of $3.0 million on these products. These actions primarily resulted from of the abrupt shift in market conditions and resulted in decreased demand, particularly in Central America, in the second half of 2008. We had immaterial inventory write-downs in 2007. Some of our OEM partners that had previously entered into the low-tier handset range continued to sell a higher amount of low-tier handsets, which had less margin opportunity than mid-tier and high-end handsets sales. Our gross margin was impacted by the change of product and regional mix of our sales. The economic downturn also reduced consumer demand for higher-priced and higher-margin products.
For the year ended December 31, 2008, our gross profit decreased to $10.0 million from $11.7 million, a decrease of 14% compared with the year ended December 31, 2007. This decrease in gross profit was primarily the result of the $2.5 million inventory write-down during 2008, as well as sales of certain products below cost in efforts to reduce inventory levels and carrying costs. In addition, a decrease in gross margin due to a product mix shift, as well as other factors resulting from the general economic downturn, negatively impacted gross profit.
| For the Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2008 | 2007 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Net sales | $ | 213,223 | $ | 214,462 | (1 | )% | ||||
Cost of sales | 203,210 | 202,803 | 1 | % | ||||||
Gross profit | $ | 10,013 | $ | 11,659 | (14 | )% | ||||
Gross margin | 4.7 | % | 5.4 | % | (14 | )% |
Operating Expense and Operating Loss from Continuing Operations
For the year ended December 31, 2008, operating expense increased almost 5%, to $13.9 million compared with 2007. As a percentage of net sales from continuing operations, operating expense increased to 6.5% in the year ended December 31, 2008, compared with 6.2% for 2007. The increase in operating expense as a percentage of net sales was primarily related to the increase in marketing activities related to sales of our products, as we continued to create brand awareness at the point of sale. Marketing expenses increased approximately $0.7 million in 2008 compared to 2007. In addition, we had product tooling and engineering expenses related to theverykool® products during 2008 increase $1.1 million in 2008 compared to 2007. Marketing, tooling and engineering increases were primarily related to the increased penetration and sales of ourverykool®-branded products. Operating expense for the year ended December 31, 2008 included non-cash expense related to stock options of $127,000, compared to $143,000 in the year ended December 31, 2007.
For the year ended December 31, 2008, our operating loss from continuing operations was $3.9 million, compared with a loss of $1.6 million for the year ended December 31, 2007. As a percentage of net sales, operating loss from continuing operations was 2% for the year ended December 31, 2008, compared to a loss of 1% for the year ended December 31, 2007. The increase in operating loss from continuing operations was a result of the decrease in gross margin and gross profit (related primarily to inventory write-downs and product sales below cost) and the increase in operational expenses (most notably relating to marketing, product tooling and engineering) as discussed above.
| For the Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2008 | 2007 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Net sales | $ | 213,223 | $ | 214,462 | (1 | )% | ||||
Operating expense | $ | 13,900 | $ | 13,255 | 5 | % | ||||
Percentage of net sales | 6.5 | % | 6.2 | % | 5 | % |
Operating Loss from Continuing Operations
| For the Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2008 | 2007 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Net sales | $ | 213,223 | $ | 214,462 | (1 | )% | ||||
Operating loss from continuing operations | $ | (3,887 | ) | $ | (1,595 | ) | 144 | % | ||
Percentage of net sales | (1.8 | )% | (0.7 | )% | 157 | % |
Other Income
During 2008, we settled an outstanding claim against a former service provider in which we received a gross amount of $655,000, of which $87,000 represented reimbursement for legal fees, and also had a gain from an insurance settlement. During 2007, we received $2.1 million in compensation from our early lease termination and relocation of our corporate headquarters. During 2008, we
incurred $545,000 of interest expense, compared to $901,000 for 2007, primarily due to a lower average outstanding balance on our line of credit as well as generally lower borrowing rates.
| Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2008 | 2007 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Other Income | $ | 583 | $ | 2,080 | (72 | )% | ||||
Interest expense | (545 | ) | (901 | ) | (40 | )% | ||||
Other income, total | $ | 38 | $ | 1,179 | (97 | )% |
Loss from Continuing Operations
During the year ended December 31, 2008, our loss from continuing operations was $6.3 million, compared to income from continuing operations of $0.7 million for the year ended December 31, 2007. Included in this loss was the non-cash valuation allowance of $3.2 million related to our deferred tax assets described above, in addition to the $2.5 million of inventory write-downs taken during the year, which enabled us to significantly reduce inventory levels and the associated carrying costs. This loss from continuing operations was also impacted by the decreases in gross margin and gross profit, sales at or below cost on certain products, increased operational expenses (marketing, product tooling and engineering), and the general economic downturn that affected our sales regions. Income from continuing operations of $0.7 million in 2007 primarily resulted from the compensation we received from our early lease termination of our former corporate headquarters.
| For the Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2008 | 2007 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Net sales | $ | 213,223 | $ | 214,462 | (1 | )% | ||||
Net income (loss) from continuing operations | $ | (6,309 | ) | $ | 685 | (1,021 | )% | |||
Percentage of net sales | (3.0 | )% | 0.3 | % | (1,100 | )% |
Loss from Discontinued Operations
For the year ended December 31, 2008, we incurred a loss of $4.1 million from discontinued operations, compared to a loss of $2.3 million for the year ended December 31, 2007. The loss was a result of very low sales in the U.S. and Mexico during 2008, as we wound down our business in these areas.
Net loss
During the year ended December 31, 2008, our net loss was $10.4 million, compared to net loss of $1.6 million in the same period in 2007. This loss was primarily related to the factors discussed above,
including the inventory write-down, marketing, engineering and tolling expense, as well as the non-cash valuation allowance for the deferred tax assets.
| For the Year Ended December 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) | |||||||||
| 2008 | 2007 | ||||||||
| (Dollar amounts in thousands) | | ||||||||
Net sales | $ | 213,223 | $ | 214,462 | (1 | )% | ||||
Net income (loss) | $ | (10,415 | ) | $ | (1,615 | ) | (544 | )% | ||
Percentage of net sales | (4.9 | )% | (0.8 | )% | (713 | )% |
Financial Condition, Liquidity and Capital Resources
We generally use cash from our sale of products, lines of credit (bank and vendor) and the sale of securities and exercise of stock options (from time to time) to provide the capital needed to support our business. As of December 31, 2009, we did not have any material commitments for capital expenditures. We believe that we have sufficient liquidity (cash and available borrowings) to continue our operations for the next 12 months.
Year ended December 31, 2009
Cash Provided by (Used In) Operating Activities
At December 31, 2009, we had $18.4 million in cash, a decrease of $6.3 million from December 31, 2008, and we had $25.5 million outstanding under our bank credit facility, an increase of $11.2 million from December 31, 2008. During the twelve months ended December 31, 2009, we used cash and continued to leverage our credit facility to fund our operations. The increase in our use of the credit facility was directly related to the significantly increased levels of accounts receivable and our taking advantage of purchase discounts during the twelve months ended December 31, 2009. The net cash used in operating activities was $16.9 million for the twelve months ended December 31, 2009 compared to net cash provided from operating activities of $16.8 million for 2008. The change resulted primarily from significantly increased accounts receivable and decreased accrued expenses, but was offset by a smaller decrease in accounts payable compared to the change in 2008. Trade accounts receivable increased by $19.3 million and accounts payable and accrued expenses decreased by $3.0 million from December 31, 2008. The increase in accounts receivable was primarily due to the sales activity towards the later part of 2009 and the standard payment terms of sales we provide our customers. The decrease in accounts payable and accrued expenses at December 31, 2009 compared to December 31, 2008 was primarily due to our taking advantage of beneficial purchasing terms offered by other vendors and partners in the ordinary course in 2009. Accounts receivable other decreased by $3.2 million and inventory decreased by $1.0 million from December 31, 2008.
Days of Sales Outstanding
Days of sales outstanding (the average number of days it takes to collect revenue after a sale is made) at December 31, 2009 was 66 days, compared with 56 days at December 31, 2008. This increase was due to several customers making payments shortly after the year end, as more than 80% of our accounts receivable at December 31, 2009 were still within current terms provided to our customers. Normal payment terms require our customers to pay on a net 30-day or net 60-day basis, depending on the customer. The extension of net 60-day terms was required to remain competitive in the regions in which we currently operate, Central and South America. In an effort to penetrate new markets and reach new customers, we may offer terms beyond our normal terms.
Net Cash Used in Investing Activities
The net cash used in investing activities was $154,000 for the year ended December 31, 2009, compared to cash used of $312,000 for the year ended December 31, 2008. The use of cash during 2009 and 2008 was primarily the result of our investment in tooling and molds for our proprietaryverykool® products.
Net Cash Provided by (Used in) Financing Activities
The net cash provided by financing activities for the year ended December 31, 2009 of $10.7 million as a result of $11.2 million funding from our credit facility. This source of funding was offset by the net repurchase of $483,000 shares of our common stock. The net cash used in financing activities for the year ended December 31, 2008 of $12.5 million was primarily the result of payments on our credit facility due to less financing needs for our decreased levels of inventory and accounts receivable.
Working Capital
Our net working capital at December 31, 2009 was $24.4 million, compared with $25.6 million at December 31, 2008. This slight decrease was primarily due to an increase in amounts drawn on our bank credit facility and a decrease in cash and cash equivalents, offset by a significant increase in accounts receivable and a decrease in accounts payable and accrued expenses for the year ended December 31, 2009.
Borrowings
On April 30, 2008, we entered into a Loan, Security and Bulk Purchase Agreement and a Letter of Credit and Security Agreement (collectively, the "Agreement") with Wells Fargo Century, Inc. (the "Lender"), replacing the then existing asset-based secured credit facility with Wells Fargo HSBC Trade Bank, N.A. Pursuant to the Agreement, the Lender may advance up to $45,000,000 to us based on the expected collections of eligible receivables as well as value of our eligible inventory determined in accordance with the Agreement. The outstanding advances may not exceed the lesser of (i) $45,000,000 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 ($29.1 million at December 31, 2009). At December 31, 2009, the majority of our debt was based on foreign accounts receivable, a majority of which is insured. This credit facility has a two-year term ending April 2010 and is secured by all of our assets. The terms automatically roll over annually; however, the terms and conditions of such credit facility (including, without limitations, rates, eligibility, borrowing base and maximum line) may change. The interest rate for each borrowing under the credit facility is, at our option, either the Wells Fargo Bank N.A. prime rate minus 0.50% (3.25% less 0.50% at December 31, 2009) or the LIBOR rate plus 2.00% (0.25% plus 2.00% at December 31, 2009). As of December 31, 2009, we were in compliance with the covenants of the credit facility.
At December 31, 2009 and December 31, 2008, amounts drawn against the credit facility were $25.5 million and $14.3 million, respectively. Credit lines have been an important part of operating and growing our business, and market changes affecting accounts receivable have, and will in the future, diminish or increase the borrowing base of available funds under our current credit line. At December 31, 2009 and December 31, 2008, advances were at 88% and 66% of the available borrowing base. At February 28, 2010, we had no balance against our line of credit.
Year ended December 31, 2008
Cash Provided by Operating Activities
At December 31, 2008, we had $24.7 million in cash, an increase of $4.1 million from December 31, 2007. During the year ended December 31, 2008, we continued to leverage our bank and vendor credit facilities to fund our operations, in addition to reducing our accounts receivable and inventory levels. The net cash provided by operating activities from continuing operations was $10.6 million for the year ended December 31, 2008, which resulted primarily from substantially decreased inventory and accounts receivable levels. The $9.5 million decrease in inventory at December 31, 2008 in addition to a $0.5 million decrease in prepaid inventory were primarily attributable to our efforts to reduce inventory levels as a result of worldwide economic conditions. Accounts receivable decreased $14.9 million primarily due to decreased sales in the second half of 2008, which we believe was substantially the result of the worldwide economic downturn. Accounts payable at December 31, 2008 decreased $9.8 million. The decrease was related to our decreased use of our vendors' credit facilities during the year ended December 31, 2008, as we decreased our inventory levels as noted above.
Days of Sales Outstanding
Days of sales outstanding at December 31, 2008 was 56 days, compared with 61 days at December 31, 2007. This decrease was due to continuous efforts to keep our customers to the payment terms we provide.
Cash Used in Investing Activities
The net cash used in investing activities was $312,000 for the year ended December 31, 2008, compared to cash used of $1.4 million for the year ended December 31, 2007. The use of cash during 2008 and 2007 was primarily the result of our investment in tooling and molds for our proprietaryverykool® products.
Net Cash Used in (Provided by) Financing Activities
The net cash used in financing activities for the year ended December 31, 2008 of $12.5 million was primarily the result of payments on our bank credit facilities due to less financing needs for our decreased levels of inventory and accounts receivable, compared to 2007, when we had cash provided from financing activities of $1.6 million as a result of funding from our bank credit facilities.
Working Capital
Our net working capital at December 31, 2008 was $25.6 million, compared with $33.4 million at December 31, 2007. The decrease was primarily due to decreases in inventory and accounts receivable, partially offset by the increase in our cash balance, for the year ended December 31, 2008. In addition, the loss from discontinued operations of $4.1 million also reduced our overall working capital.
Critical Accounting Policies and Estimates
We believe the following criticalCritical accounting policies are those policies that, in management’s view, are most important toin the presentationportrayal of our financial condition and results of operations. The notes to our consolidated Financial Statements also include disclosure of significant accounting policies. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the condition and results that we report in our financial statements. These critical accounting policies require management'sus to make difficult and subjective judgments, often as a result of the need to make estimates about the effects ofand assumptions regarding matters that are inherently uncertain. Our critical accounting policies and estimates and assumptions that require the most significant judgment are discussed further below.
Revenue Recognition and Allowance for Returns
Revenues for wireless handset and accessory sales are recognized when (i) shipment of the products to customers has occurred and title has passed, (ii) when collection of the outstanding receivables is probable and (iii) the final price of the products is determined, which occurs at the time
of shipment. Sales are recorded net of discounts, rebates, cooperative marketing arrangements, (marketing, training and promotional funds), returns and allowances. Consideration is given onOn select sales, forwe may agree to cooperative arrangements wherein we agree to fund future marketing programs related to market development, training and special promotions,the products purchased by the customer. Such arrangements are usually agreed uponto in advance. The amount givenof the co-op allowance is generally in the form of a credit memo, which is appliedrecorded as a reduction of the sale price and recordedadded to accrued expenses as a current liability. ExpendituresSubsequent expenditures made pursuant to the agreed-upon activityarrangements reduce this liability. To the extent we incur costs in excess of the established cooperative fund, we recognize thatthe amount as a selling or marketing expense. As part of the sales process, we may perform certain value-added services such as programming, software loading and quality assurance testing. These value-added services are considered an ancillary component of the sales process and amounts attributable to these processes are included in the unit cost to the customer. Furthermore, these value-added services are related to services prior to the shipment of the products, and no value-added services are provided after delivery of the products. We recognize as a reserve against the related receivables estimates for product returns based on historical experience and other judgmental factors. Wefactors, evaluate these estimates on an ongoing basis and adjust theour estimates each period based on actual product return activity. We recognize freight costs billed to our customers in revenuesales and actual freight costs incurred as a component of cost of sale.sales.
Allowance for Doubtful Accounts
We provide for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. We evaluate the collectability of our accounts receivable on an ongoing basis. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations, we record a specific allowance against amounts due in order to reduce the net recognized receivable to the amount we reasonably believe will be collected, after consideration for accounts receivable insurance coverage we may have. For all other customers, we recognize allowanceallowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and our historical experience. Credit evaluations are undertaken for all major sales transactions before shipment is authorized. Normal payment terms require payment on a net 30-day or net 60-day basis depending on the customer. On an ongoing basis, we analyze the payment history of customer accounts, including recent customer purchases. We evaluate aged items in accounts receivable and provide reserves for doubtful accounts. Customer creditworthiness and economic conditions may change, including increasing the risk of collectability and sales returns, and may require additional provisions, which could negatively impact our operating results.
