UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark one)

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

For the fiscal year ended December 31, 20122013

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.)

3636 Nobel Drive, Suite 325

San Diego, CA 92122

(Address of principal executive offices including zip code)

858-373-1600

(Registrant’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.    ¨  Yes    x  No

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    ¨  Yes    x  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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date 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).    x  Yes    ¨  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’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. x

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

 

Large accelerated filer ¨  Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a 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).    ¨  Yes    x  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’s most recently completed second fiscal quarter was $15,559,668.$4,488,320. This calculation is based upon the closing price of $1.56$0.45 of the stock on June 29, 2012.28, 2013. Without asserting that any director or executive officer of the registrant, or the beneficial owner of more than five percent of the registrant’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 22, 2013,7, 2014, there were 14,184,14614,184,145 shares of the registrant’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 20132014 Annual Meeting of Stockholders expected to be held on June 10, 2013.9, 2014.

 

 

 


InfoSonics Corporation

Form 10-K for the Year Ended December 31, 20122013

INDEX

 

     Page No. 
 

PART I

1
Item 1.

Business

   1  

Item 1.

1A.
 

BusinessRisk Factors

   16  

Item 1A.

1B.
 Risk Factors7

Item 1B.

Unresolved Staff Comments

12
Item 2.

Properties

12
Item 3.

Legal Proceedings

12
Item 4.

Mine Safety Disclosures

   13

Item 2.

Properties14

Item 3.

Legal Proceedings14

Item 4.

Mine Safety Disclosures14  
 

PART II

   1514  

Item 5.

 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   1514  

Item 6.

 

Selected Financial Data

   1514  

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   1514  

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

   2322  

Item 8.

 

Financial Statements and Supplementary Data

   2322  

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

22
Item 9A.

Controls and Procedures

22
Item 9B.

Other Information

   23

Item 9A

Controls and Procedures24

Item 9B.

Other Information24  
 

PART III

   2524  

Item 10.

 

Directors and Executive Officers and Corporate Governance

   2524  

Item 11.

 

Executive Compensation

   2524  

Item 12.

 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   2524  

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

   2524  

Item 14.

 

Principal Accountant Fees and Services

   2524  
 

PART IV

   2625  

Item 15.

 

Exhibits and Financial Statement Schedules

   2625  
 

Signatures

   2726  
 

Exhibits

  


Forward-Looking Statements

Certain 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 competitors, suppliers and customers are generally outside of our control. 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.

PART I

 

Item 1.Business

Company Overview

We are a provider of wireless handsets (which may be referred to herein as “phones”, “cell phones”, “mobile phones”, “feature phones” and “smartphones”), tablets and accessories to carriers, distributors and original equipment manufacturers (“OEMs”) in Latin America, Asia Pacific, Europe, Africa and Africa.the United States. We design, develop, source and sell our proprietary line of products under theverykool® brand and on a private label basis to certain customers (collectively referred to asverykool® products). We first introduced ourverykool® brand in 2006 with the goal toprovide the market with products that are unique, beautifully designed, feature packed and provide exceptional “value” for the consumer. Ourverykool® products include entry-level, mid-tier and high-end feature phones and Android-based smartphones.

Our corporate headquarters are in San Diego, California. We have wholly owned subsidiaries in Central and South America, which conduct some of our business activities in their respective regions, as well as subsidiaries in Hong Kong and China 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 our customers. We also have sales representatives, field engineers and marketing resources located throughout Latin America, our principal market.

ForOver the past five years, our business has had two primary components: (1) legacy distribution of wireless handsets supplied by major manufacturers, primarily Samsung, and (2) provision of our own proprietaryverykool® products that we originally sourced from independent design houses and original design manufacturers (“ODMs”). Our revenue peaked 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 productproducts to carriers 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 signaled the closing stagecomplete shut-down of our distribution business. Ourof third party branded products which ended with the termination on March 31, 2012 of our distribution agreement with Samsung was scheduled to expire December 31, 2011 but was extended until March 31, 2012 to accommodate the orderly conclusion of this business.Samsung. Since April 1, 2012, , our business has and will continue to be centered on ourverykool® product line.

Our flagship product line is nowverykool®. In order to better control our product roadmap, in April 2010 we established an in-house design center in Beijing, China where we design a number of phones in our product portfolio. We continue to source the remaindermajority of our phones from independent design houses and ODMs. We contract with electronic manufacturing services (“EMS”) providers to manufacture all of our branded products.

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 same name under the laws of and into the State of Maryland.

Global Wireless Industry

Today’s wireless handsets can be segmented into two primary categories: feature phones and smartphones. The distinguishing characteristics of smartphones is that they are built on a mobile operating system and are generally more sophisticated, have higher computing power and are more expensive. Rapid technological developments over recent 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, run application programs 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 for some of these more advanced services and features is not as strong in certain of the price-sensitive foreign markets we serve, the cost of producing smartphones continues to decline and we believe demand will continue to increase in the future as the products become more affordable and worldwide economic conditions improve.

The following statistics were published by GSMA Wireless Intelligence. Worldwide wireless connections at December 31, 2012 reached an estimated 6.8 billion, or approximately 97% of the world’s population. However, this number decreases to an estimated 5.9 billion when machine-to-machine connections and inactive SIM cards are excluded. Furthermore, it is estimated that consumers use an average of 1.85 SIM cards each so that the number of “unique” mobile subscribers at the end of 2012 was estimated to be 3.2 billion. This indicates that only an estimated 46% of the world’s population has subscribed to mobile services. Approximately one-third of the world’s 7 billion population are unlikely to be able to subscribe to mobile services for a variety of reasons including an absence of network coverage, but GSMA Wireless Intelligence predicts that the mobile industry will reach the 5 billion unique user milestone over the next decade as network expansion continues to progress in developing markets and as people in rural areas subscribe to mobile services. By 2017, subscriber penetration in “developed” countries is expected to pass 80%, and growth in these markets is expected to slow. In contrast, subscriber penetration across “developing” countries is forecast to increase from 39% in 2012 to 47% in 2017. The highest unique subscriber penetration is in Japan (88%) and Europe (87% in the UK). However, penetration is only 26% in India, 33% in Africa and 57% in South America. In China, the world’s largest mobile market, unique subscriber penetration is expected to grow from 43% to 52% over the next five years.

According to Strategy Analytics,International Data Corporation (“IDC”), shipments of mobile phones during 20122013 increased by less than 2%4.8% to an estimated 1.5751.822 billion devices compared to 1.5461.738 billion units in 2011.2012. However, according to the firm IDC, shipments of smartphones in 2012 grew2013 hit the one billion unit milestone by 43%growing 38% over the prior year to more than 700 million1.004 billion units. This represents a majority of approximately 44%55% of all mobile phone shipments for the year. The replacement cycleAccording to IDC, the top trends driving smartphone growth are lower cost and the popularity and affordability of smartphones remain the largest factors driving global mobile phone sales demand.

The rapid shift from feature phones to smartphones is evidenced in the Q4-2012 shipment numbers published by IDC. Worldwide smartphone shipments in Q4-2012 amounted to over 219 million units, a 36% increase over Q4-2011, and 45% of all mobile phone shipments in the quarter.large screen devices. The Android operating system became thecontinued its undisputed worldwide volume leaderdominance in smartphones in 2012,2013, growing from a 49%69% market share in 20112012 to 68% market sharenearly 79% in 2012. However, 2013, is expectedaccording to be a year when Android will be required to defend its leadership position not only against Apple, but also against a building wave of challengers including Microsoft, Blackberry, Firefox, Ubuntu and Tizen.Strategy Analytics.

In 2013, IDC2014, Gartner, Inc. expects 5.5%4.9% growth over 20122013 in worldwide mobile phone shipments. This includes an expected 22%shipments to almost 1.9 billion units. DigiTimes Research expects about a 24% increase in smartphone shipments much slower than the 43% growth in 2012. 2013 unit2014, which would indicate a 19% decline in global shipments of feature phones are expected to decline globally by 6%, a slower rate of decline compared to 2013. DigiTimes expects the 15% decline experiencedsmartphone growth to be driven by demand in 2012.Russia, India, Indonesia and Latin American countries.

Our Business and Strategy

China is the world leader in both manufacturing and design of wireless handsets. Furthermore, on the manufacturing front, Chinese suppliers have forced 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, in late 2009 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 the base for marketing and selling our products in Asia-Pacific. At December 31, 2012, this team consisted of 55 employees, primarily engineers located in Beijing, and quality control and manufacturing support personnel in Shenzhen. 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 shipped our first 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 our China development team. All of our manufacturing is done by contract manufacturers in China.

Our current strategy is to source most of our low-end feature phones from outside design houses and have our in-house development team focus on more complicated models and smartphones. Many of our internally developed models are ruggedized, active lifestyle phones that are the basis for a concept we believe has significant market potential. We believe the attractive industrial design or “feel” of these phones gives them strong appeal, and, when combined with a rather unique combination of features, help differentiate these products from the competition. With the cessation of our historical distribution business, we are striving to expand sales of our proprietaryverykool® phones. Our strategy includes the following elements:

Continued refreshment and introduction of new models of ourverykool® line of differentiated phones.

Transition our line-up of phones to include a greater selection of smartphones in response to the affordability and popularity of smartphones in worldwide markets.

Expansion into new geographic markets, including the United States and throughout Europe.

Leverage our historical presence and existing infrastructure in Latin America.

Expand our design partnerships and other relationships to enhance our design capabilities and product offerings.

Differentiated verykool® Product Line.

The worldwide market for wireless handsets and tablets is extremely competitive. It is characterized by a large number of providers, often with very similar products, who often ultimately compete on price at very thin margins. The capabilities and features of the phones are primarily a function of the chipset manufacturers, and it is difficult to

achieve differentiation. Despite this, we still believe differentiation is possible particularly through a combination of factors, including through development of our line ofverykool® active lifestyle handsets that weare in the process of expanding.xTreme ruggedized handsets. We strive for (1) a consistent, attractive industrial design, (2) a unique combination of features, and (3) an attractive price point which together provide exceptional “value” to the consumer and which we hope will set our phones apart from the competition.

Our strategy includes the following elements:

Continued refreshment and introduction of new models of ourverykool® line of differentiated phones.

Transitioning our line-up of phones to include a greater selection of smartphones in response to the affordability and popularity of smartphones in worldwide markets.

Expansion into new geographic markets, including the United States and throughout Europe.

Leveraging our historical presence and existing infrastructure in Latin America.

Expand our design partnerships and other relationships to enhance our design capabilities and product offerings.

Smartphones vs. Feature Phones.

Technological advances and affordability in smartphones, including the pervasiveness of the open source Android operating system, are driving the global wireless industry. The popularity of smartphones is gaining dramatically in developed countries with broader-based consumer purchasing power. However, in certain geographic regions including Latin America, the market is extremely price sensitive and the price points of traditional smartphones are beyond the reach of most consumers. With increasing volumes and lower production costs for smartphones, we intend to expand our portfolio of affordable smartphones. We will also continue to provide low-end feature phones, but expect over time to replace more expensive feature phones with entry-level smartphones.

Geographic Market Expansion.

Historically, our traditional market focus has been Latin America. However, as described above, withIn the opening of our new development subsidiary in Beijing in April 2010,last few years, we expanded geographically into Asia Pacific by offering ourhave also shipped products to OEM customers on a private label basis. In the fourth quarter of 2010 we shipped our first productsbasis to customers in both China and India, and in 2011 added private label customers in Western Europe, Russia, Singapore, other Southeast Asian countries and Africa. During 2012, our private labelHowever, this business was concentrated in the first quarter,has been inconsistent and in 2013sporadic. In 2014, we intend to explore the introduction ofmarket theverykool® brand into certain of these markets whereto introduce the brand and build a more consistent business base. We also intend to increase our presence in the United States market. During 2013, we have previously only sold our products on a private label basis. In addition, during 2012 we began sellingverykool® products to a small number of distributors in the United StatesU.S. who serve small Regional Service Area (“RSA”) carriers. We expectIn December 2013, we signed a distribution agreement with Ingram Micro Mobility, which we anticipate will provide us the opportunity in 2014 to continue this effort in 2013, along with offering our phonesaccess Ingram’s vast U.S. distribution network to consumers in the U.S. through ourcarrier, retail and on-line store.customer channels.

Leverage our Latin America Presence.

We have worked hard over the past fivesix years to develop theverykool® brand name in Latin America. AsIn 2014, we differentiate our product line as described above, we intend to continue to leverage the brand equity we have built in Latin America, as well as our existing in-country sales and technical resources, to expand sales to existing customers, acquire new customers, and expand into other Latin AmericaAmerican countries where possible.

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 capabilities. This is expected to help us expand our product portfolio and enable us to participate in new technologies.

Customers

Our current Latin American customers include carriers, agents, distributors and resellers. Our customers elsewhere in Asia Pacific, Europe and Africa are all OEM customers to whom our products are sold on a private label basis and comprised 15%3% of ourverykool® product sales in 2012.2013. In the United States, our customers include distributors who primarily supply regional carriers. We sell our products pursuant to customer purchase orders and ship products by common carrier based on customer-specified delivery dates. During 2012,2013, we sold products to approximately 2235 customers. Our three largest customers in 20122013 represented 16%20%, 11%14% and 9%13% of our net sales, respectively. Our first and third largest customers were carrier customers in Latin America and our second largest customer was an open market distributor, the second largest was a carrier customer in Latin America and the third largest was an OEM customer in Europe.distributor.

Purchasing and Suppliers

Over the past threeIn earlier years, Samsung was the major supplier for our distribution business, primarily in Argentina. Products purchased from Samsung related entities represented 9%0%, 41%9% and 45%41% of our cost of sales in 2013, 2012 2011 and 2010,2011, respectively. The decline in concentration of Samsung purchases in 2012 is due to the termination on March 31, 2012 of our Samsung distribution business.agreement.

For our brandedverykool® products, we have established key relationships with a number of leading contract manufacturers of wireless telecommunications equipment.equipment in China. 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 wireless handsets to our specifications as designed and prototyped by our in-house design team. In 2012,2013, we purchased products from nineten manufacturers, the top three representing 24%38%, 24%12% and 21%10%, respectively, of our cost of sales, respectively.sales.

We maintain agreements with certain of our significant suppliers. Certain of the agreements require us to satisfy minimum monthly volumes to secure specified pricing. The supply agreements generally can be terminated on short notice by either party. We purchase products from manufacturers pursuant to purchase orders placed from time to time in the ordinary course of business. 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 our 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 suppliers could cause a delay in or loss of sales and adversely affect our 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 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 marketing 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. Further, we may participate in co-op advertising sponsored by our carrier customers in radio and newspaper ads.

As of December 31, 2012,2013, we employed or contracted with 2015 sales, marketing and merchandizing professionals who are assigned specific geographic territories, most of 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 formedWe maintain an in-house development team consisting primarily of seasoned wireless engineers in Beijing, China. Our product roadmap is determined and monitored by close coordination between our BeijingChinese team and corporate product management. The firstverykool® product designed by our China team was shipped in the fourth quarter of 2010 and we have generated a relatively continuous flow of new products since that time. During the second half of 2012, the R&D team had a large number of new products under development simultaneously, and, as a consequence, the headcount was expanded to match the workload. At December 31, 2012, the team had 55 employees. However, in late December, as the multiple development projects were drawing to completion, we determined to execute a restructuringfocus of our China workforce inin-house team has been our ruggedized line of xTreme products. In December 2012 and June 2013, we restructured the first quarter of 2013team to eliminate redundancies and to shift more of our personnel toconsolidate it into a single location in Shenzhen from Beijing to be closer to our suppliers, contract manufacturers and customers. The restructuring includedAt December 31, 2013, the reduction of 21team had 23 employees. We

expect to continue to use outside design houses to augment the efforts of our China development team and will sometimes incur outside non-recurring engineering fees, which are also classified as R&D expense. R&D expenses for the yearyears ended December 31, 2011, 2012 amounted toand 2013 were $1.6 million, $2.2 million.million and $1.3 million, respectively.

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 the Argentina tariff, is incorporated by reference herein from Items 1A and 7 hereof and Note 1211 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 fourth quarter of the calendar year due to the Christmas holiday season. On the supply side of our 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 for the Chinese New Year. We strive to manage around the closure, but if factories have difficulty starting back up, we could experience delays in getting product and satisfying customer orders, which could have a material adverse effect on our 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 into the sourcing and distribution of wireless handsets have been relatively low. Our ability to continue to compete successfully in the wireless handset business 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 technology requirements, new and differentiated 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 Latin America include wireless OEMs, wireless equipment manufacturers, carriers and wireless distributors such as BrightPoint, Inc. (now part of Ingram Micro), Brightstar Corporation and CT Miami. 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. Although we believe our information systems are adequate, the two systems are discreet

and 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. We have licensed a more complete and integrated enterprise resource planning (“ERP”) system which we plan to implementare in 2013.the process of implementing.

Employees

As of December 31, 2012,2013, we had 10367 employees and contractors. Of these employees and contractors, 2 were in executive management positions, 2015 were engaged in sales and marketing, 5523 were in research and development, 3 were in service operations, 4 were in finance and administration, and 1920 were in product development, logistics and field engineering. We plan to reduce the size of our research and development staff by 21 as part of a restructuring in the first quarter of 2013. 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 at www.infosonics.com provides a link to the Securities and Exchange Commission’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.

 

Item 1A.Risk Factors

Risks Relating to Our Business

The major portion of our business relating to distribution of Samsung products in Argentina has ended and we may not be able to replace those sales.

Our distribution agreement with Samsung expired March 31, 2012. We are working diligently to replace the lost distribution revenues with higher margin sales of ourverykool® products through expansion into new geographic markets in Asia Pacific, Europe, Africa, Latin America and the United States. However, there can be no assurance that we will be successful in this effort or whether it can be accomplished in a timely manner or at all.

The loss or reduction in orders from principal customers or a reduction in prices we are able to charge these customers willwould have a negative impact upon our financial results.

Our three largest customers for the year ended December 31, 2012,2013, represented 16%20%, 11%14% and 9%13% of our net sales, respectively. The markets we serve and are targeting for future business are subject to significant price 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 willcould continue for an uncertain period. If we continue to operate at a loss, our business may not be financially viable.

For the year ended December 31, 2012,2013, our net loss was $2.5 million.$597,000. We have now reported sixseven consecutive loss years with an aggregate net loss of $22.1$22.7 million. As of December 31, 2012,2013, our cash and restricted cash balances were $6.2balance was $2.4 million, we had net working capital of $16.3$16.0 million and we had no

outstanding debt. Given the continued economic slowdown, our business now being focused on proprietary products without established markets and the uncertainty of most global markets, we cannot adequately evaluate the financial viability of our business or our long-term 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 in our proprietaryverykool®line requires a significant investment in research and product development, manufacturing and marketing. Our development team in Beijing China has had success with delivery of new products, but has also encountered delays and design challenges, and may not be successful in developing the differentiated products we need to ultimately implement our strategy successfully. In addition, our new products may not be well received by our customers or the end-users. Further, failure to adequately carry out our product marketing, sales and delivery strategy or otherwise be successful in promoting ourverykool® brand may result in inventory obsolescence, including inventory which we have built in anticipation of market acceptance of our products. If any of these events occur, our financial condition and operating results would 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 that may cause our sales and operating results to fluctuate significantly from quarter to quarter. These factors include:

 

the addition or loss of customer or supplier relationships;

 

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; and

 

general economic conditions.

Our operating performance may cause our stock price to fluctuate. Between January 1, 20122013 and March 20, 2013,7, 2014, our stock price has fluctuated between $1.78$0.38 and $0.52$4.23 per share, and we anticipate that significant volatility in our stock price will continue for the foreseeable future.

The terminationWe do not currently have a bank line of our secured credit facility in the fallor other source of 2010 has restricted the availability of liquidity.financing.

Historically, oneWe do not currently have a bank line of our primary sources of liquidity has been borrowing from bank lines of credit. Our secured bank credit facility with Wells Fargo Trade Capital LLC terminated on September 22, 2010.or other financing source. While we believe that our current cash resources and working capital are sufficient tomay adequately fund our operations for the foreseeable future, we do not currently have a permanent letterthe lack of credit facility, which mayfinancing could impede our procurement operations. Failure to secure a replacement bank credit facility on acceptable terms could adversely affect our ability to supportthe future growth inof our business. We are currently in discussions with a number of funding sources to provide financing, but there can be no assurance that a definitive agreement will be reached.

We face many risks relating to intellectual property rights.

Our business will be harmed 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’s indemnity may not cover any or all damages and losses suffered by us due to a potentially infringing 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’ proprietary information or develop similar technology relating to our verykool® products independently. Furthermore, effective patent, copyright, trademark and trade secret protection may be unavailable or limited, especially in certain foreign 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’ intellectual property rights by third parties and the cost of any litigation necessary to enforce our or our manufacturers’ intellectual property rights could have an adverse impact on our business.

Virtually allThe majority of our revenues during the year ended December 31, 20122013 were, and for the near future will likely continue to be, generated outside of the United States, in countries that may have volatile currencies or other risks.