Inventory Write-Off and Effect on Gross MarginReserves
We regularly monitor inventory quantities on hand and record a provision for excess, slow moving and obsolete inventories based primarily on historical usage rates and our estimated forecast of product demand for a period of time, generally three months. Because of obsolescence, we will generally provide a full reserve for the costs of our inventories in excess of our relevant demand forecast for the applicable period.and expected pricing. We attempt to tightly control our inventory levels so that we limit inventoriesand in excess of demand for the succeeding several months.recent past have moved more to a build-to-order model. However, because we need to place non-cancelable orders with significantour contract manufacturers with a lead time of 30 to 60 days, and because it is difficultwe may not have a confirmed customer purchase order in hand as quickly as we would like to, estimate product demand, we sometimes build inventoriestake an inventory risk. As our products get closer to end-of-life status, we are more strict about our build-to-order policy in excessorder to limit our inventory exposure on older product.
Results of demandOperations:
The following table sets forth certain items from our consolidated statements of operations and comprehensive loss as a percentage of net sales for the applicable future periods. If this occurs, we provideperiods indicated (percentages may not add due to rounding):
2010 | 2009 | 2008 | ||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of sales | 93.4 | % | 93.4 | % | 95.3 | % | ||||||
Gross profit | 6.6 | % | 6.6 | % | 4.7 | % | ||||||
Operating expenses: | ||||||||||||
Selling, general and administrative | 10.8 | % | 6.2 | % | 6.5 | % | ||||||
Research and development | 1.3 | % | 0.0 | % | 0.0 | % | ||||||
12.1 | % | 6.2 | % | 6.5 | % | |||||||
Operating income (loss) from continuing operations | -5.5 | % | 0.4 | % | -1.8 | % | ||||||
Other income (expense): | ||||||||||||
Interest expense (net) | 0.0 | % | -0.1 | % | -0.3 | % | ||||||
Other income (expense), net | 0.0 | % | 0.0 | % | 0.3 | % | ||||||
Income (loss) from continuing operations before income taxes | -5.6 | % | 0.2 | % | -1.8 | % | ||||||
Benefit (provision) for income taxes | 0.6 | % | 0.0 | % | -1.2 | % | ||||||
Income (loss) from continuing operations | -5.0 | % | 0.2 | % | -3.0 | % | ||||||
Income (loss) from discontinued operations, net of tax | 0.1 | % | -0.9 | % | -1.9 | % | ||||||
Net loss | -4.9 | % | -0.7 | % | -4.9 | % | ||||||
We do not believe that inflation had a reserve, which may havesignificant impact on our results of operations for the periods reported in our Consolidated Audited Financial Statements.
Year Ended December 31, 2010 Compared With Year Ended December 31, 2009
Net Sales
For the year ended December 31, 2010, our net sales of $72.5 million decreased by $158.8 million, or 68.6%, compared to net sales of $231.3 million in 2009. The significant decline was primarily the effect of a stiff import tariff on certain electronic devices, including wireless handsets, that was enacted in Argentina in November 2009. The tariff began to affect our sales beginning in the first quarter of 2010 and had a negative impact throughout the year. In 2010, our Samsung distribution sales in Argentina declined by $147.5 million to $59.7 million from $207.2 million in 2009. Distribution sales in the remainder of Latin America during 2010 fell by an additional $14.1 million, as Samsung began to shift its business to other locally-based distributors or distributed directly. Offsetting these declines was an increase in sales of our brandedverykool® products of $2.9 million, which represented a 34.1% increase in sales of those products over 2009.
In February 2011, Argentina enacted a further import regulation effective March 6, 2011 which essentially resulted in the conclusion of our distribution business. Going forward, we expect our business to be centered on ourverykool® product line. Our goal is to replace the lost gross profit from distribution revenues with higher marginverykool® sales through expansion of our product portfolio and entry into new geographic markets in Asia Pacific and Latin America.
Cost of Sales, Gross Profit and Gross Margin
For the Year Ended December 31, | Increase (Decrease) | |||||||||||
2010 | 2009 | |||||||||||
(Dollar amounts in thousands) | ||||||||||||
Net sales | $ | 72,530 | $ | 231,310 | (68.6 | %) | ||||||
Cost of sales | 67,734 | 216,003 | (68.6 | %) | ||||||||
Gross profit | $ | 4,796 | $ | 15,307 | (68.6 | %) | ||||||
Gross margin | 6.6 | % | 6.6 | % | — |
For the year ended December 31, 2010, cost of sales was $67.7 million, 93.4% of net sales, and gross margin was 6.6%, compared to cost of sales of $216.0 million, 93.4% of net sales, and a 6.6% gross margin for the year ended December 31, 2009. In 2010, our gross profit amounted to $4.8 million, a decrease of 68.6% from $15.3 million in 2009 as a result of the decrease in sales. Sales of ourverykool® branded products typically result in higher gross margins than our distribution sales. However,verykool® margins were reduced in 2010 by approximately $356,000 charged to cost of sales for reserves for slow moving and obsolete inventories.
Operating Expenses and Operating Income (Loss) from Continuing Operations
For the year ended December 31, 2010, operating expenses of $8.8 million decreased by $5.6 million, or 39.1%, from $14.5 million in 2009. Selling, general and administrative (“SG&A”) expenses declined by $6.5 million, but this reduction was partially offset by an increase in R&D spending of $0.9 million related to our new development team in Beijing that was established in April 2010 to focus on ourverykool® products. The majority of the SG&A decrease was related to reduction of expenses that were variable with sales, which decreased 69% in 2010 compared to 2009. Although we made reductions in other expenses as well, such reductions were not proportionate to the decline in revenue. In response to the declining sales, we made reductions in headcount, but we were only able to reduce wages and benefits by approximately 24% in 2010 compared to the prior year. In addition, we curtailed marketing spending, but had commitments that could not be terminated, thus marketing expenses declined by 13% in 2010 compared to 2009. As a percentage of net sales, total operating expenses increased to 12.1% in 2010 compared to 6.2% in 2009.
For the year ended December 31, 2010, we sustained an operating loss from continuing operations of $4.0 million, compared to operating income of $0.9 million for the year ended December 31, 2009. The loss was the result of the significant decrease in sales and gross profit, which was only partially offset by a decrease in operating expenses.
Interest Expense and Other Income
During the year ended December 31, 2010, borrowing under our bank revolving line of credit was greatly reduced compared to 2009, and we had no borrowings after June 30, 2010. The line of credit was terminated on September 22, 2010. As a consequence, interest expense in 2010 amounted to $23,000 compared to $342,000 in 2009.
Income (Loss) from Continuing Operations
For the year ended December 31, 2010, we sustained a loss from continuing operations of $3.6 million compared to income of $484,000 in 2009. The 2010 loss from continuing operations, which benefited from a tax refund of $423,000 from the carry back of net operating losses in 2007 and 2008 to prior years, was primarily due to the significant decrease in sales and gross profit during the year as discussed above.
Income (Loss) from Discontinued Operations
During the second quarter of 2008, we assessed opportunities in the United States and Mexico and decided to implement actions necessary to close sales operations in both of those countries, which we substantially completed in the second half of 2009, although we generated $44,000 in income from discontinued operations during 2010 from the salvage sale of remaining inventories. We are continuing efforts to obtain a refund of the VAT taxes prepaid in Mexico in connection with our discontinued operations and expect to continue to record adjustments and expenses through discontinued operations as necessary until that process is completed.
Net Loss
For the year ended December 31, 2010, our net loss was $3.6 million, compared to a net loss of $1.5 million in 2009. The 2010 loss was the result of a significant reduction in sales and gross profit caused primarily by the Argentine tariff first instituted in late 2009 that negatively impacted our distribution business.
Year Ended December 31, 2009 Compared With Year Ended December 31, 2008
Net Sales
For the year ended December 31, 2009, our net sales of $231.3 million increased $18.1 million, or 8.5%, compared to net sales of $213.2 million in 2008. The average selling price of wireless handsets sold in 2009 increased 13.4% relative to 2008, due primarily to increased volume of higher-priced handsets, including some of ourverykool® and OEM products. The increase in average selling price was partially offset by a 1.2% decrease in overall wireless handset sales volume. The geographic mix of net sales shifted slightly in the twelve months ended December 31, 2009 as sales in South America were more than 91% of net sales, compared to 76% of net sales for 2008. Sales in Central America decreased to 9% of total net sales in the twelve months ended December 31, 2009, as compared to 24% for 2008. These regional shifts in net sales resulted from the factors discussed below.
In 2009 in South and Central America, we continued to expand our customer base and geographic presence by seeking new customers and additional business with existing customers for both our distribution business and ourverykool® line of products. In South America, net sales were $210.7 million for the twelve months ended December 31, 2009, a 30% increase from 2008. This increase was primarily due to increased sales in existing countries where we sell products, primarily Argentina. In Central America, net sales decreased 59% to $20.6
million for the twelve months ended December 31, 2009, which was primarily due to the continuing low demand during the year, which we believe was related to the worldwide and regional economic downturn. Despite the year-over-year decline, we saw sequential quarterly improvement in Central America in the second and third quarters of 2009. Net sales in the second quarter of 2009 increased 81% over the first quarter of 2009, and sales in the third quarter of 2009 increased 124% over the first quarter of 2009. A seasonal decrease in sales resulted in a smaller increase in the fourth quarter of 2009 of 58% over the first quarter of 2009.
Cost of Sales, Gross Profit and Gross Margin
For the Year Ended December 31, | Increase (Decrease) | |||||||||||
2009 | 2008 | |||||||||||
(Dollar amounts in thousands) | ||||||||||||
Net sales | $ | 231,310 | $ | 213,223 | 8.5 | % | ||||||
Cost of sales | 216,003 | 203,210 | 6.3 | % | ||||||||
Gross profit | $ | 15,307 | $ | 10,013 | 52.9 | % | ||||||
Gross margin | 6.6 | % | 4.7 | % | 40.4 | % |
For the year ended December 31, 2009, cost of sales was $216.0 million, or 93.4% of net sales, and gross margin was 6.6%, as compared with $203.2 million, or 95.3% of net sales, and 4.7% for gross margin for the year ended December 31, 2008. The increase in gross margin was due to a product mix shift, including increased sales of higher-margin products (including ourverykool®products), improved product sourcing for ourverykool®line of products and beneficial purchasing opportunities.
For the twelve months ended December 31, 2009, our gross profit increased 52.9% to $15.3 million from $10.0 million for 2008. This increase in gross profit was primarily the result of the increased net sales and of the factors which increased our gross margin as described above.
Operating Expenses and Operating Income (Loss) from Continuing Operations
For the year ended December 31, 2009, operating expenses increased 4.3%, to $14.5 million, from 2008. As a percentage of net sales from continuing operations, operating expenses decreased to 6.2% in the year ended December 31, 2009, compared with 6.5% for 2008. The total increase in operating expenses was related to the opening of a new market in South America and other support required in additional markets due to the global and regional economic downturn. It also included the write-off of intangible assets related to our Argentina business described in Item 8, Note 5 to the Consolidated Audited Financial Statements. Operating expenses decreased as a percentage of net sales as we took action to reduce fixed operational costs to match current market conditions.
For the year ended December 31, 2009, our operating income from continuing operations was $0.9 million, as compared with an operating loss of $3.9 million for the year ended December 31, 2008. As a percentage of net sales, operating income from continuing operations was 0.4% for the year ended December 31, 2009, compared to an operating loss of 1.8% for the year ended December 31, 2008.
Interest Expense and Other Income
During 2009 we incurred $342,000 of interest expense compared to $545,000 for 2008, due to lower interest rates. During 2008, we settled an outstanding claim against a former service provider in which we received a gross amount of $655,000, of which $87,000 represented reimbursement for legal fees, and also had a gain from an insurance settlement.
Income (Loss) from Continuing Operations
During the year ended December 31, 2009, our income from continuing operations was $484,000, compared to loss from continuing operations of $6.3 million for the year ended December 31, 2008. The net income from continuing operations was primarily due to the increased gross margin and gross profit discussed above. Included in the loss for 2008 is a non-cash valuation allowance of $3.2 million related to our deferred tax assets (see Item 8, Note 10 to our Consolidated Audited Financial Statements), in addition to the $2.5 million of inventory write-downs taken during the year, which enabled us to significantly reduce inventory levels and the associated carrying costs.
Loss from Discontinued Operations
For the year ended December 31, 2009, we incurred a loss of $2.0 million from discontinued operations, as compared to a loss of $4.1 million for the year ended December 31, 2008. The losses were the result of very low sales in the discontinued U.S. and Mexico operations during 2009 and 2008, as we wound down our business in these areas, as well as the other matters discussed in Item 8, Note 2 to the Consolidated Audited Financial Statements.
Net Loss
During the year ended December 31, 2009, our net loss was $1.5 million, compared to a net loss of $10.4 million in 2008. The loss was attributable to our loss from discontinued operations as we continued to wind down business in the United States and Mexico. The loss in the year ended December 31, 2008 was related to the general economic downturn and other factors such as inventory write-downs, marketing, engineering and tooling expenses, as well as the non-cash valuation allowance for deferred tax assets described above.
Financial Condition, Liquidity and Capital Resources
Historically, we have used cash from our sale of products, lines of credit (bank and vendor) and the sale of securities and exercise of stock options (from time to time) to provide the capital needed to support our business.
The primary drivers affecting our cash and liquidity are net income (losses) and working capital requirements. Capital equipment is not significant in our business, and at December 31, 2010 we did not have any material commitments for capital expenditures. Our largest working capital requirement is for accounts receivable, as we move more toward a build-to-order model to minimize our inventory levels. We typically bill customers on an open account basis subject to our standard credit quality and payment terms ranging between net 30 and net 60 days. If our net revenue increases, it is likely that our accounts receivable balance will also increase. Our accounts receivable could further increase if customers delay their payments or if we grant them extended payment terms.
As of December 31, 2010, we had $12.5 million of cash and cash equivalents and $20.9 million of working capital compared to $18.4 million of cash and cash equivalents and $24.4 million of working capital as of December 31, 2009. As of December 31, 2010 we had no bank debt, compared to $25.5 million of revolving bank debt as of December 31, 2009. These changes are further discussed below.
As of December 31, 2010, cash and cash equivalents consisted of cash on hand and in bank accounts.
Operating Activities
Net cash provided by operating activities for the year ended December 31, 2010 amounted to $20.0 million compared to $16.9 million of cash used in operations for the year ended December 31, 2009. Although the net loss of $3.6 million in 2010 was larger than the $1.5 million loss in 2009, cash flow was positive in 2010 as our business contracted significantly, compared to negative cash flow in 2009, when our revenues expanded.
In 2010, we generated $24.0 million of positive cash flow from a reduction in net working capital. This consisted primarily of a $30.0 million reduction in trade accounts receivable, reflecting the 68.6% drop in annual revenue for the year. Days sales outstanding in receivables at December 31, 2010 was 77 days, which reflects a significant portion of fourth quarter shipments made in the last month of the quarter, as well as several customers making payments shortly after year end. An additional $1.7 million was generated from a reduction of inventories, offset by a combined reduction in accounts payable and accrued expenses of $8.0 million.