The vast majority of our sales activities are conducted in territories and countries outside of the United States, primarily in Latin America, and to a lesser extent in Europe and Asia Pacific. Historically, the majority of our sales transactions were denominated in U.S. dollars and therefore may be impacted by changes in the strength of the U.S. dollar relative to the foreign economies where we conduct business. Certain sales transactions in Mexico are denominated in the Mexican peso, which has been a very volatile currency. Further, the fact that we sell 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 develop and sell products. United States laws and regulations relating to investment and trade in foreign countries could also change to our detriment. We are particularly exposed to the fact that all our R&D and manufacturing activities are in China, which may change its own policies on business and foreign investment in companies there. Any of these factors could have material adverse effects on our business and operations. Also, although we purchase and sell products in U.S. dollars and do not engage in significant 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. Although we are now making significant investments in R&D to keep our proprietaryverykool® products competitive in terms of technology and features, there is no guarantee we will 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. Furthermore, if we do not adequately anticipate future technological changes, we may not establish appropriate supplier relationships or perform appropriate product development. These factors all pose significant risks to loss of customers and decreased sales and 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. A substantial default by a major customer could have a material adverse effect on our financial position, cash flow and results of operations.

We rely on our information technology systems to function efficiently, without interruptions, and if they do not, customer relationships could be harmed.

We are dependent upon our information systems to manage our business and to be responsive to our customers needs, and we plan to implement a new ERP system in 2013.2014. These systems may experience interruptions, including interruptions of related services from third-party providers which may be beyond our control. Such business interruptions could cause us to fail to meet customer requirements and could result in the loss of business relationships. 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 our proprietaryverykool®products.

Our third party manufacturers typically provide limited or no warranties on their 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 source 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 manufacturers or at prices above our cost. 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, sometimes including our own 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. Sourcing and 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, as well as differentiate ourverykool® 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, international, national, regional and local economic conditions, and competitors’ discount pricing and promotion strategies. As wireless telecommunications markets mature, and as we seek to enter into new markets 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, the information and technology related to ourverykool® 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 (including our design team in China) 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, and other key employees, including ourverykool® design team members in China.employees. If we are unable to retain our 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.

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 claimed 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 theirour shares. TheAdditionally, 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 $1.78$0.38 and $0.52$4.23 from January 1, 20122013 through March 20, 2013.7, 2014.

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.

At various times over the last several years we faced potential delisting from The NASDAQ Stock Market for failure to maintain the minimum $1.00 bid price per share requirement for continued listing. Once again, on December 10, 2012, we received a Nasdaq Staff Deficiency letter indicating that,If our common stock trades for the prior thirty30 consecutive business days below the $1.00 minimum closing bid price for our common stock had closed below the minimum $1.00 per share requirement, for continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A),NASDAQ will send us a deficiency notice advising us that we have been provided an initial periodwill be afforded a “compliance period” of 180 calendar days or until June 10, 2013,to regain compliance with the applicable requirements. Because of our most recent failure to comply with this requirement in December 2012, we were afforded two 180-day periods by The NASDAQ Stock Market to regain compliance. The letter states thatOn January 9, 2014, after the Nasdaq staff will provide written notification that we have achieved compliance with Rule 5550(a)(2) if at any time before June 10, 2013, theclosing bid price of our common stock closeshad been at $1.00 per share or moregreater for a minimum of ten10 consecutive business days.

We intend to monitor the bid price of our stock and consider available options if our stock does not trade at a level likely to result in us regaining compliance with Nasdaq’s minimum bid price ruledays, we were notified by June 10, 2013. If we do not regain compliance with Rule 5550(a)(2) by June 10, 2013, we may be eligible for an additional 180 calendar day compliance period. To qualify, we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq CapitalNASDAQ Stock Market with the exception of the bid price requirement, and would need to provide written notice of our intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq Staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will notify us that our stock will be subject to delisting. In the event of such a notification, we may appeal the Staff’s determination to delist our stock, but there can be no assurance the Staff would grant our request for continued listing.had regained compliance.

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 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 OTC Pink, OTCQX, 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 Capital Market and the trading price remains below $5.00 per share, trading in our common stock might also become subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, which require additional disclosure by broker-dealers in connection with any trade involving a stock defined as a “penny stock” (generally, any equity security not listed on a national securities exchange or quoted on The NASDAQ Stock Market that has a market price of less than $5.00 per share, subject to certain exceptions). Many brokerage firms are reluctant to recommend low-priced stocks to their clients. Moreover, various regulations and policies restrict the ability of stockholders to borrow against or “margin” low-priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the common stock can result in an individual stockholder 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’ 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 1, 2013,2014, 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.

Not Applicable.

Item 2.Properties.

Our corporate headquarters office is located in San Diego, California. Ourverykool® R&D facility is located in Beijing, China and we have a small quality control office located in Shenzhen, China, close to our contract manufacturers. All of these facilities are occupied pursuant to operating leases. The table below summarizes information concerning those leases, but does not include local sales tax, VAT tax or common area maintenance charges where applicable:

 

  Aggregate
Square Footage
   Approximate
Monthly Rent
   Lease term   Aggregate
Square Footage
   Approximate
Monthly Rent
   Lease term 

San Diego, California

   7,700    $14,000     Oct 2012 to Sep 2017     7,700    $14,000     Oct 2012 to Sep 2017  

Beijing, China

   5,270     10,200     Mar 2012 to Mar 2013  

Shenzhen, China

   1,200     1,400     Mar 2012 to Mar 2013     2,418    $4,100     Mar 2013 to Mar 2014  

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. We expect the Shenzhen lease to be renewed or replaced by March 31, 2014 at comparable terms.

 

Item 3.Legal Proceedings.

Viamport Litigation

On May 22, 2012, a lawsuit was filed against the Company in Santo Domingo, Dominican Republic (Case No. FP-12-461) by Viaimport, SRL, a former customer of the Company, and served on the Company on July 12, 2012. The complaint alleges breach of contract and seeks U.S. $1 million in damages. The Company believes that this case is without merit and intends to vigorously defend itself. In addition, on August 31, 2012, the Company filed a lawsuit against Viaimport and its principal, Omar Hassan, in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County Florida (Case No. 12-34647CA32) for non-payment of purchase obligations aggregating $288,559 and other damages. AlthoughOn August 12, 2013, Viaimport filed a counterclaim against InfoSonics in Miami-Dade County, which is essentially a mirror image of the Dominican Republic complaint. On November 19, 2013, InfoSonics filed a request with the Dominican Republic Court to request dismissal of the case there for lack of jurisdiction in order to have both related actions heard in Miami-Dade County. Both lawsuits are in their early stages, atthe discovery stage. The Miami actions are scheduled for trial on May 27, 2014; no trial date has been set for the Dominican Republic case. The parties began settlement discussions on January 16, 2014, which discussions are still ongoing. At this time we do not believe itthese matters will have a material adverse effect on our financial condition. However, the ultimate legal and financial liability with respect to these matters cannot be estimated with certainty and the Dominican Republic case is complicated by its foreign venue.

Steelhead Litigation

On January 14, 2013, Steelhead Licensing LLC (“Steelhead”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the District of Puerto Rico, alleging that certain of our products infringe claims of U.S. Patent No. 5,491,834. Steelhead iswas seeking injunctive relief as well as the recovery of unspecified monetary damages. On May 24, 2013 we entered into a Settlement and Patent License Agreement with Steelhead whereby we denied any wrongdoing and received a fully paid up and perpetual license to Steelhead patents in exchange for a one-time cash payment of an immaterial amount. The lawsuit has now been dismissed with prejudice.

Wyncomm Litigation

On April 12, 2013, Wyncomm LLC (“Wyncomm”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the District of Delaware, alleging that certain of our products infringe claims of U.S. Patent No. 5,506,866. Wyncomm is seeking recovery of unspecified monetary damages. We do not believe we infringe the SteelheadWyncomm patent and intend to defend ourselves vigorously. On February 13, 2014 we filed an answer with the Court stating that we do not infringe and setting forth multiple defenses. We are currently in settlement discussions with Wyncomm, and do not believe this lawsuit will have a material adverse effect on our financial condition.

Blue Spike Litigation

On October 8, 2013, Blue Spike, LLC (“Blue Spike”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the Eastern District of Texas, alleging that certain of our products infringe claims of U.S. Patent No. 5,745,569. Blue Spike is seeking recovery of unspecified monetary damages. We do not believe we infringe the Blue Spike patent and intend to defend ourselves vigorously. On February 10, 2014 we filed an answer with the Court stating that we do not infringe and setting forth multiple defenses. Due to the inherent uncertainty of litigation, we cannot identify probable or estimable damages related to the lawsuit at this time.

The Company may become involved in certain other legal proceedings and claims which arise in the normal course of business. Other than as described above, as of the filing date of this report, the Company did not have any significant litigation outstanding.

 

Item 4.Mine Safety Disclosures.

Not Applicable.

PART II

 

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our Common Stock trades on The NASDAQ Capital Market under the symbol “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:

 

2013

  High   Low 

First Quarter

  $0.77    $0.52  

Second Quarter

  $0.62    $0.38  

Third Quarter

  $0.70    $0.44  

Fourth Quarter

  $1.89    $0.48  

2012

  High   Low   High   Low 

First Quarter

  $1.05    $0.58    $1.05    $0.58  

Second Quarter

  $1.68    $0.72    $1.68    $0.72  

Third Quarter

  $1.78    $1.08    $1.78    $1.08  

Fourth Quarter

  $1.19    $0.60    $1.19    $0.60  

2011

  High   Low 

First Quarter

  $1.28    $0.74  

Second Quarter

  $0.94    $0.65  

Third Quarter

  $0.86    $0.50  

Fourth Quarter

  $0.74    $0.50  

As of March 20, 20137, 2014 the closing price of our common stock on The NASDAQ Capital Market was $0.60,$3.68, and there were approximately nine stockholders of record.

We have not paid any cash dividends and do not expect to pay any cash dividends in the foreseeable future.

The information regarding equity compensation plans is incorporated by reference into Item 12 of this Form 10-K, which incorporates by reference the information set forth in the Company’s Definitive Proxy Statement in connection with the 20132014 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 20122013 fiscal year.

Unregistered Issuances.

None for applicable period.

Issuer Repurchases of Equity Securities.

None for applicable period.

 

Item 6.Selected Financial Data.

Not Applicable.

 

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our 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” and other information contained in this annual report. The discussion is based upon, among other things, our Consolidated Audited Financial Statements, which have been prepared in accordance with 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 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 a provider of wireless handsets (which may be referred to herein as “phones”, “cell phones”, “mobile phones”, “feature phones” and “smartphones”) and accessories to carriers, distributors and OEMs in Latin America, Asia Pacific, Europe, Africa and Africa.the United States. We design, develop, source and sell our proprietary line of products under theverykool® brand and on a private label basis to certain customers (collectively referred to asverykool® products).verykool® products include entry-level, mid-tier and high-end feature phones and Android-based smartphones. We first introduced theverykool® brand in 2006, and have been working to gain brand identity and grow sales. We are now in the midst of a transformation ofhave recently transformed our company as we move from our former existenceprior business model as a distributor of phones designed, developed and manufactured by others, to our newcurrent business model of designing, manufacturing, sourcing and selling our ownverykool® products. During the year ended December 31, 2012, 92% of our sales were comprised ofverykool® products and we are now focused on growing our revenue base for these products.