In 2009, we invested $18.2 million in net working capital, consisting principally of a $19.3 million increase in accounts receivable, reflecting the 8.5% growth in annual sales for the year, the timing of sales in the fourth quarter and some slowness in payments at the end of the year by our customers. Days sales outstanding in receivables at December 31, 2009 was 66 days, compared with 56 days at December 31, 2008. This increase was due to several customers making payments shortly after year end. We also used approximately $3.0 million to pay down trade accounts payable and accrued expenses. These amounts were partially offset by cash inflow from a $3.2 million reduction in other accounts receivable and a $1.0 million reduction in inventories.
Investing Activities
Net cash used in investing activities was $325,000 and $154,000 for the years ended December 31, 2010 and 2009, respectively. Cash used in both years included investment in tooling and molds for our proprietaryverykool® products, and 2010 also included the purchase of computers and office equipment for our newly established design center in Beijing.
Financing Activities
Net cash used in financing activities in the year ended December 31, 2010 of $25.5 million represented the complete retirement of outstanding balances under our revolving credit facility. In the year ended December 31, 2009, net cash of $10.7 million was provided by financing activities. This consisted of $11.2 million of funding from our credit facility, partially offset by the purchase of treasury stock at a cost of $483,000.
We previously had a revolving credit facility with a bank pursuant to which we could borrow up to $45 million based on a borrowing base of our accounts receivable and inventories. The credit facility was secured by all our assets. On July 22, 2010, although we had no outstanding borrowings at the time and were in compliance with all of our covenants under the credit facility, we received a notice from the Lender of its election to terminate the credit facility on September 22, 2010, the end of the 60-day notice period. It is our belief that the principal reasons for the Lender’s actions were the decreased utilization of the facility by us, the high level of capital reserves required by the Lender to support the facility and our lack of profitability.
Based on our reported resultscurrent outlook for our business, we believe that our current cash resources and working capital are sufficient to fund our operations for the foreseeable future. However, our cash and working capital needs could change significantly if our business begins to grow rapidly. The lack of operations and financial condition.a line of credit could inhibit our growth. For this reason, we continue evaluating potential lines of credit.
Contractual Obligations and Off-Balance Sheet Arrangements
At December 31, 2010, we did not have any relationship with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest, or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we did not engage in trading activities involving non-exchange traded contracts.
Contractual Obligations
We lease corporate and administrative office facilities and equipment under non-cancelable operating leases. Certain of these leases contain renewal options. Rent expense under these leases was approximately $483,000, $534,000 $558,000, and $628,000$558,000 for the years ended December 31, 2009, 2008 and 2007, respectively. We also have a line of credit facility, which is shown on our balance sheet as a current liability and the balance was $25.5 million and $14.3 million at December 31,2010, 2009 and 2008, respectively.
Table of Contents At December 31, 2010, we had no amounts outstanding related to any debt obligations.
The following is a schedule of aggregate future minimum rental payments required by the above leases.leases (in thousands):
| | Payments due by period | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||
Revolving Line of Credit* | $ | 25,494,140 | $ | 25,494,140 | — | — | — | |||||||||
Operating Lease Obligations** | 948,122 | 430,586 | $ | 517,536 | — | — | ||||||||||
Total | $ | 26,442,262 | $ | 25,924,726 | $ | 517,536 | — | — | ||||||||
We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Payments due by period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Operating Lease Obligations | $ | 635 | $ | 405 | $ | 230 | — | — |
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Item 7A. 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"“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
We are exposed to market risk from changes in interest rates on our outstanding revolving line of credit. At December 31, 2009,2010, we had approximately $25.5 millionno outstanding which could be affected by changes in short-term interest rates. The interest rate for the revolving line of credit is the prime rate minus 0.50% (2.75% at March 19, 2010) or LIBOR plus 2.00% (2.26% at March 19, 2010). For every 1% increase in our bank's prime rate or LIBOR, our interest expense would increase by $255,000 assuming the same $25.5 million remained outstanding for the entire year.
The above sensitivity analysis for interest rate risk excludes accounts receivable, accounts payablebearing debt and accrued liabilities because of the short-term maturity of such instruments. The analysis does not consider the effect this movement may have on other variables, such as changes in sales volumes, which could be indirectly attributed to changes in interest rates. The actions that we would take in response to such a change are also not considered. If it were possible to quantify this impact, the results could well be different than the sensitivity effects shown above.no rate-sensitive investments.
Market Risk
Substantial portionsSubstantially all of our revenues, costs and expenses are transacted in markets outside the United States, however, all sales transactions and accounts receivable are denominated in U.S. dollars. Product costs, and the majority of our operating expenses are also denominated in U.S. dollar, but payroll and other costs of our Beijing development team are denominated in Chinese Yuan Renminbi. 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'countries’ political, economic or regulatory conditions and trade protection measures.measures, particularly China. Our market risk management includes an accounts receivable insurance policy for both our foreign sales, as well as any domestic and foreign 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 its results of operations and financial position. We do not believe that foreign currency fluctuations had a material impact on our financial results during 2010, 2009 2008 or 2007.2008.
Item 8. | Financial Statements and Supplementary Data. |
Item 8. Financial Statements and Supplementary Data.
The information required by this item is included below in "Item“Item 15 Exhibits, Financial Statements and Financial Statement Schedules"Schedules” and incorporated by reference herein.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
None.
Item 9A(T). | Controls and Procedures. |
Item 9A(T). Controls and Procedures.
(i) Disclosure Controls and Procedures
An evaluation was performed pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"“Exchange Act”) under the supervision and with the participation of our management, including the President and Chief Executive Officer and President and the Interim Chief Financial Officer, of the effectiveness of the Company'sCompany’s 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 Annual 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 SEC'sSEC’s 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 President and Chief Executive Officer and President and the Interim Chief Financial Officer concluded that the Company'sCompany’s disclosure controls and procedures were effective as of the end of the period covered by this Annual Report.
(ii) Internal Control Over Financial Reporting.
Management'sManagement’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our President and Chief Executive Officer and President and Interim Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20092010 as required by the Exchange Act Rule 13a-15(c). In making this assessment, we used the criteria set forth in the framework in Internal Control—IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—IntegratedControl-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.2010. This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management'sManagement’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporarylaw, rules of the Securities and Exchange Commissionregulations that permitspermit us to provide only management'smanagement’s report in this Annual Report.
(iii) Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during our fourth fiscal quarter ended December 31, 2009,2010, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Item 9B. | Other Information. |
None.
Item 9B. Other Information.
PART III
None.
Item 10. | Directors and Executive Officers and Corporate Governance. |
Item 10. Directors and Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20102011 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.
We have adopted a Code of Ethics that applies to our President and Chief Executive Officer, Chief Financial Officer principal accounting officer and controller and a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees. Copies of these codes are available on our website (www.infosonics.com) and are also available without charge upon written request directed to Investor Relations, InfoSonics Corporation, 4350 Executive Drive Suite #100, San Diego, California 92121.
If we make changes to our Code of Ethics or Code of Business Conduct and Ethics in any material respect or waive any provision of either such Code for certain management persons covered by either such Code, we expect to provide the public with appropriate notice of any such change or waiver by publishing a description of such event on our corporate website,www.infosonics.com, or by other appropriate means as required by applicable rules of the Securities and Exchange Commission.SEC.
Item 11. | Executive Compensation. |
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20102011 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20102011 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20102011 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.
Item 14. | Principal Accountant Fees and Services. |
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20102011 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.
(a) The following documents, included elsewhere in this annual report on Form 10-K (see F-pages herein regarding financial statement information) are incorporated herein by reference and filed as part of this report: (1) Financial Item 15. Item 15. Exhibits and Financial Statement Schedules.Statement Schedules.
(a)(1)The consolidated balance sheets as of December 31, 2010 and (a)2009, and the consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the years ended December 31, 2010, 2009 and 2008, together with notes thereto.
(2) Financial Statementsstatement schedule:
Schedule II – Valuation and Financial Statement SchedulesQualifying Accounts.
See the financial statements and supplementary data beginning on page F-1 and F-22, which are incorporated by reference.(3) Exhibit index
(a)(3)Exhibits.
See Exhibit Index, which is incorporated by reference.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 31, | By: | / S/ JOSEPH RAM | |||||||||||
Joseph Ram, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| ||
|
| |
March 31, | /
President and Chief Executive Officer and Director (Principal Executive Officer) | |
March 31, | /
(Principal Financial and Accounting Officer) | |
March 31, | / Randall P. Marx, Director | |
March 31, 2011 | /S/ ROBERT S. PICOW Robert S. Picow, Director | |
March 31, 2011 | /S/ KIRK A. Kirk A. Waldron, Director |
INFOSONICS CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
For the years ended December 31, 2010, 2009 2008 and 2007
2008
Table of Contents
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CONSOLIDATED FINANCIAL | |||||||||
F-3 | |||||||||
Consolidated | |||||||||
Consolidated Statements of | |||||||||
Notes to Consolidated Financial Statements | |||||||||
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
InfoSonics Corporation and subsidiaries
San Diego, California
We have audited the accompanying consolidated balance sheets of InfoSonics Corporation and subsidiaries as of December 31, 20092010 and 2008,2009, and the related consolidated statements of operations and comprehensive operations, stockholders'loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2009.2010. Our audits also included the financial statement schedule of InfoSonics Corporation and subsidiaries listed in Item 15(a). These financial statements and financial statement schedule are the responsibility of the InfoSonics Corporation and subsidiaries'Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of InfoSonics Corporation and subsidiaries as of December 31, 20092010 and 2008,2009, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2009,2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We were not engaged to examine management's assessment of the effectiveness of InfoSonics Corporation and subsidiaries internal control over financial reporting as of December 31, 2009 included in the accompanying Management's Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.
/s/ SINGERLEWAK LLP
Irvine, California
March 31, 20102011
INFOSONICS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
| December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | |||||||
ASSETS | |||||||||
Current assets | |||||||||
Cash and cash equivalents | $ | 18,418,066 | 24,714,753 | ||||||
Trade accounts receivable, net of allowance for doubtful accounts of $589,720 and $429,126 as of December 31, 2009 and 2008 respectively | 41,914,231 | 22,727,738 | |||||||
Accounts receivable other | 1,003,940 | 4,209,658 | |||||||
Inventory, net of reserves of $112,135 and $161,556 as of December 31, 2009 and 2008 respectively | 3,423,244 | 4,375,334 | |||||||
Prepaid assets | 368,959 | 244,103 | |||||||
Net assets of discontinued operations | 879,896 | 3,264,817 | |||||||
Total current assets | 66,008,336 | 59,536,403 | |||||||
Property and equipment, net | 315,669 | 498,079 | |||||||
Intangible assets (Note 5) | — | 504,000 | |||||||
Other assets | 97,768 | 115,900 | |||||||
Total assets | $ | 66,421,773 | $ | 60,654,382 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
Current liabilities | |||||||||
Accounts payable | $ | 9,618,865 | $ | 10,982,306 | |||||
Accrued expenses | 5,665,460 | 7,304,090 | |||||||
Line of credit | 25,494,140 | 14,273,978 | |||||||
Income taxes payable | 91,096 | 24,100 | |||||||
Net liabilities of discontinued operations | 724,366 | 1,310,434 | |||||||
Total current liabilities | 41,593,927 | 33,894,908 | |||||||
Commitments and Contingencies (Note 8) | |||||||||
Stockholders' equity | |||||||||
Preferred stock, $0.001 par value 10,000,000 shares authorized: 0 shares issued and outstanding | — | — | |||||||
Common stock, $0.001 par value 40,000,000 shares authorized: 14,184,146 and 15,010,807 shares issued and 14,184,146 and 14,956,270 shares outstanding as of December 31, 2009 and 2008, respectively | 14,184 | 14,956 | |||||||
Treasury stock, at cost (0 shares at 2009 and 54,537 at 2008) | — | (16,900 | ) | ||||||
Additional paid-in capital | 31,727,090 | 31,666,434 | |||||||
Accumulated other comprehensive loss | (6,944 | ) | (25,211 | ) | |||||
Accumulated deficit | (6,906,484 | ) | (4,879,805 | ) | |||||
Total stockholders' equity | 24,827,846 | 26,759,474 | |||||||
Total liabilities and stockholders' equity | $ | 66,421,773 | $ | 60,654,382 | |||||
The accompanying
December 31, | ||||||||
�� | 2010 | 2009 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 12,484 | $ | 18,418 | ||||
Trade accounts receivable, net of allowance for doubtful accounts of $197 and $590 as of December 31, 2010 and 2009, respectively | 12,239 | 41,914 | ||||||
Other accounts receivable | 608 | 1,004 | ||||||
Inventory | 1,688 | 3,423 | ||||||
Prepaid assets | 596 | 369 | ||||||
Net assets of discontinued operations | 767 | 880 | ||||||
Total current assets | 28,382 | 66,008 | ||||||
Property and equipment, net | 294 | 316 | ||||||
Other assets | 68 | 98 | ||||||
Total assets | $ | 28,744 | $ | 66,422 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 4,196 | $ | 9,619 | ||||
Accrued expenses | 3,226 | 5,757 | ||||||
Line of credit | — | 25,494 | ||||||
Net liabilities of discontinued operations | 57 | 724 | ||||||
Total current liabilities | 7,479 | 41,594 | ||||||
Commitments and Contingencies (Note 8) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.001 par value, 10,000 shares authorized: no shares issued and outstanding | — | — | ||||||
Common stock, $0.001 par value, 40,000 shares authorized: 14,184 shares issued and outstanding | 14 | 14 | ||||||
Additional paid-in capital | 31,856 | 31,727 | ||||||
Accumulated other comprehensive loss | (131 | ) | (7 | ) | ||||
Accumulated deficit | (10,474 | ) | (6,906 | ) | ||||
Total stockholders’ equity | 21,265 | 24,828 | ||||||
Total liabilities and stockholders’ equity | $ | 28,744 | $ | 66,422 | ||||
Accompanying notes are an integral part of these financial statements.