ForOver the past five years, our business has had two primary components: (1) legacy distribution of wireless handsets supplied by major manufacturers, primarily Samsung, and (2) provision of our own proprietaryverykool® products that we originally sourced from independent design houses and original design manufacturers (“ODMs”). Our revenue peaked 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 productproducts to carriers 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 signaled the closing stagecomplete shut-down of our distribution business. Ourbusiness of third party branded products which ended with the termination on March 31, 2012 of our distribution agreement with Samsung was scheduled to expire December 31, 2011 but was extended until March 31, 2012 to accommodate the orderly conclusion of this business.Samsung. Since April 1, 2012, , our business has and will continue to be centered on ourverykool® product line.

Prior to 2010 weThe majority of our phones are sourced all ourverykool® phones from independent design houses and ODMsODMs. In addition, a number of phones in China. In late 2009, with a desire to improve our time-to-market, better protectproduct portfolio are developed internally by 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 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 teamShenzhen, China, which currently consists of 55 employees, primarily engineers, located in Beijing. The quarter ended June 30, 2010 was the first full quarter of operation23 employees. We contract with electronic manufacturing services (“EMS”) providers to manufacture all of our China subsidiary. Its expenses are classified as R&D expenses onbranded products.

Historically, our statement of operations, together with any NRE (non-recurring engineering) expenses paid to other design houses. We shipped our first product designed by our China team to a customer in China in October 2010 and shipped 6 other new models to customers during 2011. Although we expect to continue to use outside design houses to augment the efforts of our China development team, intraditional market focus has been Latin America. During 2013 we plandid a small amount of business with customers in the United States and sought to increaseexpand our presence in the portion of our portfolio of products that are internally designed. All of our manufacturing continuesU.S. market. In December 2013 we signed a distribution agreement with Ingram Micro Mobility which we anticipate will provide us the opportunity in 2014 to be done by contract manufacturers in China.access Ingram’s vast U.S. distribution network to carriers, retail and on-line customer channels.

Areas of Management Focus and Performance Indicators

We focus on the needs of our customers, developing and sourcing new and innovative products, fostering close relationships with manufacturers, and expanding our business in our current markets and entering into new

geographic markets, all while maintaining close attention to operational efficiencies and costs. We are particularly focused on increasing sales volumes of higher margin proprietary products in a cost effective manner to enable us to return to profitability, as well as monitoring and managing levels of accounts receivable and inventory to minimize risk. Performance indicators that are important for the monitoring and management of our business include top line sales growth, cost of sales and gross margin percentage, operating expenses in absolute dollars and as a percent of revenues and operating and net income (loss). We rely upon our in-house software

management system 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.

Management and employees spend a significant amount of time traveling to Latin America and Asia Pacific with the purpose of spending time with our key customers, suppliers, our BeijingChinese design team and other contractors 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.

Critical Accounting Policies and Estimates

Critical accounting policies are those policies that, in management’s view, are most important in the portrayal 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 us to make difficult and subjective judgments, often as a result of the need to make estimates and 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, returns and allowances. On select sales, we may agree to cooperative arrangements wherein we agree to fund future marketing programs related to the products purchased by the customer. Such arrangements are usually agreed to in advance. The amount of the co-op allowance is recorded as a reduction of the sale and added to accrued expenses as a current liability. Subsequent expenditures made pursuant to the arrangements reduce this liability. To the extent we incur costs in excess of the established cooperative fund, we recognize the 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, evaluate these estimates on an ongoing basis and adjust our estimates each period based on actual product return activity. We recognize freight costs billed to our customers in sales and actual freight costs incurred as a component of cost of 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 allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and our historical experience.

Inventory Reserves

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 and expected pricing. We attempt to tightly control our inventory levels and in the recent past have moved more to a build-to-order model. However, because we need to place non-cancelable orders with our contract manufacturers with a lead time of 30 to 60 days, and because we may not have a confirmed customer purchase order in hand as quickly as we would like to, we sometimes take inventory risk. As our products get closer to end-of-life status, we are more strict about our build-to-order policy in order to limit our inventory exposure on older product.

Results of Operations:

The following table sets forth certain items from our consolidated statements of operations and comprehensive loss as a percentage of net sales for the periods indicated:

 

  2012 2011 2010   2013 2012 2011 

Net sales

   100.0  100.0  100.0   100.0  100.0  100.0

Cost of sales

   80.2  87.0  93.4   81.7  80.2  87.0
  

 

  

 

  

 

   

 

  

 

  

 

 

Gross profit

   19.8  13.0  6.6   18.3  19.8  13.0
  

 

  

 

  

 

   

 

  

 

  

 

 

Operating expenses:

        

Selling, general and administrative

   20.6  15.7  10.8   17.8  20.6  15.7

Research and development

   6.5  4.5  1.3   3.5  6.5  4.5
  

 

  

 

  

 

   

 

  

 

  

 

 
   27.1  20.2  12.1   21.3  27.1  20.2
  

 

  

 

  

 

   

 

  

 

  

 

 

Operating loss from continuing operations

   -7.3  -7.2  -5.5

Operating loss

   -3.0  -7.3  -7.2

Other income (expense):

        

Interest income (expense), net

   0.2  0.0  0.0   1.5  0.2  0.0

Other income (expense), net

   -0.2  0.1  0.0   0.0  -0.2  0.1
  

 

  

 

  

 

   

 

  

 

  

 

 

Loss from continuing operations before income taxes

   -7.3  -7.1  -5.5

Loss before income taxes

   -1.5  -7.3  -7.1

Benefit (provision) for income taxes

   0.0  0.0  0.5   -0.1  0.0  0.0
  

 

  

 

  

 

 

Loss from continuing operations

   -7.3  -7.1  -5.0

Income from discontinued operations, net of tax

   0.0  0.0  0.1
  

 

  

 

  

 

   

 

  

 

  

 

 

Net loss

   -7.3  -7.1  -4.9   -1.6  -7.3  -7.1
  

 

  

 

  

 

   

 

  

 

  

 

 

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.

Year Ended December 31, 2013 Compared With Year Ended December 31, 2012

Net Sales

For the year ended December 31, 2013, our total net sales of $37.9 million increased by $3.6 million, or 10.5%, compared to net sales of $34.3 million in 2012. Sales during 2013 ofverykool® products increased by $6.3 million, or 20.1%, compared to $31.6 million in 2012, offset by the decrease of $2.7 million of Samsung distribution sales in 2012. Our Samsung distribution business ended March 31, 2012. Our revenue growth reflects strong performance with carrier customers in Peru, Guatemala, Puerto Rico and the Dominican Republic, partially offset by declines in private label sales in Europe, Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”). 2013 represented a record year for sales ofverykool® products, both in terms of dollar value and units sold. We shipped 1.9 million units in 2013, an 86% increase over 1.0 million units shipped in 2012. However, the product mix shifted significantly to low-end feature phones resulting in a reduction of our average selling price from $30.19 in 2012 to $19.65 in 2013.

Cost of Sales, Gross Profit and Gross Margin

   For the Year
Ended December 31,
  Increase
(Decrease)
 
   2013  2012  
   (Dollar amounts in thousands)    

Net sales

  $37,895   $34,294    10.5

Cost of sales

   30,953    27,488    12.6
  

 

 

  

 

 

  

Gross profit

  $6,942   $6,806    2.0
  

 

 

  

 

 

  

Gross margin

   18.3  19.8  (7.7%) 

For the year ended December 31, 2013, cost of sales was $31.0 million, 81.7% of net sales, and gross margin was 18.3%, compared to cost of sales of $27.5 million, 80.2% of net sales, and a 19.8% gross margin for the year ended December 31, 2012. In 2013, our gross profit amounted to $6.9 million, an increase of 2.0% from $6.8 million in 2012. The 7.7% reduction in gross margin was primarily the result of a higher concentration of sales of low-end feature phones at lower gross margins.

Operating Expenses and Operating Loss

For the year ended December 31, 2013, operating expenses of $8.1 million decreased by $1.2 million, or 13.0%, from $9.3 million in 2012. Selling, general and administrative (“SG&A”) expenses decreased by $0.3 million and R&D spending decreased by $0.9 million. The decrease in SG&A expenses in 2013 compared to 2012 was primarily the result of a lack of bad debt expense in 2013 compared to an isolated bad debt recorded in the first quarter of 2012. The decreased R&D expenses were primarily the result of the reduction-in-force and consolidation of our development team into our Shenzhen, China office which we accomplished in the first and second quarters of 2013. Severance costs of $100,000 for the employees terminated in the first quarter of 2013 were recorded in the fourth quarter of 2012 as we finalized the plan to eliminate the headcount redundancies in December 2012.

For the year ended December 31, 2013, we sustained an operating loss of $1.1 million, cutting by more than half the operating loss of $2.5 million for the year ended December 31, 2012. The $1.4 million improvement came primarily from the $1.2 million reduction in operating expenses and $0.1 million improvement in gross profit.

Interest Expense and Other Income (Expense)

For the year ended December 31, 2013, other income (expense) of $582,000 consisted principally of $527,000 related to the legal defeasance of a previously recorded supplier obligation that had been included in accrued expenses on our balance sheet and $55,000 related to a forfeited customer deposit. Interest income, principally from a customer installment obligation, amounted to $17,000. In 2012, other income (expense) included $72,000 of expense comprised of $48,000 of foreign exchange losses and a $24,000 loss on disposal of fixed assets. We also recorded $61,000 of interest income primarily related to financed customer receivables.

Net Loss

For the year ended December 31, 2013, our net loss was $597,000 after a tax provision of $51,000 related primarily to a foreign dividend received from one of our wholly owned subsidiaries. Because of our prior operating losses and lack of carry-back ability, our provision for income taxes for 2012 was nominal and our net loss was $2.5 million.

Year Ended December 31, 2012 Compared With Year Ended December 31, 2011

Net Sales

For the year ended December 31, 2012, our net sales of $34.3 million decreased by $0.6 million, or 1.7%, compared to net sales of $34.9 million in 2011. The significant decrease in our distribution business from 2011 to 2012 was almost entirely offset by the increase in sales of our brandedverykool® products. Our Samsung distribution business ended March 31, 2012 as a consequence of a stiff import tariff on certain electronic devices, including wireless handsets, that was enacted in Argentina in November 2009 and an additional import regulation which became effective in March 2011. These protective import actions began to negatively affect our sales beginning in the first quarter of 2010, accelerated through 2010 and continued through the end of 2011. In 2012,

our Samsung distribution sales declined by $10.7 million, or 81%, to $2.5 million from $13.2 million in 2011. Nearly offsetting this decline was an increase in sales of our brandedverykool® products of $10.1 million, or 47.3%, to $31.6 million from $21.4 million in 2011. This represented a record year for sales ofverykool® products, both in terms of dollar value and units sold.