INFOSONICS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
and Comprehensive Loss
(Amounts in thousands, except per share data)
| For the Year Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | ||||||||
Net sales | $ | 231,310,197 | $ | 213,222,973 | $ | 214,462,495 | |||||
Cost of sales | 216,003,371 | 203,210,148 | 202,803,136 | ||||||||
Gross profit | 15,306,826 | 10,012,825 | 11,659,359 | ||||||||
Operating expenses | 14,453,692 | 13,900,063 | 13,254,681 | ||||||||
Operating income (loss) from continuing operations | 853,134 | (3,887,238 | ) | (1,595,322 | ) | ||||||
Other income (expense) | |||||||||||
Other income | 7,575 | 582,804 | 2,080,552 | ||||||||
Interest income (expense), net | (342,468 | ) | (544,560 | ) | (901,106 | ) | |||||
Income (loss) from continuing operations before provision for income taxes | 518,241 | (3,848,994 | ) | (415,876 | ) | ||||||
Provision for (benefit from) income taxes | 34,500 | 2,459,659 | (1,101,022 | ) | |||||||
Income (loss) from continuing operations | 483,741 | (6,308,653 | ) | 685,146 | |||||||
Income (loss) from discontinued operations, net of tax (Note 10) | (2,011,252 | ) | (4,106,587 | ) | (2,299,803 | ) | |||||
Net income (loss) | $ | (1,527,511 | ) | $ | (10,415,240 | ) | $ | (1,614,657 | ) | ||
Basic earnings (loss) per share | |||||||||||
From continuing operations | $ | 0.03 | $ | (0.42 | ) | $ | 0.05 | ||||
From discontinued operations | $ | (0.14 | ) | $ | (0.28 | ) | $ | (0.16 | ) | ||
Net Income (loss) | $ | (0.11 | ) | $ | (0.70 | ) | $ | (0.11 | ) | ||
Diluted earnings (loss) per share | |||||||||||
From continuing operations | $ | 0.03 | $ | (0.42 | ) | $ | 0.05 | ||||
From discontinued operations | $ | (0.14 | ) | $ | (0.28 | ) | $ | (0.16 | ) | ||
Net Income (loss) | $ | (0.11 | ) | $ | (0.70 | ) | $ | (0.11 | ) | ||
Basic weighted-average number of shares outstanding | 14,458,096 | 14,884,133 | 14,458,394 | ||||||||
Diluted weighted-average number of shares outstanding | 14,576,789 | 14,884,133 | 14,458,394 |
The accompanying
For the Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net sales | $ | 72,530 | $ | 231,310 | $ | 213,223 | ||||||
Cost of sales | 67,734 | 216,003 | 203,210 | |||||||||
Gross profit | 4,796 | 15,307 | 10,013 | |||||||||
Operating expenses: | ||||||||||||
Selling, general and administrative | 7,828 | 14,406 | 13,900 | |||||||||
Research and development | 977 | 48 | — | |||||||||
8,805 | 14,454 | 13,900 | ||||||||||
Operating income (loss) from continuing operations | (4,009 | ) | 853 | (3,887 | ) | |||||||
Other income (expense): | ||||||||||||
Other income | 4 | 7 | 583 | |||||||||
Interest expense, net | (23 | ) | (342 | ) | (545 | ) | ||||||
Income (loss) from continuing operations before benefit (provision) for income taxes | (4,028 | ) | 518 | (3,849 | ) | |||||||
Benefit (provision) for income taxes | 416 | (34 | ) | (2,460 | ) | |||||||
Income (loss) from continuing operations | (3,612 | ) | 484 | (6,309 | ) | |||||||
Income (loss) from discontinued operations, net of tax (Note 2) | 44 | (2,011 | ) | (4,106 | ) | |||||||
Net loss | $ | (3,568 | ) | $ | (1,527 | ) | $ | (10,415 | ) | |||
Basic earnings (loss) per share: | ||||||||||||
Continuing operations | $ | (0.25 | ) | $ | 0.03 | $ | (0.42 | ) | ||||
Discontinued operations | — | (0.14 | ) | (0.28 | ) | |||||||
Net loss | $ | (0.25 | ) | $ | (0.11 | ) | $ | (0.70 | ) | |||
Diluted earnings (loss) per share: | ||||||||||||
Continuing operations | $ | (0.25 | ) | $ | 0.03 | $ | (0.42 | ) | ||||
Discontinued operations | — | (0.14 | ) | (0.28 | ) | |||||||
Net loss | $ | (0.25 | ) | $ | (0.11 | ) | $ | (0.70 | ) | |||
Basic weighted-average number of common shares outstanding | 14,184 | 14,458 | 14,884 | |||||||||
Diluted weighted-average number of common shares outstanding | 14,184 | 14,577 | 14,884 | |||||||||
Comprehensive Loss: | ||||||||||||
Net loss | $ | (3,568 | ) | $ | (1,527 | ) | $ | (10,415 | ) | |||
Foreign currency translation adjustments | 124 | 18 | 6 | |||||||||
Comprehensive loss | $ | (3,444 | ) | $ | (1,509 | ) | $ | (10,409 | ) | |||
Accompanying notes are an integral part of these financial statements.
INFOSONICS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Operations
Stockholders’ Equity
(Amounts in thousands)
| Fiscal Years Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | ||||||||
Net loss | $ | (1,527,511 | ) | $ | (10,415,240 | ) | $ | (1,614,657 | ) | ||
Other comprehensive income (loss): | |||||||||||
Foreign currency translation adjustments | 18,267 | 5,979 | (22,325 | ) | |||||||
Comprehensive loss | $ | (1,509,244 | ) | $ | (10,409,261 | ) | $ | (1,636,982 | ) | ||
The accompanying
Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||
Balance, December 31, 2007 | 14,647 | $ | 15 | $ | — | $ | 31,506 | $ | 5,535 | $ | (31 | ) | $ | 37,025 | ||||||||||||||
Exercise of stock options | 264 | — | — | 34 | — | — | 34 | |||||||||||||||||||||
Stock-based compensation expense | — | — | — | 93 | — | — | 93 | |||||||||||||||||||||
Common stock issuance | 100 | — | — | 33 | — | — | 33 | |||||||||||||||||||||
Treasury stock purchase | (55 | ) | — | (17 | ) | — | — | — | (17 | ) | ||||||||||||||||||
Foreign currency translation | — | — | — | — | — | 6 | 6 | |||||||||||||||||||||
Net loss | — | — | — | — | (10,415 | ) | — | (10,415 | ) | |||||||||||||||||||
Balance, December 31, 2008 | 14,956 | 15 | (17 | ) | 31,666 | (4,880 | ) | (25 | ) | 26,759 | ||||||||||||||||||
Stock-based compensation expense | — | — | — | 61 | — | — | 61 | |||||||||||||||||||||
Treasury stock purchase and retirement | (772 | ) | (1 | ) | 17 | — | (499 | ) | — | (483 | ) | |||||||||||||||||
Foreign currency translation | — | — | — | — | — | 18 | 18 | |||||||||||||||||||||
Net loss | — | — | — | — | (1,527 | ) | — | (1,527 | ) | |||||||||||||||||||
Balance, December 31, 2009 | 14,184 | 14 | — | 31,727 | (6,906 | ) | (7 | ) | 24,828 | |||||||||||||||||||
Stock-based compensation expense | — | — | — | 129 | — | — | 129 | |||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | (124 | ) | (124 | ) | |||||||||||||||||||
Net loss | — | — | — | — | (3,568 | ) | — | (3,568 | ) | |||||||||||||||||||
Balance, December 31, 2010 | 14,184 | $ | 14 | $ | — | $ | 31,856 | $ | (10,474 | ) | $ | (131 | ) | $ | 21,265 | |||||||||||||
Accompanying notes are an integral part of these financial statements.
INFOSONICS CORPORATION AND SUBSIDIARIESConsolidated Statements of Stockholders' Equity
| Common Stock | | | | Accumulated Other Comprehensive Loss | | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Treasury Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | | ||||||||||||||||||
| Shares | Amount | Total | |||||||||||||||||||
Balance, December 31, 2006 | 14,180,068 | 14,180 | — | 30,751,372 | 7,150,092 | (8,865 | ) | 37,906,779 | ||||||||||||||
Income tax benefit realized | — | — | — | 198,178 | — | — | 198,178 | |||||||||||||||
Exercise of stock options | 466,999 | 467 | — | 285,023 | — | — | 285,490 | |||||||||||||||
Stock-based compensation expense | — | — | — | 271,417 | — | — | 271,417 | |||||||||||||||
Foreign currency translation | — | — | — | — | — | (22,325 | ) | (22,325 | ) | |||||||||||||
Net Loss | — | — | — | — | (1,614,657 | ) | — | (1,614,657 | ) | |||||||||||||
Balance, December 31, 2007 | 14,647,067 | 14,647 | — | 31,505,990 | 5,535,435 | (31,190 | ) | 37,024,882 | ||||||||||||||
Exercise of stock options | 263,740 | 264 | — | 34,022 | — | — | 34,286 | |||||||||||||||
Stock-based compensation expense | — | — | — | 93,522 | — | — | 93,522 | |||||||||||||||
Common Stock issuance | 100,000 | 100 | — | 32,900 | — | — | 33,000 | |||||||||||||||
Treasury Stock | (54,537 | ) | (55 | ) | (16,900 | ) | — | — | — | (16,955 | ) | |||||||||||
Foreign currency translation | — | — | — | — | — | 5,979 | 5,979 | |||||||||||||||
Net Loss | — | — | — | — | (10,415,240 | ) | — | (10,415,240 | ) | |||||||||||||
Balance, December 31, 2008 | 14,956,270 | 14,956 | (16,900 | ) | 31,666,434 | (4,879,805 | ) | (25,211 | ) | 26,759,474 | ||||||||||||
Stock-based compensation expense | — | — | — | 60,655 | — | — | 60,655 | |||||||||||||||
Treasury Stock purchase and retirement | (772,124 | ) | (772 | ) | 16,900 | — | (499,168 | ) | — | (483,040 | ) | |||||||||||
Foreign currency translation | — | — | — | — | — | 18,267 | 18,267 | |||||||||||||||
Net Loss | — | — | — | — | (1,527,511 | ) | — | (1,527,511 | ) | |||||||||||||
Balance, December 31, 2009 | 14,184,146 | $ | 14,184 | — | $ | 31,727,089 | $ | (6,906,484 | ) | $ | (6,944 | ) | $ | 24,827,845 | ||||||||
The accompanying notes are an integral part of these financial statements.
INFOSONICS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
| For the Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | |||||||
Cash flows from operating activities | ||||||||||
Net loss | $ | (1,527,511 | ) | $ | (10,415,240 | ) | $ | (1,614,657 | ) | |
Adjustments to reconcile net loss from operations to net cash provided by (used in) operating activities | ||||||||||
Depreciation | 336,108 | 657,597 | 376,219 | |||||||
Loss on disposal of fixed assets | — | 459,318 | 59,312 | |||||||
Impairment of Intangible assets | 504,000 | — | — | |||||||
Provision for bad debt | 160,594 | (129,216 | ) | (121,210 | ) | |||||
Provision for obsolete inventory | (49,421 | ) | (418,882 | ) | 325,930 | |||||
Stock-based compensation expense | 60,655 | 126,522 | 271,417 | |||||||
(Increase) decrease in | ||||||||||
Trade accounts receivable | (19,347,087 | ) | 14,933,489 | (3,211,828 | ) | |||||
Accounts receivable other | 3,205,718 | (3,710,422 | ) | (341,388 | ) | |||||
Inventory | 1,001,511 | 9,523,409 | (10,333,221 | ) | ||||||
Prepaids | (124,859 | ) | 640,631 | (130,714 | ) | |||||
Other assets | 18,132 | (5,240 | ) | (28,537 | ) | |||||
Deferred tax asset current | — | 1,203,417 | (162,417 | ) | ||||||
Deferred tax asset non current | — | 1,401,671 | (1,437,671 | ) | ||||||
Increase (decrease) in | ||||||||||
Accounts payable | (1,363,442 | ) | (9,839,295 | ) | 5,012,406 | |||||
Accrued expenses | (1,638,630 | ) | 6,198,118 | (155,991 | ) | |||||
Income tax liabilities | 66,996 | (56,460 | ) | 63,460 | ||||||
Cash provided by (used in) continuing operations | (18,697,236 | ) | 10,569,417 | (11,428,890 | ) | |||||
Cash provided by discontinued operations, net | 1,798,854 | 6,264,003 | 2,185,284 | |||||||
Net cash provided by (used in) operating activities | (16,898,382 | ) | 16,833,420 | (9,243,606 | ) | |||||
Cash flows from investing activities | ||||||||||
Purchase of property and equipment | $ | (153,695 | ) | $ | (463,353 | ) | $ | (1,387,681 | ) | |
Sale of property and equipment | — | 19,002 | — | |||||||
Cash used in continuing operations | (153,695 | ) | (444,351 | ) | (1,387,681 | ) | ||||
Cash provided by discontinued operations | — | 132,259 | 14,618 | |||||||
Net cash used in investing activities | (153,695 | ) | (312,092 | ) | (1,373,063 | ) | ||||
Cash flows from financing activities | ||||||||||
Borrowings from line of credit | 263,893,398 | 244,112,726 | 426,734,074 | |||||||
Payments on line of credit | (252,673,236 | ) | (256,593,849 | ) | (425,627,588 | ) | ||||
Cash paid for treasury stock | (483,040 | ) | (16,955 | ) | — | |||||
Cash received from stock, options and warrants | — | 34,286 | 483,668 | |||||||
Net cash provided by (used in) financing activities | 10,737,122 | (12,463,792 | ) | 1,590,154 | ||||||
Effect of exchange rate changes on cash | 18,268 | 5,063 | (22,325 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | (6,296,687 | ) | 4,062,599 | (9,048,840 | ) | |||||
Cash and cash equivalents, beginning of period | 24,714,753 | 20,652,154 | 29,700,994 | |||||||
Cash and cash equivalents, end of period | $ | 18,418,066 | $ | 24,714,753 | $ | 20,652,154 | ||||
Cash paid for interest | 342,476 | 581,313 | 899,844 | |||||||
Cash paid for income taxes | — | 8,822 | — |
For the Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (3,568 | ) | $ | (1,527 | ) | $ | (10,415 | ) | |||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||
Depreciation | 281 | 336 | 657 | |||||||||
Loss on disposal of fixed assets | 66 | — | 459 | |||||||||
Impairment of intangible assets | — | 504 | — | |||||||||
Provision for (recovery of) bad debts | (393 | ) | 160 | (129 | ) | |||||||
Provision for obsolete inventory | (12 | ) | (49 | ) | (419 | ) | ||||||
Stock-based compensation | 129 | 61 | 126 | |||||||||
(Increase) decrease in: | ||||||||||||
Trade accounts receivable | 30,068 | (19,347 | ) | 14,933 | ||||||||
Other accounts receivable | 396 | 3,206 | (3,710 | ) | ||||||||
Inventory | 1,747 | 1,001 | 9,523 | |||||||||
Prepaids | (227 | ) | (125 | ) | 641 | |||||||
Other assets | 30 | 18 | (5 | ) | ||||||||
Deferred tax asset, current | — | — | 1,203 | |||||||||
Deferred tax asset, non current | — | — | 1,402 | |||||||||
Increase (decrease) in: | ||||||||||||
Accounts payable | (5,423 | ) | (1,363 | ) | (9,839 | ) | ||||||
Accrued expenses | (2,531 | ) | (1,572 | ) | 6,142 | |||||||
Cash provided by (used in) continuing operations | 20,563 | (18,697 | ) | 10,569 | ||||||||
Cash provided by (used in) discontinued operations, net | (554 | ) | 1,799 | 6,264 | ||||||||
Net cash provided by (used in) operating activities | 20,009 | (16,898 | ) | 16,833 | ||||||||
Cash flows from investing activities: | ||||||||||||
Purchase of property and equipment | (325 | ) | (154 | ) | (463 | ) | ||||||
Sale of property and equipment | — | — | 19 | |||||||||
Cash used in continuing operations | (325 | ) | (154 | ) | (444 | ) | ||||||
Cash provided by discontinued operations | — | — | 132 | |||||||||
Net cash used in investing activities | (325 | ) | (154 | ) | (312 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Borrowing (payments) on revolving line of credit | (25,494 | ) | 11,220 | (12,480 | ) | |||||||
Cash paid for treasury stock | — | (483 | ) | (17 | ) | |||||||
Cash received from exercise of options and warrants | — | — | 34 | |||||||||
Net cash provided by (used in) financing activities | (25,494 | ) | 10,737 | (12,463 | ) | |||||||
Effect of exchange rate changes on cash | (124 | ) | 18 | 5 | ||||||||
Net increase (decrease) in cash and cash equivalents | (5,934 | ) | (6,297 | ) | 4,063 | |||||||
Cash and cash equivalents, beginning of period | 18,418 | 24,715 | 20,652 | |||||||||
Cash and cash equivalents, end of period | $ | 12,484 | $ | 18,418 | $ | 24,715 | ||||||
Cash paid for interest | $ | 23 | $ | 342 | $ | 581 | ||||||
Cash paid for income taxes | — | — | 9 |
Non Cash Supplemental disclosures:
During the year ended December 31, 2009, the Company retired 826,661827 shares of its treasury stock. The retirement reduced treasury stock and increased the accumulated deficit by $499,168.$499.
The accompanying notes are an integral part of these financial statements.
NOTE 1—ORGANIZATION AND LINE OF BUSINESS
InfoSonics Corporation ("InfoSonics"(“InfoSonics”) was incorporated in February 1994 in the state of California.California and reincorporated in September 2003 in the state of Maryland. InfoSonics and its subsidiaries, Axcess Mobile, LLC ("(“Axcess Mobile"Mobile”), InfoSonics Latin America, Inc, InfoSonics de Mexico S.A. de C.V., InfoSonics de Guatemala S.A., InfoSonics El Salvador S.A. de C.V., InfoSonics S.A., InfoSonics Colombia S.A., verykool USA, Inc., InfoSonics de Panama, and Verykoolverykool Hong Kong Limited, and verykool Wireless Technology Limited (collectively, the "Company"“Company”), develop, manufacture and sell wireless telecommunication products and accessories to wireless network operators, carriers, distributors, retailers and dealer agents. The Company's principalCompany markets are Centralits products throughout Latin America and South America. In September 2003, the Company reincorporatedhas recently entered markets in the state of Maryland under the name InfoSonics Corporation.Asia Pacific.
NOTE 2—DISCONTINUED OPERATIONS
During the quarter ended June 30, 2008, the Company assessed opportunitiesits business in the United States and Mexico and began to implement actions necessary to close sales operations in both of those countries, which actions continued in the second half of 2008. These two areas accounted for less than 1% of the Company's net sales in 2008, as compared to 12% of net sales for 2007.Mexico. Due to the changing environment and consolidation in the United States of the smaller regional wirelesscellular carriers (one of the Company’s then target markets) into larger national carriers, along with the Company’s inability to penetrate the Mexico market due to challenges of openingfostering sales relations with the wirelessdominant cellular carriers in Mexico, the Company'sthere, management determined that it was necessary to take decisive actions to mitigate further losses. The Company implemented actions necessary to close operations related to sales operations in both of those countries, which actions were substantially completed by the end of 2009. The results of the discontinued operations are as follows:follows (in thousands):
| Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | |||||||
Net Sales | $ | 491,514 | $ | 869,804 | $ | 30,224,232 | ||||
Gross Loss | (1,372,248 | ) | (2,358,218 | ) | (150,677 | ) | ||||
Operating Loss | (2,011,252 | ) | (4,628,207 | ) | (2,675,161 | ) | ||||
Capital Expenditures | — | — | 9,519 | |||||||
Depreciation and Amortization | — | 26,529 | 32,303 |
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net sales | $ | 64 | $ | 492 | $ | 870 | ||||||
Gross profit (loss) | 64 | (1,372 | ) | (2,358 | ) | |||||||
Operating income (loss) | 1 | (2,008 | ) | (4,628 | ) | |||||||
Net income (loss) | 44 | (2,011 | ) | (4,106 | ) | |||||||
Depreciation and amortization | — | — | 27 |
The operating loss from discontinued operations for 2009 included expenses associated with an arbitration proceeding. In December 2009, the Company became subject to a final arbitral award following completion of an arbitration proceeding held in October 2009 in Mexico City, Mexico, in October 2009 before the International Court of Arbitration of the International Chamber of Commerce. The arbitration arose from a payment dispute with a former supplier of wireless handsets to the Company. As a result of the arbitral award, the Company has beenwas required to pay the former supplier the disputed amount of $538,840, plus interest accrued from the date of the demand for the disputed payment, for a total of $662,669 in damages (in addition todamages. The Company also incurred legal costs associated with the arbitration).arbitration. The settlement amount was paid in full in the quarter ended March 31, 2010.
Liabilities of discontinued operations consist primarily of accounts payable. Assets of discontinued operations are as follows:
| December 31, 2009 | December 31, 2008 | |||||
---|---|---|---|---|---|---|---|
Cash | $ | 15,974 | $ | 8,641 | |||
Accounts Receivable | 13,228 | 1,050,758 | |||||
Inventory | — | 1,307,463 | |||||
Prepaid Taxes | 850,694 | 897,955 | |||||
Total | $ | 879,896 | $ | 3,264,817 | |||
NOTE 2—DISCONTINUED OPERATIONS (Continued)follows (in thousands):
December 31, 2010 | December 31, 2009 | |||||||
Cash | $ | 70 | $ | 16 | ||||
Accounts receivable | 28 | 13 | ||||||
Inventory | — | — | ||||||
Refundable VAT tax | 669 | 851 | ||||||
Total | $ | 767 | $ | 880 | ||||
As of December 31, 2009,2010, the plans fordiscontinuance of the discontinued operations were substantially completed; however,domestic and Mexican businesses was essentially complete. However, the Company is continuing its efforts 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.necessary until they are completely wound down.
The Company re-evaluated its discontinued operations as of December 31, 2010 in accordance with applicable FASB guidance due to the Company’s 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 Company’s control. As this matter is beyond the Company’s control, classification as discontinued operations is still deemed appropriate.
NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Consolidated Financial Statements include the accounts of InfoSonics and its wholly owned subsidiaries as listed in Note 1. All significant intercompany accounts and transactions are eliminated in consolidation.
Revenue Recognition and Allowance for Returns
Revenues for wireless handset and accessory sales are recognized uponwhen (i) shipment of the products to customers has occurred and title has passed, (ii) when collection of the outstanding receivables are probable and (iii) the final price of the product is determined, which occurs at the time of shipment. Sales are recorded net of discounts, rebates, cooperative marketing arrangements, (marketing, training and promotional funds), returns and allowances. Consideration is given onOn select sales, forthe Company may agree to cooperative arrangements wherein the Company agrees to fund future marketing programs related to market development, training and special promotionsthe products purchased by the customer. Such arrangements are usually agreed uponto in advance. The amount givenof the co-op allowance is generally in the form of a credit memo, which is appliedrecorded as a reduction of the sale. The same amount is recordedsale and added to accrued expenses as a current liability. ExpendituresSubsequent expenditures made pursuant to the agreed-upon activityarrangements reduce this liability. To the extent the Company incurs costs in excess of the established cooperative fund, the Company recognizes the amount as a selling or marketing expense. As part of the sales process, the Company may perform certain valued-addedvalue-added services such as programming, software loading and quality assurance testing. These value-added services are considered an ancillary component of the sales process and amounts attributable to these processes are included in the unit cost to the customer. Furthermore, these value-added services are related to services prior to the shipment of the products, and no value-added services are provided after delivery of the products. The Company recognizes as a reserve against the related receivables estimates for product returns based on historical experience and other judgmental factors, evaluates these estimates on an ongoing basis and adjusts its estimates each period based on actual product return activity. The Company recognizes freight costs billed to its customers in revenuenet sales and actual freight costs incurred as a component of cost of revenue.sales.
Comprehensive Income (Loss)
Comprehensive income (loss) as defined by U.S. generally accepted accounting principles (GAAP) includes all changes in equity (net assets) during a period from non-owner sources. The Company'sCompany’s comprehensive loss includes foreign currency translation adjustments, which are excluded from net income and are reported as a separate component of shareholdersstockholders’ equity as accumulated other comprehensive loss.
Cash and Cash Equivalents
For consolidated financial statement purposes, cash equivalents are defined as investments which have an original maturity of ninety days or less from the original date of purchase. Cash and cash equivalents consist of cash on hand and in banks. The Company maintains its cash and cash equivalents balances in a bank that from time to time exceed amounts insured by the Federal Deposit Insurance Corporation. As of December 31, 20092010 and 2008,2009, the Company maintained deposits totaling $18.4$12.5 million and $24.7$18.4 million, respectively, with certain
financial institutions in excess of federally insured
NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
amounts. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Trade Accounts Receivable
The Company provides for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. The Company writes off an account when it is considered to be uncollectible. The Company evaluates the collectability of its accounts receivable on an ongoing basis. In circumstances where the Company is aware of a specific customer'scustomer’s inability to meet its financial obligations, the Company records a specific allowance against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and the Company'sCompany’s historical experience. In certain circumstances, the Company has obtained accounts receivable insurance to mitigate its credit risk. As of December 31, 20092010 and 2008,2009, the allowance for doubtful accounts was $589,720$197,000 and $429,126,$590,000, respectively.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market and consists primarily of wireless phones and wireless phone accessories. The Company provides for the possible inability to sellwrites down its inventory by recording a reserve.when it is estimated to be excess or obsolete. As of December 31, 20092010 and 2008,2009, the inventory obsolescence reserve was $112,135net of write-downs of $100,000 and $161,556,$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 December 31, 20092010 and 2008,2009, the prepaid inventory balances included in prepaid assets were $119,145$317,000 and $170,$119,000, respectively.
Property and Equipment
Property and equipment are stated at cost. The Company provides for depreciation using the straight-line method over estimated useful lives of eighteen months to seven years. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains or losses on the sale of property and equipment are reflected in the statements of operations.
Fair Value of Financial Instruments
The Company'sCompany’s financial instruments include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued expenses and credit facilities.expenses. The book value of financial instruments is representative of their fair values. Cash and cash equivalents are the Company'sCompany’s only financial assets required to be measured at fair value and are measured using quoted prices for the identical assets in an identical market (level(Level 1 fair value hierarchy).
Accounting for the Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets'assets’ carrying amount. Management determined that there was no impairment of long-lived assets during the years ended December 31, 2008 and 2007.2010. However, as of December 31, 2009, the Company evaluated the intangible assets based on new information received regardingallocated to the impactmanagement and distribution agreements it purchased in connection with the 2005 acquisition of Primasel S.A. in Argentina. Management determined that a new tariff passed in Argentina in November 2009 affecting certain imported electronics, including wireless handsets, onwould significantly decrease the expected future business and cash flows from these agreements. As a result of
NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
this evaluation, the Company concluded that the valuesintangible assets of $504,000 pertaining to the management agreement and distribution agreementagreements were fully impaired, and that the associated $504,000 intangible assets should beamount was written down to zero.zero through a charge to operating expenses.
Stock-Based Compensation
The Company’s share-based compensation plans are described in Note 9. The Company measures compensation cost for all employee stock-based awards at fair value on the date of grant and recognizes compensation expense, net of estimated forfeitures, over the requisite service period, usually the vesting period. Equity instruments issued to non-employees for awards expectedgoods or services are accounted for at fair value and are marked to vest.market until service is complete or a performance commitment date is reached, whichever is earlier. The fair value of stock options wasis determined using the Black-Scholes valuation model. Such fair value is recognized as expense over the service period, net of estimated forfeitures.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company'sCompany’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management'smanagement’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Advertising Expense
The Company expenses all advertising costs, including direct response advertising, as they are incurred. Advertising expense for the years ended December 31, 2010, 2009 and 2008 was $1,156,000, $1,341,000 and 2007 was $1,341,168, $2,008,508 and $1,409,535,$2,009,000, respectively.
Income Taxes
The companyCompany recognizes deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company'sCompany’s financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company'sCompany’s assets and liabilities result in a deferred tax asset, the companyCompany performs an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized.
In addition, the Company recognizes the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company recognizes interest and penalties related to tax uncertainties as operating expenses.
Based on our evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.
The Company is subject to U.S. Federal income tax as well as to income tax of multiple state and foreign country jurisdictions. Federal income tax returns of the Company are subject to IRS examination for the 20062004 through 20082010 tax years. State income tax returns are subject to examination for a period of three to four years after filing.
NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (Loss) Per Share
The Company computes basic earnings (loss) per share by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similarly to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive. The Company'sCompany’s common share equivalents consist of stock options and warrants.
Common shares from exercise of certain options and warrants have been excluded from the computation of diluted earnings per share because their exercise prices are greater than the Company'sCompany’s weighted-average stock price for the period. For the years ended December 31, 2010, 2009 2008 and 2007,2008, the number of such shares excluded was 1,173,751, 2,339,308739,000, 1,174,000 and 2,382,2262,339,000, respectively. SinceIn addition, because their effect would have been anti-dilutive, common shares from exercise of in-the-money options for the yearyears ended December 31, 2010 and 2008 the number of shares69,000 and 221,000, respectively, have also been excluded from the computation of net loss per share was 221,336.share.
Geographic Reporting
The Company allocates revenues to geographic areas based on the location to which the product was shipped.
Estimates and Assumptions
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.estimates and assumptions.
Major Suppliers
The Company contracts with various suppliers. Although there are a limited number of suppliers that could supply the Company'sCompany’s inventory, management believes any shortfalls from existing suppliers might be absorbed from other suppliers on comparable terms; however, there are no assurances of such other suppliers providing products on acceptable terms. Furthermore, a change in suppliers could cause a delay in sales and adversely affect results.
During the year ended December 31, 2010, the Company purchased materials from one supplier, which accounted for 83% of total cost of sales. During the year ended December 31, 2009, the Company purchased materials from one supplier, which accounted for 90% of total cost of sales. During the year ended December 31, 2008, the Company purchased materials from two suppliers, which accounted for 76% and 15% of total cost of sales. During the year ended December 31, 2007, the Company purchased materials from three suppliers, which accounted for 55%, 17% and 11% of total cost of sales.
Concentrations of RevenuesCredit Risk, Customers and Credit RiskSuppliers
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and accounts receivable. We maintain our cash and cash equivalents with various high-credit-quality financial institutions located primarily in the United States. Currently the Company’s cash balances are kept primarily in demand accounts at these banks, but the Company may periodically invest excess cash in certificates of deposit or money market accounts in order to maintain safety and liquidity. The Company’s investment strategy generally results in lower yields on investments but reduces the risk to principal in the short term prior to these funds being used in its business. The Company has not experienced any material losses on financial instruments held at financial institutions.
The Company has historically sold its products primarily to wireless network carriers throughout Latin America, as well as to distributors and value added resellers, or VARs. More recently, the Company entered the Asia Pacific market with private label sales to original equipment manufacturers, or OEMs, in China and India. The Company provides credit to its customers in the normal course of business. During the year ended December 31, 2009, three customers accounted for 28%, 28%business and 18% of total product sales. These customers represented 45% 29% and 4% ofgenerally requires no
collateral. Credit risk with respect to accounts receivable respectively, at December 31, 2009. Duringis generally concentrated due to the year ended December 31, 2008, three customers accounted for 21%, 21% and 20%small number of total product sales. These three customers represented 22%, 23% and 17% of accounts receivable, respectively at December 31, 2008. The Company does not obtain collateral with which to secure its accounts receivable.entities comprising the Company’s overall customer base. The Company performs ongoing credit evaluations of its customers and maintains
NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
reserves for potential credit losses based upon the Company'sCompany’s historical experience related to credit losses and any unusual circumstances that may affect the ability of its customers to meet their obligations. The Company also maintains an insurance policy, which partially covers a significant portion of its customer accounts, and helps to minimize the potential risk of loss. During 2008, the Company renewed its insuranceThe policy which covers losses up to $50,000,000 and$25,000,000, has a zero deductible withand a 5% co-insurance on receivables. The Company’s bad debt expenses have not been significant.
Since a majority of the Company’s sales are made to wireless network carriers, there are a limited number of potential customers in each country in which the Company does business. Carriers often purchase products from a number of suppliers, and there can be significant movement in the carrier/supplier relationships from year to year. In each of the last three years, customers representing 10% or more of the Company’s total net sales amounted to three. During 2010, the top three customers accounted for 31%, 18% and 11% of total net sales, and represented 48%, 0% and 10% of accounts receivable respectively at December 31, 2010. During 2009, the top three customers accounted for 28%, 28% and 18% of total net sales, and represented 45%, 29% and 4% of accounts receivable respectively at December 31, 2009. During 2008, the top three customers accounted for 21%, 21% and 20% of total net sales, and represented 22%, 23% and 17% of accounts receivable respectively at December 31, 2008.