Cost of Sales, Gross Profit and Gross Margin

 

   For the Year
Ended December 31,
  Increase
(Decrease)
 
   2012  2011  
   (Dollar amounts in thousands)    

Net sales

  $34,294   $34,884    (1.7%) 

Cost of sales

   27,488    30,344    (9.4%) 
  

 

 

  

 

 

  

Gross profit

  $6,806   $4,540    49.9
  

 

 

  

 

 

  

Gross margin

   19.8  13.0  52.3

For the year ended December 31, 2012, cost of sales was $27.5 million, 80.2% of net sales, and gross margin was 19.8%, compared to cost of sales of $30.3 million, 87.0% of net sales, and a 13.0% gross margin for the year ended December 31, 2011. In 2012, our gross profit amounted to $6.8 million, an increase of 49.9%, from $4.5 million in 2011. The significant improvements in both our gross profit and our gross margin percentage arewere primarily a result of the shift in the mix of sales to a lower concentration of distribution sales and a higher concentration of branded sales incident to the expiration of our distribution agreement with Samsung. Sales of ourverykool® branded products typically result in higher gross margins than our distribution sales. In 2011, distribution sales comprised 38% of total revenues, with 62% represented by branded sales. In 2012, distribution sales fell to 8% of total revenues, with 92% coming from sales of brandedverykool® products.

Operating Expenses and Operating Loss from Continuing Operations

For the year ended December 31, 2012, operating expenses of $9.3 million increased by $2.2 million, or 31.5%, from $7.1 million in 2011. Selling, general and administrative (“SG&A”) expenses increased by $1.6 million and R&D spending increased by $0.6 million. The increased SG&A expenses includeincluded increases in the following areas: personnel additions in the sales, logistics and service departments, sales commissions on increased sales ofverykool® branded products, marketing, homologation and an isolated bad debt recorded in the first quarter of 2012. The increased R&D expenses arewere primarily the result of increased headcount during the second half of 2012 to enable the contemporaneous development of a number of new smartphone models. In December 2012, as these developments drew to a close, we finalized a plan to eliminate the headcount redundancies in the first quarter of 2013 and restructure our China workforce. Severance costs for the terminated employees of $100,000 were recorded in the fourth quarter of 2012 and are alsowere included in R&D expense for the year.

For the year ended December 31, 2012, we sustained an operating loss from continuing operations of $2.5 million, equal to the operating loss of $2.5 million for the year ended December 31, 2011. The $2.2 million increase in gross profit in 2012 was offset by the $2.2 million increase in operating expenses. We expect that the restructuring in China noted above will result in an annual savings of $600,000 per year once it is completed in the first quarter of 2013.

Interest Expense and Other Income (Expense)

During the year ended December 31, 2012, other income (expense) included $72,000 of expense comprised of $48,000 of foreign exchange losses and a $24,000 loss on disposal of fixed assets. We also recorded $61,000 of interest income primarily related to financed customer receivables. In 2011 we had $30,000 of other income, consisting primarily of gain on sale of fixed assets, and $11,000 of interest income on a tax refund.

Net Loss

Because other income (expense) and income tax expense in both 2012 and 2011 were minimal, our net losses in both years were substantially equivalent to the operating losses from continuing operations for the respective years.

Year Ended December 31, 2011 Compared With Year Ended December 31, 2010

Net Sales

For The nominal income tax was the year ended December 31, 2011, our net sales of $34.9 million decreased by $37.6 million, or 51.9%, compared to net sales of $72.5 million in 2010. The significant decline was primarily the continued effect of a stiff import tariff on certain electronic devices, including wireless handsets, that was enacted in Argentina in November 2009 and an additional import regulation which became effective in March 2011. These protective import actions began to negatively affect our sales beginning in the first quarter of 2010, accelerated through 2010 and continued through the end of 2011. In 2011, our Samsung distribution sales declined by $47.8 million, or 78%, to $13.2 million from $61.0 million in 2010. Partially offsetting this decline was an increase in salesresult of our brandedverykool® products of $10.2 million, or 90.3%, to $21.4 million from $11.3 million in 2010.

Cost of Sales, Gross Profit and Gross Margin

   For the Year
Ended December 31,
  Increase
(Decrease)
 
   2011  2010  
   (Dollar amounts in thousands)    

Net sales

  $34,884   $72,530    (51.9%) 

Cost of sales

   30,344    67,734    (55.2%) 
  

 

 

  

 

 

  

Gross profit

  $4,540   $4,796    (5.3%) 
  

 

 

  

 

 

  

Gross margin

   13.0  6.6  97.0

For the year ended December 31, 2011, cost of sales was $30.3 million, 87.0% of net sales, and gross margin was 13.0%, compared to cost of sales of $67.7 million, 93.4% of net sales, and a 6.6% gross margin for the year ended December 31, 2010. In 2011, our gross profit amounted to $4.5 million, a decrease of 5.3% from $4.8 million in 2010. The dramatic improvement in our gross margin is largely a result of the shift in the mix of sales to a lower concentration of distribution sales and a higher concentration of branded sales. Sales of ourverykool® branded products typically result in higher gross margins than our distribution sales. In 2010, distribution sales comprised 84% of total revenues, with only 16% represented by branded sales. In 2011, distribution sales fell to 38% of total revenues, with 62% coming from branded sales.

Operating Expenses and Operating Loss from Continuing Operations

For the year ended December 31, 2011, operating expenses of $7.1 million decreased by $1.7 million, or 19.9%, from $8.8 million in 2010. Selling, general and administrative (“SG&A”) expenses declined by $2.3 million, but this reduction was partially offset by an increase in R&D spending of $0.6 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 volume, which decreased 52% in 2011 compared to 2010. Although we made reductions in other expenses as well, such reductions were not proportionate to the decline in sales. We significantly reduced marketing and legal expenses in 2011 compared to 2010 and reduced occupancy expenses through the closure of our Miami distribution center in March 2011. As a percentage of net sales, total operating expenses increased to 20.2% in 2011 compared to 12.1% in 2010, primarily due to the reasons outlined above.

For the year ended December 31, 2011, we sustained an operating loss from continuing operations of $2.5 million compared to an operating loss of $4.0 million for the year ended December 31, 2010. The 38% reduction in the operating loss in 2011 was achieved despite a 52% reduction in net sales. We generated slightly less gross profit, more than doubled our gross profit margin percentage and reduced operating expenses.

Interest Expense and Other Income

During the year ended December 31, 2011, we had no bank borrowings and consequently no interest expense. Interest expense in 2010 of $23,000 related to borrowings under our bank revolving line of credit in the first half of the year. The line of credit was terminated on September 22, 2010. In 2011 we had $11,000 of interest income on a tax refund and $30,000 of other income consisting primarily of gain on sale of fixed assets.

Loss from Continuing Operations

For the year ended December 31, 2011, we sustained a loss from continuing operations of $2.5 million compared to a loss of $3.6 million in 2010. The 2010 loss from continuing operations benefited from a tax refund of $423,000 from the carry back of netprior operating losses in 2007 and 2008 to prior years.

Income (Loss) from Discontinued Operations

During the second quarterlack 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. The discontinuation was completed in 2011 without any further income or loss.

Net Loss

Because the results of discontinued operations in both 2011 and 2010 were minimal, our net losses in both years were substantially equivalent to the losses from continuing operations for the respective years.carry-back ability.

Financial Condition, Liquidity and Capital Resources

Historically, we have used cash from our sale of products and lines of credit (bank and vendor) to provide the capital needed to support our business. In late 2011, we added a new foreign exchange (“FX”) hedging facility with our bank as a tool to hedge our exposure to changes in certain foreign currency exchange rates. We electively terminated this facility in the first quarter of 2013 and the restricted cash supporting it was returned to our general cash reserves.

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, 20122013 we did not have any material commitments for capital expenditures. Our largest working capital requirement is for accounts receivable, and, to a lesser extent, inventory (including prepaid inventory, which is a component of prepaid assets), as we continually strive to minimize our inventory levels. We typically bill customers on an open account basis, subject to our standard credit quality andqualification, with payment terms ranging between net 30 and net 6090 days. Some of our larger carrier customers, however, often delay payments beyond the invoiced payment terms. 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 ifChinese suppliers from whom we grant them extended payment terms.purchase product do not offer us vendor credit. Furthermore, we typically are required to pay a 15% to 20% deposit at the time we place a purchase order with the remaining balance due prior to shipment.

As of December 31, 2012,2013, we had $2.4 million of cash and cash equivalents and $16.0 million of working capital compared to $6.2 million of cash, cash equivalents and restricted cash and $16.3 million of working capital compared to $12.4 million of cash, cash equivalents and restricted cash and $18.6$16.2 million of working capital as of December 31, 2011.2012. As of both December 31, 20122013 and 2011,2012, we had no bank debt.

As of December 31, 2012,2013, cash and cash equivalents consisted of cash on hand and in bank accounts.

Operating Activities

Net cash used by operating activities for the year ended December 31, 20122013 amounted to $5.9$3.7 million compared to $0.1$5.9 million of cash provided by operations for the year ended December 31, 2011. Although the net

loss2012. The $2.2 million reduction of $2.5 million in 2012cash required to fund operations was equaldue largely to the $2.5$1.2 million reduction in the net loss, in 2011, our business contracted significantly in 2011adjusted for non-cash items, for 2013 compared to 2010 and2012.

In 2013, we used $3.4 million of cash to fund our net working capital requirements. This included a $1.6 million increase in trade accounts receivable, reflecting the 40% increase in sales in the fourth quarter of 2013 compared to 2012, partially offset by a more current receivable base. Days sales outstanding in receivables at December 31, 2013 was 90 days, which was a substantial improvement over the 109 days at December 31, 2012. We also used $1.9 million to increase our prepaid inventory levels, partially offset by a $1.2 million reduction in receivables in 2011inventories. An additional $1.0 million was the largest factor in the stabilization of cash that year.used to reduce payables and accruals.

In 2012, we used $4.4 million of cash to fund our net working capital requirements. This included a $1.9 million increase in trade accounts receivable, reflecting a larger share of our fourth quarter sales to carrier customers who traditionally pay slower on purchases they make during the holiday season.delayed payments in December. Days sales outstanding in receivables at December 31, 2011 was 109 days, which was significantly greater than the 65 days at December 31, 2011. We also used $1.4 million to increase our inventory levels, although this was partially offset by a $1.1 million reduction in prepaid inventories. An additional $1.9 million was used to reduce payables and accruals and $0.3 million for other assets.

In 2011, we generated $1.6 million of positive cash flow from a reduction in net working capital. This consisted primarily of a $3.7 million reduction in trade accounts receivable, reflecting the 51.9% drop in annual revenue for the year, and $0.5 million from a reduction in other receivables. Days sales outstanding in receivables at December 31, 2011 was 65 days, which was a significant improvement over 77 days at December 31, 2010. Partially offsetting the reduction in receivables was an increase in inventories and prepaids of $2.4 million and a net reduction in payables and accruals of $0.2 million.

Investing Activities

Net cash used in investing activities was $0.4 million and $1.2 million for the years ended December 31, 2012 and 2011, respectively. Cash used in both years included investment into purchase property and equipment, primarily tooling and molds for our proprietaryverykool®products. products, amounted to $145,000 in 2013 compared to $396,000 in 2012. In 2011,2013, we also investedfreed up $1.0 million in aof restricted cash accountwhich had been used to secure our obligations under a newan FX hedging facility with our bank.bank which was terminated in the first quarter.

Financing Activities

There were no financing activities in the years ended December 31, 2013, 2012 andor 2011. 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 then existing revolving credit facility. Pursuant to that bank facility, 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 current outlook for our business, weWe believe that our current cash resources and working capital are sufficient tomay adequately fund our operations at the current level. However, the lack of additional cash resources could impede the future growth of our business. In January 2014, we received commitments from certain of our product vendors to extend 60 day credit terms to us, supported by credit insurance. We would still be required to pay the upfront 15% to 20% deposit upon placement of purchase orders, but the remaining balance would be subject to the 60 day credit terms beginning on the date of product delivery. We would reimburse the vendor for the foreseeable future. However, our cashcost of the credit insurance, as well as pay a finance charge based on the balances outstanding during the 60-day term. Two credit insurers have committed to a combined policy coverage of $4 million, and working capital needs could change significantly if our business grows rapidly or losses continue. The lackthe combined cost of the insurance and the finance charge would be at effective annual rates from 5.8% to 7.4%. In addition, we are currently in discussions with a linenumber of credit could inhibit our growth. For this reason, we continue evaluating potential lines of credit or alternatefunding sources to provide additional asset-based financing, vehicles.but there can be no assurance that a definitive agreement will be reached.

Off-Balance Sheet Arrangements

At December 31, 2012,2013, we did not have any off-balance sheet arrangements.

Contractual Obligations

We lease corporate and administrative office facilities and equipment under non-cancelable operating leases. Rent expense under these leases was approximately $301,000, $385,000 $406,000 and $483,000$406,000 for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively. At December 31, 2012,2013, 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 (in thousands):

 

      Payments due by period       Payments due by period 

Contractual Obligations

  Total   Less than
1 year
   1-3 years   3-5 years   More than
5 years
   Total   Less than
1 year
   1-3 years   3-5 years   More than
5 years
 

Operating Lease Obligations

  $929    $209    $370    $350         $737    $195    $389    $153       

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” 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 Rates

At December 31, 2012,2013, we had no outstanding interest bearing debt and no rate-sensitive investments.

Foreign Exchange and Other Risks

At December 31, 20122013 and 2011,2012, foreign currency cash accounts in Mexican pesos amounted to $105,000$18,000 and $64,000,$105,000, respectively. Also at December 31, 2013 and 2012, accounts receivable denominated in Mexican pesos amounted to $271,000.$165,000 and $271,000, respectively. Prior to December 2011, all of our sales transactions were denominated in U.S. dollars. Beginning in December 2011, we began to price sales in foreign currencies only to certain customers in Mexico. Product costs, and the majority of our operating expenses are also denominated in U.S. dollars, but payroll and other costs of our BeijingChina development team are denominated in Chinese Yuan Renminbi.

Foreign currency risks are associated with our cash, receivables, payroll and payables denominated in foreign currencies. Fluctuations in exchange rates will result in foreign exchange gains and losses on these foreign currency assets and liabilities, which are included in other income (expense) in our consolidated statements of operations. At December 31, 2011 we had a single foreign currency forward contract in the amount of $303,000. There were no forward contracts outstanding at December 31, 2013 or 2012. We do not believe that foreign currency fluctuations had a material impact on our financial results during 2013, 2012 or 2011.

As a result of our international sales, our future operating results could be adversely affected by a variety of factors, including changes in specific countries’ political, economic or regulatory conditions and trade protection measures, particularly China. Our market risk management includes an accounts receivable insurance policy for our foreign sales, as well as any domestic 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 2012, 2011 or 2010.

 

Item 8.Financial Statements and Supplementary Data.

The information required by this item is included below in “Item 15 Exhibits, Financial Statements and Financial Statement Schedules” and incorporated by reference herein.

 

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.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”) under the supervision and with the participation of our management, including the President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’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’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 the Chief Financial Officer concluded that the Company’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’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 Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20122013 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-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2012.2013. This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to law, rules and regulations that permit us to provide only management’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, 2012,2013, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

Item 9B.Other Information.

None.

PART III

 

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 20132014 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 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, 3636 Nobel Drive, Suite 325, San Diego, California 92122.

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 SEC.

 

Item 11.Executive Compensation.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20132014 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.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20132014 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.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20132014 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.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 20132014 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.

PART IV

 

Item 15.Exhibits and Financial Statement Schedules.

(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 statements:

The consolidated balance sheets as of December 31, 20122013 and 2011,2012, and the consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the years ended December 31, 2013, 2012 2011 and 2010,2011, together with notes thereto.

(2) Financial statement schedule:

Schedule II – Valuation and Qualifying Accounts.

(3) Exhibit index

SIGNATURES

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.

 

  INFOSONICS CORPORATION
March 22, 201314, 2014  By: /S/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.

 

Date:

  

Signature and Title:

March 22, 201314, 2014  

/s/    JOSEPH RAM        

Joseph Ram,

President and Chief Executive Officer and Director

(Principal Executive Officer)

March 22, 201314, 2014  

/s/    VERNON A. LOFORTI        

Vernon A. LoForti,

Vice President, Chief Financial Officer and Secretary

(Principal Financial and Accounting Officer)

March 22, 201314, 2014  

/s/    RANDALL P. MARX        

Randall P. Marx,

Director

March 22, 201314, 2014  

/s/    ROBERT S. PICOW        

Robert S. Picow,

Director

March 22, 201314, 2014  

/s/    KIRK A. WALDRON        

Kirk A. Waldron,

Director

INFOSONICS CORPORATION

Consolidated Financial Statements

For the years ended December  31, 2013, 2012 2011 and 20102011

Table of Contents

 

   Page 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

   F-2  

CONSOLIDATED FINANCIAL STATEMENTS:

  

Consolidated Balance Sheets

   F-3  

Consolidated Statements of Operations and Comprehensive Loss

   F-4  

Consolidated Statements of Stockholders’ Equity

   F-5  

Consolidated Statements of Cash Flows

   F-6  

Notes to Consolidated Financial Statements

   F-7  

SUPPLEMENTAL INFORMATION:

  

Valuation and Qualifying Accounts—Schedule II

   F-21F-22  

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

InfoSonics Corporation

San Diego, California

We have audited the accompanying consolidated balance sheets of InfoSonics Corporation and subsidiaries as of December 31, 20122013 and 2011,2012, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2012.2013. Our audits also included the financial statement schedule of InfoSonics Corporation listed in Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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 auditaudits 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, 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 as of December 31, 20122013 and 2011,2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012,2013, 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.

/s/ SINGERLEWAK LLP

Irvine, California

March 22, 201314, 2014

INFOSONICS CORPORATION

Consolidated Balance Sheets

(Amounts in thousands, except per share data)

 

  December 31,   December 31, 
  2012 2011   2013 2012 
ASSETS      

Current assets:

      

Cash and cash equivalents

  $5,230   $11,422    $2,369   $5,230  

Restricted cash

   1,003    1,000         1,003  

Trade accounts receivable, net of allowance for doubtful accounts of $339 and $97 as of December 31, 2012 and 2011, respectively

   10,247    8,610  

Trade accounts receivable, net of allowance for doubtful accounts of $373 and $339 as of December 31, 2013 and 2012 respectively

   11,856    10,247  

Other accounts receivable

   95    76     163    95  

Inventory

   3,429    2,238     2,467    3,429  

Prepaid assets

   1,521    2,485     3,435    1,521  
  

 

  

 

   

 

  

 

 

Total current assets

   21,525    25,831     20,290    21,525  

Property and equipment, net

   367    311     200    367  

Other assets

   229    69     179    229  
  

 

  

 

   

 

  

 

 

Total assets

  $22,121   $26,211    $20,669   $22,121  
  

 

  

 

   

 

  

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities:

      

Accounts payable

  $1,514   $2,506    $1,161   $1,514  

Accrued expenses

   3,786    4,719     3,180    3,786  
  

 

  

 

   

 

  

 

 

Total current liabilities

   5,300    7,225     4,341    5,300  
  

 

  

 

   

 

  

 

 

Commitments and Contingencies (Note 9)

   

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     14    14  

Additional paid-in capital

   32,282    32,051     32,391    32,282  

Accumulated other comprehensive loss

   (13  (117   (18  (13

Accumulated deficit

   (15,462  (12,962   (16,059  (15,462
  

 

  

 

   

 

  

 

 

Total stockholders’ equity

   16,821    18,986     16,328    16,821  
  

 

  

 

   

 

  

 

 

Total liabilities and stockholders’ equity

  $22,121   $26,211    $20,669   $22,121  
  

 

  

 

   

 

  

 

 

Accompanying notes are an integral part of these financial statements.

INFOSONICS CORPORATION

Consolidated Statements of Operations and Comprehensive Loss

(Amounts in thousands, except per share data)

 

  For the Year Ended December 31,   For the Year Ended December 31, 
  2012 2011 2010   2013 2012 2011 

Net sales

  $34,294   $34,884   $72,530    $37,895   $34,294   $34,884  

Cost of sales

   27,488    30,344    67,734     30,953    27,488    30,344  
  

 

  

 

  

 

   

 

  

 

  

 

 

Gross profit

   6,806    4,540    4,796     6,942    6,806    4,540  
  

 

  

 

  

 

   

 

  

 

  

 

 

Operating expenses:

        

Selling, general and administrative

   7,075    5,479    7,828     6,751    7,075    5,479  

Research and development

   2,218    1,588    977     1,336    2,218    1,588  
  

 

  

 

  

 

   

 

  

 

  

 

 
   9,293    7,067    8,805     8,087    9,293    7,067  
  

 

  

 

  

 

   

 

  

 

  

 

 

Operating loss from continuing operations

   (2,487  (2,527  (4,009

Operating loss

   (1,145  (2,487  (2,527

Other income (expense):

        

Other income (expense), net

   (72  30    4     582    (72  30  

Interest income (expense), net

   61    11    (23   17    61    11  
  

 

  

 

  

 

   

 

  

 

  

 

 

Loss from continuing operations before benefit (provision) for income taxes

   (2,498  (2,486  (4,028

Benefit (provision) for income taxes

   (2  (2  416  
  

 

  

 

  

 

 

Loss from continuing operations

   (2,500  (2,488  (3,612

Income from discontinued operations, net of tax (Note 2)

           44  

Operating loss before benefit (provision) for income taxes

   (546  (2,498  (2,486

Provision for income taxes

   (51  (2  (2
  

 

  

 

  

 

   

 

  

 

  

 

 

Net loss

  $(2,500 $(2,488 $(3,568  $(597 $(2,500 $(2,488
  

 

  

 

  

 

   

 

  

 

  

 

 

Net loss per share (basic and diluted):

    

Continuing operations

  $(0.18 $(0.18 $(0.25

Discontinued operations

             
  

 

  

 

  

 

 

Net loss

  $(0.18 $(0.18 $(0.25

Net loss per share (basic and diluted)

  $(0.04 $(0.18 $(0.18
  

 

  

 

  

 

   

 

  

 

  

 

 

Basic and diluted weighted-average number of common shares outstanding

   14,184    14,184    14,184     14,184    14,184    14,184  

Comprehensive Loss:

        

Net loss

  $(2,500 $(2,488 $(3,568  $(597 $(2,500 $(2,488

Foreign currency translation adjustments

   104    14    (124   (5  104    14  
  

 

  

 

  

 

   

 

  

 

  

 

 

Comprehensive loss

  $(2,396 $(2,474 $(3,692  $(602 $(2,396 $(2,474
  

 

  

 

  

 

   

 

  

 

  

 

 

Accompanying notes are an integral part of these financial statements.