The Company’s agreement with Samsung to distribute its products to customers in Argentina requires the Company to purchase the products directly from Samsung. Because such distribution sales have historically represented a large percentage of the Company’s sales, there consequently is a significant supplier concentration in Samsung, although going forward these types of distribution sales in Argentina are expected to continue to diminish as the Company has refocused its business on itsverykool® products. For its branded business of verykool products, the Company contracts with a number of OEM suppliers, design houses and contract manufacturers. Although each may supply a somewhat differentiated product or service, management believes any shortfalls from existing suppliers can be absorbed by other suppliers on comparable terms. However, there are no assurances this can be achieved, and a change in suppliers could cause a delay in product shipments and sales and adversely affect results.
Recently Issued Accounting Pronouncements
Recently Adopted:
In September 2006, the Financial Accounting Standards Board ("FASB") issued guidance regarding the fair value of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, which was adopted in the first quarter of 2009. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
In December 2007, the FASB issued this guidance to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a noncontrolling interest, sometimes called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. This guidance requires, among other items, that a noncontrolling interest be included in the consolidated statement of financial position within equity separate from the parent's equity; consolidated net income to be reported at amounts inclusive of both the parent's and noncontrolling interest's shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated statement of income; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. This guidance became effective for the Company on January 1, 2009 and its adoption did not have a material impact to our consolidated financial statements.
In March 2008, the FASB issued guidance requiring additional disclosures about objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for under existing guidance, and how the derivative instruments and related hedged items affect our financial statements. This guidance also requires disclosures about credit risk-related contingent features in derivative agreements. The adoption of this guidance did not have a material impact to our consolidated financial statements as the Company does not have derivative instruments for purposes of hedging activities.
In May 2008, the FASB issued guidance that applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative. Under this guidance, companies are required to separately account for the liability and equity components of convertible debt by first determining the carrying amount of the liability component by measuring the fair value of a similar liability that does not have an associated equity component and then determining the carrying amount of the equity component embedded in the instrument by deducting the fair value of the liability component from the initial proceeds ascribed to the convertible debt instrument as a whole. The carrying amount of the equity component will then be amortized over the expected life of the debt to interest expense. The Company adopted this during the first quarter of 2009, which did not have a material impact to the consolidated financial statements as the Company does not have convertible notes outstanding which can be converted in whole or in part, to cash.
NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 2007, the FASB issued guidance requiring that the purchase method be used for all business combinations and for an acquirer to be identified for each business combination. This standard defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control instead of the date that the consideration is transferred. The guidance requires an acquirer in a business combination, including business combinations achieved in states (step acquisition), to recognize the assets acquired, liabilities assumed, and any noncontrolling interest in the acquire at the acquisition date, measured at their fair values of that date, with limited exceptions. It also requires the recognition of assets acquired and liabilities assumed arising from certain contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. This guidance became effective for the Company on January 1, 2009 and did not have a material impact to our consolidated financial statements as the Company did not make any acquisitions in 2009.
On June 30, 2009, we adopted FASB guidance that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, the guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
Effective January 1, 2009, we adopted FASB guidance that requires (i) an acquirer to recognize at fair value, at the acquisition date, an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period otherwise the asset or liability should be recognized at the acquisition date if certain defined criteria are met; (ii) contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination should be recognized initially at fair value; (iii) subsequent measurements of assets and liabilities arising from contingencies should be based on a systematic and rational method depending on their nature and contingent consideration arrangements; and (iv) disclosures of the amounts and measurement basis of such assets and liabilities and the nature of the contingencies. The provisions of this guidance did not have a material impact to our consolidated financial statements, as the Company did not make any acquisitions in 2009.
On January 1, 2009, we2010, the Company adopted FASB guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset in order to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under GAAP. The adoption of this guidance did not have a material impact to our consolidated financial statements.
In June 2009, the FASBchanges issued guidance that establishes the FASB Accounting Standards CodificationTM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entitiesaccounting for variable-interest entities. These changes require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This guidance became effective for us for the period ended September 30, 2009 and did not have a material impact on the consolidated financial statements.
NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ISSUED (Not adopted yet):
In June 2009, the FASB issued guidancevariable-interest entity; to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets, the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. This guidance is effective for fiscal years and interim periods beginning after November 15, 2009. Management does not expect the adoption of this guidance to have a material impact on the Company's financial statements.
In June 2009, the FASB issued guidance that relates torequire ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This guidance addsvariable-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 interestvariable-interest entity when any changes in facts and circumstances occur such that the 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 entity'sentity’s economic performance.performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s 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 Company’s 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 FASB’s 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 effective asrequired 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 beginningretained 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 each reporting perioda subsidiary that begins after November 15, 2009. Management does not expectresult in a change of control of the subsidiary as an equity transaction. The adoption of these changes had no impact on the Company’s 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 Company’s 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, the adoption of these changes had no impact on the Company’s condensed consolidated financial statements.
ISSUED (Not adopted yet):
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU No. 2009-13”) and Accounting Standards Update No. 2009-14, “Certain Revenue Arrangements That Include Software Elements” (“ASU No. 2009-14”). ASU No. 2009-13 amends guidance included within ASC Topic 605-25 to require an entity to use an estimated selling price when vendor specific objective evidence or acceptable third party evidence does not exist for any products or services included in a multiple element arrangement. The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation. ASU No. 2009-13 also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying this guidance. ASU No. 2009-14 amends guidance included within ASC Topic 985-605 to exclude tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. Entities that sell joint hardware and software products that meet this scope exception will be required to follow the guidance of ASU No. 2009-13. ASU No. 2009-13 and ASU No. 2009-14 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or January 1, 2011 for the Company. While the Company is continuing its evaluation of the impact of adoption of ASU No. 2009-13 and ASU No. 2009-14, management does not currently believe adoption will have a material impact on the Company'sCompany’s consolidated financial statements.
NOTE 4—PROPERTY AND EQUIPMENT
Property and equipment are primarily located in the United States and China and consisted of the following as of the dates presented:presented (in thousands):
| December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2009 | 2008 | |||||
Machinery and Equipment | $ | 471,953 | $ | 469,411 | |||
Tooling, Molds and Software | 481,984 | 330,828 | |||||
Furniture and Fixtures | 106,314 | 106,314 | |||||
1,060,251 | 906,553 | ||||||
Less Accumulated Depreciation | 744,582 | 408,474 | |||||
Total | $ | 315,669 | $ | 498,079 | |||
December 31, | ||||||||
2010 | 2009 | |||||||
Machinery and Equipment | $ | 466 | $ | 472 | ||||
Tooling, Molds and Software | 674 | 482 | ||||||
Furniture and Fixtures | 92 | 106 | ||||||
1,232 | 1,060 | |||||||
Less Accumulated Depreciation | 938 | 744 | ||||||
Total | $ | 294 | $ | 316 | ||||
Depreciation expense was $336,108, $657,597$281,000, $336,000 and $376,219$657,000 for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively.
NOTE 5—INTANGIBLE ASSETS
As a result of the purchase of Primasel S.A. in Argentina in 2005, the Company recorded intangible assets of $504,000. These assets consisted of a management agreement and a distribution agreement with values of $378,000 and $126,000, respectively, at December 31, 2008. As of December 31, 2009, the Company evaluated the intangible assets based on new information received regarding the impact of a new tariff passed in Argentina in November 2009 affecting certain imported electronics, including wireless handsets, onand determined that the tariff would significantly decrease expected future cash flows from these agreements. As a result of this evaluation, the Company concluded that the values of the management agreement and distribution agreement were fully impaired and that the associated $504,000 of intangible assets should bewas written down to zero.
Table of Contentszero through a charge to operating expenses.
NOTE 6—LINE OF CREDIT
On April 30, 2008, the company entered into a Loan, Security and Bulk Purchase Agreement and a Letter of Credit and Security Agreement (collectively, the "Agreement"“Agreement”) with Wells Fargo Century, Inc. (the "Lender"Trade Capital LLC (“Lender”), replacing the then-existing asset-based secured credit facility with Wells Fargo HSBC Trade Bank, N.A. Pursuantpursuant to the Agreement,which the Lender maycould advance up to $45,000,000$45 million to usthe Company based on the expected collections of eligible receivables as well as value of ourthe Company’s eligible inventory determined in accordance with the Agreement. The outstanding advances may not exceed the lesser of (i) $45,000,000 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 ($29.1 million at December 31, 2009). At December 31, 2009, the majority of our debt was based on foreign accounts receivable, a majority of which is insured. This credit facility has an initial two-year term ending April 2010, and iswas secured by all of our assets. The terms automatically roll over annually; however, the terms and conditionsassets of such credit facility (including, without limitation, rates, eligibility, borrowing base and maximum line) may change.the Company. The interest rate for each borrowing under the credit facility is,was, at ourthe option of the Company, either the Wells Fargo Bank N.A. prime rate minus 0.50% (3.25% less 0.50% at December 31, 2009) or the LIBOR rate plus 2.00% (0.25% plus 2.00% at December 31, 2009). AsAlthough the Agreement contained a provision for automatic annual renewals, Section 6.2 of December 31, 2009, we werethe Agreement provided that it could be terminated for convenience by either party with 60 days’ written notice. Despite the Company being in compliance with all of its covenants under the covenantsAgreement, on July 22, 2010, the Company received a notice from the Lender of its election to terminate the Agreement on September 22, 2010, the end of the credit facility.
60-day notice period. It is the Company’s belief that the principal reasons for the Lender’s 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 Company’s lack of profitability. The Company believes that its current cash resources and working capital are sufficient to fund its operations for the foreseeable future. At December 31, 2009, and December 31, 2008, amountsthe amount drawn against the Lender line of credit werewas $25.5 million and $14.3 million, respectively. Credit lines have been an important partrepresenting 88% of operating and growing our business, and market changes affecting accounts receivable have, and will in the future, diminish or increase the borrowing base of available funds under our current credit line. At December 31, 2009 and December 31, 2008, advances were at 88% and 66% of thethen available borrowing base. At February 28, 2010, ourThe line of credit balance was zero.completely retired and there were no outstanding balances as of December 31, 2010.
NOTE 7—ACCRUED EXPENSES
As of December 31, 20092010 and 2008,2009, accrued expenses consisted of the following:following (in thousands):
| December 31, 2009 | December 31, 2008 | |||||
---|---|---|---|---|---|---|---|
Accrued product costs | $ | 1,476,677 | $ | 3,070,058 | |||
Accrued legal settlement* | — | 4,150,000 | |||||
Other accruals | 4,188,783 | 84,032 | |||||
Total | $ | 5,665,460 | $ | 7,304,090 | |||
December 31, 2010 | December 31, 2009 | |||||||
Accrued product costs | $ | 1,159 | $ | 1,477 | ||||
Income taxes payable | 96 | 91 | ||||||
Other accruals | 1,971 | 4,189 | ||||||
Total | $ | 3,226 | $ | 5,757 | ||||
NOTE 8—COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its corporate and administrative offices, R&D office, warehouse and distribution centers, and certain equipment under operating lease agreements, which expire through September 2012. Certain of the agreements contain renewal options. Future minimum payments under these operating lease agreements at December 31, 20092010 were as follows:follows (in thousands):
Year Ending December 31, | Payments | Payments | ||||||
---|---|---|---|---|---|---|---|---|
2010 | 430,586 | |||||||
2011 | 311,544 | $ | 405 | |||||
2012 | 205,992 | 230 | ||||||
Total | $ | 948,122 | $ | 635 | ||||
The Company has subleased a portion of its Miami facility, which lease and sublease expire on March 31, 2011. The minimum sublease income due in 2011 from the sublease is $20,000. Rent expense was $533,762, $557,689$483,000, $534,000 and $628,354$558,000 for the years ended December 31, 2010, 2009 and 2008, and 2007, respectively.
In September 2007, we entered into an early termination of our then-existing space for our corporate and administrative office facilities, receiving net proceeds of $2,080,552. Also in September 2007, the Company entered into a building lease agreement for its new corporate and administrative office facilities. The new lease agreement is for a period of 60 months and requires monthly rental payments of $20,361. In addition, commencing on each anniversary date of the lease, the monthly rent will increase by 3%.
Litigation
The Company may become involved in certain legal proceedings and claims which arise in the normal course of business. As of December 31, 2009,2010, except as disclosed below, the Company did not have any material litigation outstanding, and management does not currently expect any matters to have a material impact on the Company'sCompany’s liquidity or the financial statements taken as a whole.
Securities Class Actions
InfoSonics has settled the securities class action against the Company and certain of its officers and directors, captionedIn Re: InfoSonics Corporation Securities Litigation, Lead Case No. 06 CV 1231, filed in the United States District Court for the Southern District of California. Plaintiffs' third amended consolidated complaint had alleged violations of Section 10(b) of the Exchange Act and associated Rule 10b-5, Section 20(a) and Section 20A in connection with the announcement of the Company's restatement of first quarter 2006 earnings and in connection with allegedly false and/or misleading statements related to the Company's distribution of the VK Mobile phone. On October 17, 2008, the parties entered a Stipulation and Agreement of Settlement (the "Securities Settlement") of the case, which provides for, among other things, a dismissal with prejudice of the lawsuit, releases of the defendants, and a payment by the Company or its insurer of $3.8 million to plaintiffs (inclusive of any plaintiffs' attorneys fees, to be determined by the Court). The Securities Settlement further provides that defendants deny any liability or responsibility for the claims made and make no admission of any wrongdoing. On February 10, 2009, the Company's insurer funded the full settlement payment. On May 5, 2009, the Court entered an order finally approving the Securities Settlement as fair and reasonable, and directing the clerk to enter final judgment and dismissing the action with prejudice.
NOTE 8—COMMITMENTS AND CONTINGENCIES (Continued)
Derivative Action
InfoSonics has settled the derivative action purportedly on behalf of the Company against certain of its officers and directors, and the Company as a nominal defendant, captionedIn Re InfoSonics Corporation Derivative Litigation, Lead Case No. 06 CV 1336, filed in the United States District Court for the Southern District of California. Plaintiffs' consolidated complaint had alleged claims for violations of Section 14(a) of the Exchange Act, Sections 25402 and 25403 of the California Corporations Code, disgorgement under the Sarbanes-Oxley Act of 2002, breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, rescission, a constructive trust, and an accounting, in connection with the Company's restatement of first quarter 2006 earnings and in connection with allegations of wrongdoing with respect to granting, exercising, accounting and reporting of the stock options that the Company granted in December 2005. On September 4, 2007, the Court granted defendants' motion to dismiss for failure to make a demand on the board, and also granted with prejudice the motion to dismiss the Sarbanes-Oxley claim. On October 17, 2008, the parties entered into a Stipulation and Agreement of Settlement (the "Derivative Settlement"), which provides for, among other things, a dismissal with prejudice of the lawsuit, releases of the defendants, corporate governance changes and a payment by the Company or its insurer of plaintiffs' attorneys fees to be ordered by the Court up to a maximum of $350,000. The Derivative Settlement further provides that defendants deny any liability or responsibility for the claims made and make no admission of any wrongdoing. The Company's insurer funded the full settlement payment. On June 3, 2009, the Court approved the settlement and entered the final judgment and order of dismissal with prejudice of the case.
LG 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 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 allegesalleged 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 seekingsought in excess of $5 million in damages. On July 31, 2009, the defendants removed the case to federal court in San Diego. TheOn November 1, 2010, the action was dismissed with prejudice after a settlement agreement was reached in mediation resulting in a payment to the Company recently filed an amended complaint.of $500,000, including payment of a $400,000 receivable that was owed to the Company by the defendants.