INFOSONICS CORPORATION

Consolidated Statements of Stockholders’ Equity

(Amounts in thousands)

 

  Common Stock   

Additional

Paid-In

   

Retained

Earnings

 

Accumulated

Other

Comprehensive

     Common Stock   Additional
Paid-In
Capital
   Retained
Earnings
(Deficit)
  Accumulated
Other
Comprehensive
Loss
  Total 
Shares   Amount   Capital   (Deficit) Loss Total 

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
  

 

   

 

   

 

   

 

  

 

  

 

  Shares   Amount   Additional
Paid-In
Capital
   Retained
Earnings
(Deficit)
  Accumulated
Other
Comprehensive
Loss
  Total 

Balance, December 31, 2010

   14,184     14     31,856     (10,474  (131  21,265     14,184    $14     

Stock-based compensation expense

             195             195               195             195  

Foreign currency translation

                      14    14                        14    14  

Net loss

                  (2,488      (2,488                  (2,488      (2,488
  

 

   

 

��  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Balance, December 31, 2011

   14,184     14     32,051     (12,962  (117  18,986     14,184     14     32,051     (12,962  (117  18,986  

Stock-based compensation expense

             231             231               231             231  

Foreign currency translation

                      104    104                        104    104  

Net loss

                  (2,500      (2,500                  (2,500      (2,500
  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Balance, December 31, 2012

   14,184    $14    $32,282    $(15,462 $(13 $16,821     14,184     14     32,282     (15,462  (13  16,821  

Stock-based compensation expense

             109             109  

Foreign currency translation

                      (5  (5

Net loss

                  (597      (597
  

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Balance, December 31, 2013

   14,184    $14    $32,391    $(16,059 $(18 $16,328  
  

 

   

 

   

 

   

 

  

 

  

 

 

Accompanying notes are an integral part of these financial statements.

INFOSONICS CORPORATION

Consolidated Statements of Cash Flows

(Amounts in thousands)

 

  For the Year Ended December 31,   For the Year Ended December 31, 
  2012 2011 2010   2013 2012 2011 

Cash flows from operating activities:

        

Net loss

  $(2,500 $(2,448 $(3,568  $(597 $(2,500 $(2,448

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

        

Depreciation

   276    172    281     263    276    172  

Loss on disposal of fixed assets

   64    12    66     49    64    12  

Provision for (recovery of) bad debts

   242    (100  (393   34    242    (100

Provision for obsolete inventory

   171    7    (12   (194  171    7  

Stock-based compensation

   231    195    129     109    231    195  

(Increase) decrease in:

        

Trade accounts receivable

   (1,879  3,729    30,068     (1,643  (1,879  3,729  

Other accounts receivable

   (19  532    396     (68  (19  532  

Inventory

   (1,362  (557  1,747     1,156    (1,362  (557

Prepaids

   964    (1,889  (227   (1,914  964    (1,889

Other assets

   (160  (1  30     50    (160  (1

Increase (decrease) in:

        

Accounts payable

   (992  (1,690  (5,423   (353  (992  (1,690

Accrued expenses

   (933  1,493    (2,531   (606  (933  1,493  
  

 

  

 

  

 

   

 

  

 

  

 

 

Cash provided by (used in) continuing operations

   (5,897  (585  20,563  

Cash provided by (used in) discontinued operations, net

       710    (554

Cash used in continuing operations

   (3,714  (5,897  (585

Cash provided by discontinued operations, net (Note 2)

           710  
  

 

  

 

  

 

   

 

  

 

  

 

 

Net cash provided by (used in) operating activities

   (5,897  125    20,009     (3,714  (5,897  125  
  

 

  

 

  

 

   

 

  

 

  

 

 

Cash flows from investing activities:

        

Purchase of property and equipment

   (396  (201  (325   (145  (396  (201

Increase in restricted cash

   (3  (1,000    

(Increase) decrease in restricted cash

   1,003    (3  (1,000
  

 

  

 

  

 

   

 

  

 

  

 

 

Net cash used in investing activities

   (399  (1,201  (325
  

 

  

 

  

 

 

Cash flows from financing activities:

    

Payments on revolving line of credit

           (25,494
  

 

  

 

  

 

 

Net cash used in financing activities

           (25,494

Net cash provided by (used in) investing activities

   858    (399  (1,201
  

 

  

 

  

 

   

 

  

 

  

 

 

Effect of exchange rate changes on cash

   104    14    (124   (5  104    14  
  

 

  

 

  

 

   

 

  

 

  

 

 

Net decrease in cash and cash equivalents

   (6,192  (1,062  (5,934   (2,861  (6,192  (1,062

Cash and cash equivalents, beginning of period

   11,422    12,484    18,418     5,230    11,422    12,484  
  

 

  

 

  

 

   

 

  

 

  

 

 

Cash and cash equivalents, end of period

  $5,230   $11,422   $12,484    $2,369   $5,230   $11,422  
  

 

  

 

  

 

   

 

  

 

  

 

 

Cash paid for interest

  $   $   $23    $   $   $  

Cash paid for income taxes

               $   $   $  

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION AND LINE OF BUSINESS

InfoSonics Corporation (“InfoSonics”) was incorporated in February 1994 in the state of California and reincorporated in September 2003 in the state of Maryland. InfoSonics and its subsidiaries, Axcess Mobile, LLC (“Axcess 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, verykool Hong Kong Limited, and verykool Wireless Technology Limited (collectively, the “Company”), develop, manufacture and sell wireless telecommunication products and accessories to wireless carriers, distributors, retailers, dealer agents and OEMs. The Company markets its branded products throughout Latin America and on a private label basis in certain countries in Asia Pacific, Europe and Africa. The Company has also recently re-entered the United States market.

NOTE 2—DISCONTINUED OPERATIONS

During the quarter ended June 30, 2008, the Company assessed its distribution business in the United States and Mexico. Due to the changing environment and consolidation in the United States of the smaller regional cellular 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 fostering sales relations with the dominant cellular carriers there, management determined that it was necessary to take decisive actions to mitigate further losses. The Company implemented actions necessary to close operations related to salesdistribution operations in both of those countries. As of December 31, 2011, the discontinuance of both the domestic and Mexican businesses was complete. The results of the discontinued operations arewere as follows (in thousands):

 

  Year Ended December 31,   Year Ended December 31, 
    2012       2011     2010       2013       2012       2011   

Net sales

  $    $   $64    $    $    $  

Gross profit (loss)

        (53  64               (53

Operating income

        1    1               1  

Net income

            44                 

Depreciation and amortization

                             

NOTE 3—RESTRUCTURING

In December 2012, the Company finalized a plan to reduce its workforce in China by 21 employees, or 20% of its worldwide workforce. The reductions, which were accomplished in the first quarter of 2013, were intended to eliminate headcount redundancies built up during multiple concurrent product developments and to restructure the China workforce with a shift toward more resources in the Company’s Shenzhen office and a lower concentration in Beijing. Severance costs, mandated by Chinese labor law, related to the terminated employees of $100,000 were recorded in the fourth quarter of 2012 as R&D expense in the accompanying consolidated statement of operations. A second restructuring was affected in the second quarter of 2013 to further reduce headcount and consolidate the development team in a single location in Shenzhen. Total costs related to this restructuring amounted to approximately $192,000 including $134,000 in severance paid to terminated employees as well as legal fees and expenses related to abandonment of one incomplete development project.

NOTE 4—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 when (i) shipment of the products to customers has occurred and title has passed, (ii) 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, returns and allowances. On select sales, the Company may agree to cooperative arrangements wherein the Company agrees to fund future marketing programs related to the products purchased by the customer. Such arrangements are usually agreed to in advance. The amount of the co-op allowance is recorded as a reduction of the sale and added to accrued expenses as a current liability. Subsequent expenditures made pursuant to the arrangements 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 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. 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 net sales and actual freight costs incurred as a component of cost of sales.

Foreign Currency Transactions

Certain of the Company’s foreign subsidiaries have a functional currency that is not the U.S. dollar. Assets and liabilities of such subsidiaries are translated to U.S. dollars using exchange rates in effect at the balance sheet dates. Revenues and expenses are translated at average exchange rates in effect during the period. Translation adjustments are included in stockholders’ equity in the accompanying consolidated balance sheets as a component of accumulated other comprehensive income (loss).

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’s comprehensive loss includes foreign currency translation adjustments, which are excluded from net income and are reported as a separate component of stockholders’ 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, 20122013 and 2011,2012, the Company maintained deposits totaling $5.5$2.0 million and $11.4$5.5 million, respectively, with certain financial institutions in excess of federally insured amounts. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

Restricted Cash

Restricted cash consistsas of December 31, 2012 consisted of a cash deposit with a bank that iswas pledged as collateral for the Company’s foreign exchange hedging facility. The Company terminated the hedging facility in the first quarter of 2013 and had no restricted cash as of December 31, 2013.

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’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’s historical experience. As of December 31, 20122013 and 2011,2012, the allowance for doubtful accounts was $339,000$373,000 and $97,000,$339,000, 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 writes down its inventory when it is estimated to be excess or obsolete. As of December 31, 20122013 and 2011,2012, the inventory was net of write-downs of $278,000$84,000 and $107,000,$278,000, 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, 20122013 and 2011,2012, the prepaid inventory balances included in prepaid assets were $1,061,000$2,968,000 and $2,158,000,$1,061,000, 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.

Derivative Instruments and Hedging Activities

The Company is exposed to and hedges certain risks relating to its ongoing business activities.activities, and previously used a hedging strategy to manage one of those risks. The primary risk managed by the use of derivative instruments iswas foreign currency fluctuation risk. Forward contracts arewere entered into to manage the foreign currency risk associated with various commitments arising from trade accounts receivable that are denominated in the currency in the country where the product is shipped. Derivatives arewere held only for the purpose of hedging such risks, and are not held for speculation. The Company began pricing in foreign currencies in the fourth quarter of 2011 and the practice iswas limited to Mexico. The Company held a single forward exchange contract at December 31, 2011 that was designated as a fair value hedgeterminated the hedging facility in the first quarter of a specific trade account receivable. Because the contract was entered into close to the last day of the fiscal year,2013 and there was no unrealized gain or loss at December 31, 2011 related thereto. There were no outstanding forward exchange contracts atas of December 31, 2013 or 2012.