Vendors
The Company has entered into written agreements with some of its supplier-manufacturers. None of these agreements require minimum amounts of product to be purchased. Some of the agreements contain automatic
renewal clauses and the Company believes that it will be able to renew these contracts with similar terms upon their individual expiration.expirations.
Employee Agreements and Compensation
During 2006, theThe Company providedprovides a 401(k) retirement savings plan for all full-time employees. Employees are eligible after 90 days of service with the Company. TheAlthough the Company providesprovided an employer matching contribution to all employees enrolled in the plan butduring 2008, this contribution has been suspended for 2009 and 2010.since January 1, 2009. For the yearsyear ended December 31, 2008, and 2007, the Company provided $63,000
NOTE 8—COMMITMENTS AND CONTINGENCIES (Continued)
and $82,000, respectively, for the employees in the plan.matching contribution was $63,000. All matching contributions are fully vested by the employee upon payment by the Company.
The Company entered into an employment agreement with its President and Chief Executive Officer in April 2008 that expires in April 2012. The employment agreement provides for an annual salary of $325,000. The agreement also provides that the Company may terminate the agreement without cause upon 30 days written notice if termination is without cause.notice. The Company'sCompany’s only obligation would be to pay its President and Chief Executive Officer the greater of a)(a) 18 months'months’ salary or b)(b) one-half of the salary payable over the remaining term of the agreement.
NOTE 9—STOCKHOLDERS'STOCKHOLDERS’ EQUITY
Preferred Stock
The Company has authorized the issuance of 10,000,000 shares of preferred stock, which may be issued from time to time in one or more series by the Board of Directors. In addition, the Board is authorized to set the rights, preferences, privileges and restrictions of these shares, including dividends rights, conversion rights, voting rights and liquidation preferences. These shares may have rights senior to those of the Company'sCompany’s common stock holders. As of December 31, 20092010 and 2008,2009, the Company did not have any preferred shares outstanding.
Common Stock
During 2007, the Company issued shares related to the exercise of previously issued stock options. A total of 466,999 shares of common stock were issued for proceeds of $285,490, with a range of exercise prices on the options exercised of $0.13 to $2.25.
In October 2008, the Company issued 100,000 unregistered shares of common stock in exchange for a temporary change to a revenue sharing agreement. The Company recorded a corresponding expense related to the issuance of these shares for $33,000 as stock-based compensation in the accompanying Statementstatement of Operations.operations and comprehensive loss.
Treasury Stock
On December 15, 2008, the Company announced a share buyback program, authorizing up to $500,000 to be used for stock repurchases. During the twelve months ended December 31, 2009, we repurchased 772,124772,000 shares of our common stock at a total cost (including brokerage commissions) of $483,040$483,000 at an average price per share of $0.63. During December 2008, we repurchased 54,53755,000 shares of our common stock at a total cost (including brokerage commissions) of $16,955,$17,000, at an average price per share of $0.31. During the twelve months ended December 31, 2009, the Company retired 826,661827,000 shares of stock. The retirement reduced treasury stock and increased the accumulated deficit by $499,168.$499,000.
Stock Options and Warrants
In September 2003,The Company has three stock-based compensation plans: the Board of Directors approved the 2003 stock option plan (the "2003 Plan"). The 20032006 Equity Incentive Plan is intended to provide incentives to key employees, officers, and directors of the Company who provide significant services to the Company. In January 2005, the Board of Directors increased the number of shares available under(“2006 Plan”), the 2003 Stock Option Plan to 2,800,000 shares. Options granted may be either incentive options, non-qualified options or non-discretionary options. Incentive(“2003 Plan”) and non-qualified options will vest over a periodthe 1998 Stock Option Plan (“1998 Plan”). Each of time as determinedthe plans was approved by the BoardCompany’s stockholders. As of Directors for upDecember 31, 2010, options to 10 years frompurchase 378,000 shares, 12,000 shares and 400,000 shares were outstanding under the date2006 Plan, the 2003 Plan and the 1998 Plan, respectively, and a total of grant. Non-discretionary options may be granted only to
NOTE 9—STOCKHOLDERS' EQUITY (Continued)
non-employee directors, vest over a period of three years and expire five years after the date of grant. No970,000 shares remainare available for grant 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 2006 Plan as amended.
Inwas approved by stockholders in June 2006, the stockholders approved the 2006 equity incentive plan (the "2006 Plan"), with 1,000,000 shares of the Company'sCompany’s common stock authorized for issuance under the 2006 Plan.there under. An additional 348,208 shares of the Company'sCompany’s common stock were rolled into the 2006 Plan from the 2003 Plan. The 2006 Plan is intended to provide incentives to key employees, officers, directors and directors of the Companyconsultants who provide significant services to the Company. As of December 31, 2009 there were 934,000 shares available for grant under the 2006 Plan. The exercise price will beis determined by the Compensation Committee, but willmust be at least equal to the fair market value of the common stock on the date of grant of such option. The Compensation Committee also establishes the vesting schedule for each option granted and the term of each option, which cannot exceed ten10 years from the date of grant. In the event of termination, vested shares must be exercised within three months. The 2006 Plan also provides for 100% vesting of outstanding options upon a change of control of the Company.
OurThe Company’s stock options vest on an annual or a monthly basis. As of December 31, 2009, there was $119,707 of total unrecognized compensation expense related to the non-vested stock options. 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. That expense is expected to be recognizedOptions granted generally vest over the next weighted-average period of 3.25 years. Such amounts may change as a result of additional grants, forfeitures, modifications in assumptions and other factors. GAAP provides that incomethree-year period. 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 year ended December 31, 2009, we recorded an expense of $60,655 related to options granted to our non-employee directors. These options had been granted prior to January 1, 2006. Under current U.S. federal tax law, we would 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 which results in a deferred tax asset and a corresponding deferred tax benefit in the income statement.
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 2010, 2009 2008 and 2007:2008: risk-free interest raterates of 0.49%, 0.91% in 2009,and 1.47% in 2008 and 4.66% in 2007,, respectively, 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, issue dividends; and expected lives of 3 to 7 years based upon the historical life of the Company'sCompany’s options. For grants in 2010, 2009 2008 and 2007,2008, the expected volatility used ranged from 62%88% to 108%, based on the Company'sCompany’s historical stock price fluctuations for a period matching the expected life of the options.
NOTE 9—STOCKHOLDERS' EQUITY (Continued)
A summary of option activity under all of the above plans for the year ended December 31, 2010 is as follows (shares and aggregate intrinsic value in thousands):
Shares | Wtd. Avg. Exercise Price | Wtd. Avg. Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2009 | 1,282 | $ | 1.65 | |||||||||||||
Granted during fiscal year 2010 | 140 | $ | 0.68 | |||||||||||||
Exercised during fiscal year 2010 | — | $ | — | |||||||||||||
Forfeited during fiscal year 2010 | (632 | ) | $ | 2.31 | ||||||||||||
Outstanding at December 31, 2010 | 790 | $ | 0.96 | 3.07 years | $ | 48 | ||||||||||
Vested and expected to vest | 790 | $ | 0.96 | 3.07 years | $ | 48 | ||||||||||
Exercisable at December 31, 2010 | 543 | $ | 1.09 | 1.62 years | $ | 14 | ||||||||||
The aggregate intrinsic value in the stock option summary table above is based on our closing stock price of $0.77 per share as of December 31, 2009,2010, which value would have been realized by the optionees had all options been exercised on that date.
During the quarter ended June 30, 2010, the Company established a wholly owned subsidiary in Hong Kong to serve as the base for the Company’s sales and changesmarketing efforts of its proprietary line ofverykool® products in
Asia Pacific. It also established a wholly owned subsidiary of the Hong Kong entity in China for the purpose of designing and developingverykool® 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% additional equity interest to attract and retain employees as needed. The total exercise 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 December 31, 2010 of the warrant 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 yearsyear ended 2007, 2008 and 2009 are presented in the table below:December 31, 2010 was $81,000.
| Shares | Wtd. Avg. Exercise Price | Wtd. Avg. Remaining Contractual Life | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2006 | 3,117,324 | $ | 2.56 | 3.37 years | ||||||
Granted during fiscal year 2007 | 40,000 | $ | 3.79 | 5.19 years | ||||||
Exercised during fiscal year 2007 | 466,999 | $ | 0.84 | |||||||
Returned during fiscal year 2007 | 83,389 | $ | 11,09 | |||||||
Outstanding at December 31, 2007 | 2,606,936 | $ | 2.66 | 2.63 years | ||||||
Granted during fiscal year 2008 | 183,000 | $ | 1.04 | 5.19 years | ||||||
Exercised during fiscal year 2008 | 263,740 | $ | 0.13 | |||||||
Returned during fiscal year 2008 | 950,252 | $ | 5.05 | |||||||
Outstanding at December 31, 2008 | 1,575,944 | $ | 1.46 | 2.98 years | ||||||
Granted during fiscal year 2009 | 252,500 | $ | 0.51 | 5.19 years | ||||||
Exercised during fiscal year 2009 | 0 | $ | ||||||||
Returned during fiscal year 2009 | 546,000 | $ | 0.56 | |||||||
Outstanding at December 31, 2009 | 1,282,444 | $ | 1.65 | 3.25 years | ||||||
Vested and expected to vest | 1,282,444 | $ | 1.65 | 3.25 years | ||||||
Exercisable at December 31, 2009 | 1,027,159 | $ | 1.88 | 2.59 years | ||||||
A summary of the status of the Company'sCompany’s non-vested options at December 31, 2009,2010, and changes during the year then ended are presented below:below (shares in thousands):
| Shares | Weighted-average grant-date fair value | |||||
---|---|---|---|---|---|---|---|
Non-vested at December 31, 2008 | 146,660 | $ | 1.27 | ||||
Granted | 252,500 | $ | 0.51 | ||||
Vested | 41,375 | $ | 1.29 | ||||
Forfeited | 102,500 | $ | 0.77 | ||||
Non-vested at December 31, 2009 | 255,285 | $ | 0.72 | ||||
Shares | Weighted-average grant-date fair value | |||||||
Non-vested at December 31, 2009 | 248 | $ | 0.50 | |||||
Granted | 140 | $ | 0.58 | |||||
Vested | (79 | ) | $ | 0.52 | ||||
Forfeited | (62 | ) | $ | 0.45 | ||||
Non-vested at December 31, 2010 | 247 | $ | 0.55 | |||||
The weighted-average per share grant-date fair value of options granted during the year ended December 31,2010, 2009 was $0.51.and 2008 were $0.58, $0.51 and $1.04, respectively. The total intrinsic value of options grantedexercised during 2008 was $1,000, and the year ended December 31,total amount of cash generated from such exercises was $34,000. There were no option exercises in 2009 was $0.and 2010. The unrecognized stock-based compensation unrecognized expense for future periods as of December 31, 20092010 is $119,707 with$126,000, which is expected to be recognized over a weighted-average remaining vesting period of 3.25approximately 2.41 years.
Table Such amount may change as a result of Contents
NOTE 9—STOCKHOLDERS' EQUITY (Continued)
future grants, forfeitures, modifications in assumptions and other factors. The weighted-average remaining contractual life of the options outstanding at December 31, 2009 was 3.25 years. The weighted-averagetotal fair value per share of options grantedthat vested during 2010, 2009 and 2008 was $0.51, $1.04$41,000, $53,000 and $3.79$59,000, respectively.
The following table summarizes share-based compensation expense for the years ended December 31 2009, 2008 and 2007, respectively. The exercise prices of the options outstanding at December 31, 2009 ranged from $0.13 to $5.91, and information relating to these options is as follows:(in thousands):
Range of Exercise Prices | Stock Options Outstanding | Stock Options Exercisable | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price of Options Outstanding | Weighted- Average Exercise Price of Options Exercisable | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
$0.13 to $1.04 | 686,000 | 437,625 | 3.12 years | $ | 0.63 | $ | 0.78 | |||||||||
$1.65 to $2.25 | 294,000 | 294,000 | 2.43 years | $ | 2.06 | $ | 2.06 | |||||||||
$3.00 to $5.91 | 302,444 | 295,534 | 4.33 years | $ | 3.24 | $ | 3.06 | |||||||||
1,282,444 | 1,027,159 | 3.25 years | $ | 1.65 | $ | 1.88 | ||||||||||
Stock-based compensation included in the results of operations for the year ended December 31, 2009 is as follows:
2010 | 2009 | 2008 | ||||||||||
Selling, general and administrative: | ||||||||||||
Non-employee directors | $ | 6 | $ | 4 | $ | 14 | ||||||
Officers | 21 | 11 | — | |||||||||
Others | 21 | 46 | 112 | |||||||||
Total SG&A | 48 | 61 | 126 | |||||||||
Research and development | 81 | — | — | |||||||||
Total share-based compensation expense before taxes | 129 | 61 | 126 | |||||||||
Related deferred income tax benefits | — | — | — | |||||||||
Share-based compensation expense | $ | 129 | $ | 61 | $ | 126 | ||||||
| Year ended December 31, 2009 | |||
---|---|---|---|---|
Officer compensation | $ | 10,587 | ||
Non-employee directors | 3,801 | |||
Sales, general and administrative | 46,267 | |||
Total stock option expense, included in total operating expenses | $ | 60,655 | ||
NOTE 10—INCOME TAXES
The Company is subject to US federal income tax as well as income tax in multiple states and foreign jurisdictions. For all major taxing jurisdictions, the tax years 2004 through 2010 remain open to examination. As of December 31, 2010, the Company does not expect any material changes to unrecognized tax positions within the next twelve months.
Components of the income tax benefit (provision) are as follows for the years ended December 31 (in thousands):
2010 | 2009 | 2008 | ||||||||||
Current tax benefit (provision): | ||||||||||||
Federal | $ | 423 | $ | — | $ | — | ||||||
State | (2 | ) | (1 | ) | (1 | ) | ||||||
Foreign | (5 | ) | (33 | ) | 56 | |||||||
Total | 416 | (34 | ) | 55 | ||||||||
Deferred tax benefit (provision): | ||||||||||||
Federal | 999 | (121 | ) | 813 | ||||||||
State | 253 | 112 | (204 | ) | ||||||||
Total | 1,252 | (9 | ) | 609 | ||||||||
Change in valuation allowance | (1,240 | ) | (567 | ) | (3,213 | ) | ||||||
Benefit (provision) for income taxes from discontinued operations | (12 | ) | 576 | 89 | ||||||||
Total benefit (provision) for income taxes from continuing operations | $ | 416 | $ | (34 | ) | $ | (2,460 | ) | ||||
A reconciliation of income taxes computed by applying the federal statutory income tax rate of 34.0% to income (loss) before income taxes to the recognized income tax benefit (provision) reported in the accompanying consolidated statements of operations is as follows for the years ended December 31 (in thousands):
2010 | 2009 | 2008 | ||||||||||
U.S. federal income tax at statutory rate | $ | 1,362 | $ | (176 | ) | $ | 1,308 | |||||
State taxes, net of federal benefit | 169 | (22 | ) | (204 | ) | |||||||
Non-deductible entertainment expenses | (28 | ) | (8 | ) | (16 | ) | ||||||
Foreign income tax rate differential | 135 | 1,016 | 969 | |||||||||
Valuation allowance | (1,252 | ) | 9 | (2,897 | ) | |||||||
Foreign dividend received | (421 | ) | (1,003 | ) | (1,813 | ) | ||||||
Other | 451 | 150 | 193 | |||||||||
Total benefit (provision) for income taxes | $ | 416 | $ | (34 | ) | $ | (2,460 | ) | ||||
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recorded a full valuation allowance against its deferred tax assets, as realization of such assets is uncertain based on the Company’s history of operating losses. Significant components of deferred tax assets and liabilities are shown below (in thousands):
December 31, | ||||||||
2010 | 2009 | |||||||
Current deferred tax assets: | ||||||||
Allowance for bad debts | $ | 9 | $ | 116 | ||||
Share-based payment expense | 750 | 732 | ||||||
Allowance for obsolete inventory | 39 | 86 | ||||||
State tax expense | 1 | 1 | ||||||
Accrued compensation | 44 | 26 | ||||||
Contribution carryover | 39 | 49 | ||||||
Credits | — | — | ||||||
Other accruals | 84 | 45 | ||||||
Total | 966 | 1,055 | ||||||
Non-current deferred tax assets: | ||||||||
Depreciation | 103 | 91 | ||||||
Capital loss | 193 | 193 | ||||||
APB 23 un-repatriated foreign earnings | (863 | ) | (863 | ) | ||||
Net operating loss | 4,058 | 2,729 | ||||||
Total | 3,491 | 2,150 | ||||||
Valuation allowance | (4,457 | ) | (3,205 | ) | ||||
Net deferred tax assets | $ | — | $ | — | ||||
At December 31, 2010, the Company had federal and state net operating loss carry forwards of approximately $12,050,000 and $14,172,000, respectively. The federal and state net operating loss carry forwards begin to expire in 2024 and 2020, respectively. At December 31, 2010, the Company also had federal and state “capital” loss carry forwards of approximately $504,000. The federal and state “capital” loss carry forwards begin to expire in 2015 unless previously utilized.
Included in the net operating loss carryforward balances noted above are approximately $1,821,000 and $1,061,000, for 2009 and 2008, respectively, which are attributed to the exercise of non-qualified stock options for which the tax effect will be a component of the Company’s Additional Paid in Capital. Pursuant to Internal Revenue Code Section 382, use of the Company’s net operating loss carry forwards will be limited if a cumulative change in ownership of more than 50% occurs within a three-year period.
Following the Company'sCompany’s adoption on January 1, 2007 of FASB guidanceFIN-48 regarding accounting for uncertainty in income taxes, on January 1, 2007, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with the guidance. In this regard, an uncertain tax position represents the Company'sCompany’s 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 thisthat review, the Company concluded that at this time there arewere no uncertain tax positions. As a result of applying this guidance, there waspositions and no cumulative effect on retained earnings.earnings at the time of adoption. Subsequent to that date of adoption through December 31, 2010, the Company has continued to evaluate its tax positions and concluded that it has not had any material uncertain tax positions.
NOTE 11—SEGMENT AND GEOGRAPHIC INFORMATION
The Company is subject to US 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. As of December 31, 2009, the Company does not expect any material changes to unrecognized tax positions within the next twelve months. The adoption of the FASB guidance described above is not expected to have a material effect on the Company's consolidated results of operations or cash flows.
The valuation reserve as of December 31, 2009 represents deferred tax assets which management believes,reports segment data based on the Company's historymanagement approach, which designates the internal reporting that is used by management for making operating and investment decisions and evaluating performance as the source of operating losses, maythe Company’s reportable segments. The Company uses one measurement of profitability and does not be realizeddisaggregate its business for internal reporting. The Company has determined that it operates in future periods. The valuation allowance was decreased by $8,653one segment, providing wireless handsets and accessories to carriers, distributors and OEM customers in 2009.
NOTE 10—INCOME TAXES (Continued)
Latin America and Asia Pacific. The following table presentssummarizes the current and deferred income tax provision for federal and state income taxesCompany’s net sales by geographic area for the years ended December 31, 2010, 2009 and 2008 and 2007:(in thousands):
| For the Year Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | ||||||||
Current tax provision | |||||||||||
Federal | $ | — | $ | — | $ | (14,723 | ) | ||||
State | 1,600 | 1,232 | (8,132 | ) | |||||||
Foreign | 32,900 | (56,461 | ) | 63,451 | |||||||
Total | 34,500 | (55,229 | ) | 40,596 | |||||||
Deferred tax provision (benefit) | |||||||||||
Federal | 120,941 | (813,132 | ) | (1,661,974 | ) | ||||||
State | (112,288 | ) | 203,875 | 61,785 | ) | ||||||
Total | 8,653 | (609,257 | ) | (1,600,189 | ) | ||||||
Plus: change in valuation allowance | (8,653 | ) | 3,213,345 | — | |||||||
Total provision (benefit) for income taxes discontinued operations | — | (89,200 | ) | 458,571 | |||||||
Total provision (benefit) for income taxes continuing operations | $ | 34,500 | $ | 2,459,659 | $ | (1,101,022 | ) | ||||
The provision (benefit) for income taxes differs from the amount that would result from applying the federal statutory rate for
2010 | 2009 | 2008 | ||||||||||
Central America | $ | 10,176 | $ | 20,647 | $ | 50,617 | ||||||
South America | 61,224 | 210,663 | 162,606 | |||||||||
China | 371 | — | — | |||||||||
India | 759 | — | — | |||||||||
Total | $ | 72,530 | $ | 231,310 | $ | 213,223 | ||||||
During the years ended December 31, 2009, 2008 and 2007:
| For the Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | |||||||
Statutory regular federal income tax rate | 34.0 | % | 34.0 | % | 34.0 | % | ||||
State taxes net of federal benefit | 4.6 | (5.1 | ) | 3.3 | ||||||
Non-deductible entertainment | 1.6 | (0.4 | ) | (0.5 | ) | |||||
Foreign income tax rate differential | (210.6 | ) | 24.4 | 10.9 | ||||||
Valuation Allowance | (1.69 | ) | (72.8 | ) | — | |||||
Foreign Dividend Received | 207.9 | (45.6 | ) | — | ||||||
Other | (28.7 | ) | 1.5 | 0.6 | ||||||
Total | 7.2 | % | (64.0 | )% | 48.3 | % | ||||
NOTE 10—INCOME TAXES (Continued)
Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes as of December 31,2010, 2009, and 2008, consistedsales to customers in Argentina represented 71%, 87% and 67% of the following:
| December 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | ||||||
Current deferred tax assets | ||||||||
Allowance for bad debt | $ | 116,131 | $ | 155,885 | ||||
Share-based payment expense | 732,098 | 671,379 | ||||||
Allowance for obsolete inventory | 86,510 | 58,687 | ||||||
State tax expense | 544 | 544 | ||||||
Accrued compensation | 25,835 | 20,837 | ||||||
Contribution carryover | 49,159 | 30,329 | ||||||
Credits | — | 47,571 | ||||||
Other accruals | 44,831 | 687,451 | ||||||
Current deferred tax assets | 1,055,108 | 1,672,683 | ||||||
Total Current deferred tax assets | 1,055,108 | 1,672,683 | ||||||
Non-current deferred tax assets | ||||||||
Depreciation | 90,424 | (88,061 | ) | |||||
Capital loss | 193,298 | — | ||||||
APB 23 unrepatriated foreign Earnings | (863,422 | ) | — | |||||
Net operating loss | 2,729,284 | 1,628,723 | ||||||
Total non-current deferred tax assets | 2,149,584 | 1,540,662 | ||||||
Valuation Allowance | (3,204,692 | ) | (3,213,345 | ) | ||||
Net deferred tax assets | $ | — | $ | — | ||||
At December 31, 2009, the Company had federal and stateCompany’s consolidated net operating loss carry forwards of approximately $10,195,000 and $11,585,000 respectively. The federal and state loss carry forwards beginrevenue. Sales in no other individual country amounted to expire in 2025 and 2017 respectively.
Included in the net operating loss balances above are approximately $1,821,000 and $1,061,000, for 2009 and 2008, respectively, which are attributed to the exercise of non-qualified stock options for which the tax effect will be a component10% or more of the Company's Additional Paid in Capital. Pursuant to Internal Revenue Code Section 382, useCompany’s consolidated net revenue.
Fixed assets, which represent approximately 1% of the Company'sCompany’s net operating loss carry forwards will be limited if a cumulative change in ownership of more than 50% occurs within a three-year period.
At December 31, 2009, the Company had federal and state capital loss carry forwards of approximately $504,000. The federal and state capital loss carry forwards begin to expire in 2015 unless previously utilized.
NOTE 11—SEGMENT AND RELATED INFORMATION
GAAP requires that the Company disclose certain information about it operating segments, whichassets, are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company currently operates one business segment. Summarized financial information
NOTE 11—SEGMENT AND RELATED INFORMATION (Continued)
concerning the Company's reportable regions is shown in the following tables for the years ended December 31, 2009, 2008 and 2007.
All fixed assets areprincipally located in the Company'sCompany’s offices in the United States or in AsiaChina at the Company’s R&D office or contract manufacturing facilities. Geographical revenues
NOTE 12—QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table presents unaudited selected quarterly financial information (in thousands, except per share data) for the years ended December 31, 2009, 2008 and 2007 were as follows:periods indicated. This information has been derived from the Company’s unaudited quarterly consolidated financial statements, which in the opinion of management include adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of such information. These operating results are not necessarily indicative of results for any future period.
| For the Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | |||||||
Central America | $ | 20,647,030 | $ | 50,617,442 | $ | 73,965,770 | ||||
South America | 210,663,167 | 162,605,531 | 140,496,725 | |||||||
Total | $ | 231,310,197 | $ | 213,222,973 | $ | 214,462,495 |
During the years ended December 31, 2009, 2008, and 2007, no revenues from any individual country other than Argentina were greater than 10% of the Company's consolidated revenues.
Year Ended December 31, 2010 Net sales Gross profit Loss from continuing operations Income (loss) from discontinued operations Net loss Basic and diluted net loss per share Year Ended December 31, 2009 Net sales Gross profit Income (loss) from continuing operations Loss from discontinued operations Net income (loss) Basic and diluted net income (loss) per share First
Quarter Second
Quarter Third
Quarter Fourth
Quarter $ 27,541 $ 22,353 $ 8,171 $ 14,465 1,441 1,569 542 1,244 (561 ) (390 ) (1,940 ) (721 ) (6 ) 76 (22 ) (4 ) (567 ) (314 ) (1,962 ) (725 ) (0.04 ) (0.02 ) (0.14 ) (0.05 ) $ 42,625 $ 61,706 $ 65,262 $ 61,717 3,355 4,072 4,334 3,546 440 397 232 (585 ) (193 ) (167 ) (47 ) (1,604 ) 247 230 185 (2,189 ) 0.02 0.02 0.01 (0.15 )
Valuation and Qualifying Accounts—Schedule II
| Balance, beginning of year | Additions charged to operations | Deletions from Reserve | Balance, end of year | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Allowance for doubtful accounts | |||||||||||||
December 31, 2009 | $ | 429,126 | $ | 443,938 | $ | 283,344 | $ | 589,720 | |||||
December 31, 2008 | 558,342 | 267,036 | 396,252 | 429,126 | |||||||||
December 31, 2007 | 679,553 | 353,268 | 474,479 | 558,342 | |||||||||
Reserve for inventory obsolescence | |||||||||||||
December 31, 2009 | $ | 161,556 | $ | 73,000 | $ | 122,421 | $ | 112,135 | |||||
December 31, 2008 | 580,438 | 983,763 | 1,402,645 | 161,556 | |||||||||
December 31, 2007 | 254,508 | 1,172,961 | 847,031 | 580,438 |
(Amounts in thousands) | ||||||||||||||||
Balance, beginning of year | Additions charged to operations | Deletions from Reserve | Balance, end of year | |||||||||||||
Allowance for doubtful accounts: | ||||||||||||||||
Year ended December 31, 2010 | $ | 590 | $ | 263 | $ | 656 | $ | 197 | ||||||||
Year ended December 31, 2009 | 429 | 444 | 283 | 590 | ||||||||||||
Year ended December 31, 2008 | 558 | 267 | 396 | 429 |
Table of ContentsEXHIBIT INDEX
Number | Description | |||
3.1 | Articles of | |||
3.2 | ||||
4.1 | Specimen Common Stock | |||
10.1 | 2003 Stock Option Plan, as | |||
10.2 | Form of Stock Option Agreement—2003 Stock Option Plan—Non Employee | |||
10.3 | Form of Stock Option Agreement—2003 Stock Option Plan—Incentive Stock | |||
10.4 | 2006 Equity Incentive | |||
10.5 | Form of Stock Option Grant Notice/Stock Option | |||
10.6 | Form of Amended and Restated Stock Option Agreement (Non-Employee | |||
10.7 | 1998 Stock Option Plan (17)(*) | |||
10.8 | Stock Purchase Agreement dated as of January 26, 2004 among InfoSonics, InfoSonics Mexico, Inc., Joseph Ram and Abraham Rosler concerning InfoSonics de | |||
10.9 | ||||
Credit Agreement dated October 6, 2005 between InfoSonics and Wells Fargo HSBC Trade Bank, | ||||
10.10 | ||||
10.11 | Seventh Amendment to Credit Agreement dated April 21, 2008 between InfoSonics and Wells Fargo HSBC Trade Bank, N.A. | |||
10.12 | Loan, Security and Bulk Purchase Agreement dated April 30, 2008, between InfoSonics and Wells Fargo Century, Inc. | |||
10.13 | Letter of Credit and Security Agreement dated April 30, 2008, between InfoSonics and Wells Fargo Century, Inc. | |||
10.14 | Agreement for Purchase and Sale of Assets dated October 20, 2004 between The Mobile Solution Corporation and Axcess Mobile, LLC | |||
10.15 | Employment Agreement effective of April 1, 2008 between InfoSonics and Joseph | |||
10.16 | Office Space Lease, dated September 10, 2007, by and between UTC Properties LLC and the | |||
10.17 | ||||
Distribution Agreement by and between InfoSonics and Samsung Electronics Argentina S.A. effective January 22, | ||||
10.18 | Addendum to Distribution Agreement by and between InfoSonics Corporation and Samsung Electronics Argentina S.A. effective as of January 6, | |||
10.19 | Offer letter between InfoSonics and Vernon A. LoForti dated July 8, 2010 (16)(*) | |||
21 | Subsidiaries of | |||
23 | Consent of Independent Registered Public Accounting | |||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, implementing Section 302 of Sarbanes-Oxley Act of | |||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, implementing Section 302 of Sarbanes-Oxley Act of | |||
32.1 | Certification of Chief Executive Officer | |||
(1) | Incorporated by reference to the Company’s Registration Statement on Form S-1, filed on January 30, 2004. |
(2) | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on January 25, 2005. |
(3) | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on October 13, 2005. |
(4) | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on November 3, 2004. |
(5) | Incorporated by reference to the Company’s Registration Statement on Form S-8, filed on June 12, 2006. |
(6) | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on June 12, 2006. |
(7) | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on October 5, 2006. |
(8) | Incorporated by reference to the Company’s Annual Report on Form 10-K, filed on March 31, 2006. |
(9) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed on November 14, 2007. |
(10) | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on April 14, 2008. |
(11) | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on April 23, 2008. |
(12) | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on May 6, 2008. |
(13) | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on January 26, 2009. |
(14) | Incorporated by reference to the Company’s Current Report on Form 8-K, filed on January 12, 2010. |
(15) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed on May 14, 2010. |
(16) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed on November 12, 2010. |
(17) | Incorporated by reference to Amendment No.6 to the Company’s Registration Statement on Form S-1/A, filed on May 20, 2004. |
(*) | Indicates a management contract or compensatory plan or arrangement |
(+) | Filed herewith |