Fair Value of Financial Instruments

The Company measures its financial instruments in its financial statements at fair value or amounts that approximate fair value. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that use primarily market-based or independently-sourced market parameters. If market observable inputs for model-based valuation techniques are not available, the Company makes judgments about assumptions market participants would use in estimating the fair value of the financial instrument. Carrying values of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses, accounts payable, and accrued expenses approximate their fair values due to the short-term nature and liquidity of these financial instruments.

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’ carrying amount. Management determined that there was no impairment of long-lived assets during the years ended December 31, 2013, 2012 2011 and 2010.2011.

Stock-Based Compensation

The Company’s share-based compensation plans are described in Note 10.9. 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 goods or services are accounted for at fair value and are marked to market until service is complete or a performance commitment date is reached, whichever is earlier. The fair value of stock options is determined using the Black-Scholes valuation model.

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’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’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, 2013, 2012 and 2011 was $523,000, $692,000 and 2010 was $692,000, $534,000, and $1,156,000, respectively.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’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’s assets and liabilities result in a deferred tax asset, the Company 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 2004 through 20122013 tax years. State income tax returns are subject to examination for a period of three to four years after filing.

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’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 arewere greater than the Company’s weighted-average stock price for the period. For the years ended December 31, 2013, 2012 2011 and 2010,2011, the number of such shares excluded was 106,000,756,000, 106,000 and 513,000,106,000, respectively. In addition, because their effect would have been anti-dilutive, common shares from exercise of in-the-money options for the years ended December 31, 2013, 2012 and 2011 of 137,000, 537,000 and 2010 of 537,000, 527,000, and 277,000, respectively, have also been excluded from the computation of net loss per 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 and assumptions.

Major Suppliers

The Company contracts with various suppliers. Although there are a limited number of suppliers that could supply the Company’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, 2013, the Company’s three largest suppliers accounted for 38%, 12% and 10%, respectively, of total cost of sales. During the year ended December 31, 2012, the Company’s three largest suppliers accounted for 24%, 24% and 21%, respectively, of total cost of sales. During the year ended December 31, 2011, the Company’s three largest suppliers accounted for 42%, 21% and 10%, respectively, of total cost of sales. During the year ended December 31, 2010, the Company purchased materials from one supplier that accounted for 83% of total cost of sales.

Concentrations of Credit Risk, Customers and Suppliers

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, European EMEA and AfricanAPAC markets with private label sales to original equipment manufacturers, or OEMs.OEMs, as well as sales of branded products to U.S. distributors. The Company provides credit to its customers in the normal course of business and generally requires no collateral. Credit risk with respect to accounts receivable is generally concentrated due to the small number of entities comprising the Company’s overall customer base. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses based upon the Company’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’s bad debt expenses have not been significant relative to its total revenues.

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 2013 and 2011, three customers represented 10% or more of the Company’s total net sales. During 2012, only two customers represented 10% or more of the Company’s total net sales. In each of 2011 and 2010, there wereThe top three customers representing 10% or morein 2013 accounted for 20%, 14% and 13%, respectively, of the Company’s total net sales.sales and represented 18%, 15% and 24% of accounts receivable, respectively, at December 31, 2013. During 2012, the top two customers accounted for 16% and 11% of total net sales, and represented 12% and 19% of accounts receivable, respectively, atas of December 31, 2012. During 2011, the top three customers accounted for 14%, 13% and 13% of total net sales, and represented 11%, 15% and 17% of accounts receivable respectively at December 31, 2011. 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.

The Company’s agreement with Samsung to distribute its products to customers in Argentina expired on March 31, 2012, and the Company focused its business on itsverykool® products.at which time Samsung ceased to be a supplier. For itsverykool® products, the Company contracts with a number of OEM suppliers, design houses and contract manufacturers. In 2012,2013, the Company purchased products from 910 manufacturers, with the top three representing 24%38%, 24%12% and 21%10%, respectively, of cost of sales. 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 May 2011,January 2013, the FASB issued guidance to amendclarifying the accountingscope of disclosures about offsetting assets and disclosure requirements on fair value measurements.liabilities. The new guidance limits the highest-and-best-use measurescope of balance sheet offsetting disclosures to nonfinancial assets, permits certainderivative instruments, including bifurcated embedded derivatives, repurchase agreements and securities lending transactions to the extent that they are (1) offset in the financial assets and liabilities with offsetting positions in marketstatements or counterparty credit risks(2) subject to be measured at a net basis, and provides guidance on the applicabilityan enforceable master netting arrangement of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitativesimilar agreement. The disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance wasrequirements are effective for annual reporting periods beginning on or after December 15, 2011. Other than requiring additional disclosures, the full adoption of this new guidance has not had an impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. This new guidance was effective for fiscal yearsJanuary 1, 2013, and interim periods beginning after December 15, 2011 and waswithin those annual periods. Entities are required to provide the new disclosures retrospectively for all comparative periods. The Company adopted by the Company onthis guidance effective January 1, 2012.2013. The adoption of this new guidance did not have an impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued new accounting guidance on the reporting of amounts reclassified from accumulated other comprehensive income. The guidance is intended to improve the reporting of reclassifications out of accumulated other comprehensive income of various components. This includes requiring an entity to present either parenthetically on the face of the financial statements or in the notes, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The new guidance is effective for public entities for annual periods, and interim periods within those periods, beginning after December 15, 2012. The Company adopted this guidance effective January 1, 2013, which adoption did not have an impact on the Company’s consolidated financial statements.

Issued (Not adopted yet):

In December 2011,March 2013, the FASB issued an update on a parent’s accounting for the cumulative translation adjustment, which we refer to as CTA, upon derecognition of certain subsidiaries or group of assets within a foreign entity or of an investment in a foreign entity. The objective of the update is to resolve the diversity in practice about the appropriate guidance on offsetting (netting)to apply to the release of CTA into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or a business within a foreign entity. The update provides that the entire amount of the CTA associated with the foreign entity would be released when there has been a sale of a subsidiary or group of net assets within a foreign entity and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible

for offsetthe sale represents the substantially complete liquidation of the investment in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The new guidanceforeign entity. This update is effective for annualfiscal years, and interim periods within those fiscal years, beginning on or after January 1,December 15, 2013. The update should be applied prospectively from the beginning of the fiscal year of adoption. We do not expect the adoption of this new guidance to have an impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued an amendment of the income tax reporting rules intended to clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax benefit is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be netted with the deferred tax asset. The amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. We are currently evaluating the impact that adoption will have on the determination or reporting of our financial results.

NOTE 5—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 (in thousands):

 

  December 31,   December 31, 
    2012       2011     2013   2012 

Machinery and Equipment

  $327    $284    $278    $327  

Tooling, Molds and Software

   475     764     557     475  

Furniture and Fixtures

   129     42     131     129  
  

 

   

 

   

 

   

 

 
   931     1,090     966     931  

Less Accumulated Depreciation

   564     779     766     564  
  

 

   

 

   

 

   

 

 

Total

  $367    $311    $200    $367  
  

 

   

 

   

 

   

 

 

Depreciation expense was $263,000, $276,000 $172,000 and $281,000$172,000 for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively.

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”) with Wells Fargo Trade Capital LLC (“Lender”), pursuant to which the Lender could advance up to $45 million to the Company based on the expected collections of eligible receivables as well as value of the Company’s eligible inventory determined in accordance with the Agreement. The credit facility was secured by all of the assets of the Company. The interest rate for each borrowing under the credit facility was, at the option of the Company, either the Wells Fargo Bank N.A. prime rate minus 0.50% or the LIBOR rate plus 2.00%. Although the Agreement contained a provision for automatic annual renewals, Section 6.2 of the 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 Agreement, 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 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, the amount drawn against the Lender line of credit was $25.5 million representing 88% of the then available borrowing base. The line of credit was completely retired and there were no outstanding balances as of December 31, 2010.

NOTE 7—FOREIGN EXCHANGE HEDGING FACILITY

On December 9, 2011, the Company entered into a Foreign Exchange Trading Master Agreement and a Pledge Agreement (collectively, the “Agreement”) with HSBC Bank USA (the “Bank”). Under the terms of the Agreement, the Company and the Bank maycould enter into spot and/or forward foreign exchange transactions and/or foreign currency options. The Company used these derivative instruments to manage the foreign currency risk associated with its trade accounts receivable that were denominated in foreign currencies, primarily the Mexican

peso. In order to secure its obligations under the Master Trading Agreement, the Company has deposited

$1 $1 million into a restricted account pursuant to a related pledge agreement. During the year ended December 31, 2012, the Company sustained a loss of $48,000 on its hedging transactions. In February 2013, the Company elected to terminate the facility due to its limited use and the restricted cash deposit was returned to the Company’s general cash reserves.

NOTE 8—7—ACCRUED EXPENSES

As of December 31, 20122013 and 2011,2012, accrued expenses consisted of the following (in thousands):

 

  December 31,
2012
   December 31,
2011
   December 31,
2013
   December 31,
2012
 

Accrued product costs

  $2,336    $1,667    $1,572    $2,336  

Income taxes payable

   98     98     130     98  

Other accruals

   1,352     2,954     1,478     1,352  
  

 

   

 

   

 

   

 

 

Total

  $3,786    $4,719    $3,180    $3,786  
  

 

   

 

   

 

   

 

 

NOTE 9—8—COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its corporate and administrative offices, R&D officesoffice and certain equipment under operating lease agreements which expire through September 2017. Certain of the agreements contain renewal options. Future minimum payments under these operating lease agreements at December 31, 20122013 were $929,000.$737,000. Rent expense was $301,000, $385,000 $406,000 and $483,000$406,000 for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively.

Litigation

Viamport Litigation

On May 22, 2012, a lawsuit was filed against the Company in Santo Domingo, Dominican Republic (Case No. FP-12-461) by Viaimport, SRL, a former customer of the Company, and served on the Company on July 12, 2012. The complaint alleges breach of contract and seeks U.S. $1 million in damages. The Company believes that this case is without merit and intends to vigorously defend itself. In addition, on August 31, 2012, the Company filed a lawsuit against Viaimport and its principal, Omar Hassan, in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County Florida (Case No. 12-34647CA32) for non-payment of purchase obligations aggregating $288,559 and other damages. AlthoughOn August 12, 2013, Viaimport filed a counterclaim against InfoSonics in Miami-Dade County, which is essentially a mirror image of the Dominican Republic complaint. On November 19, 2013, InfoSonics filed a request with the Dominican Republic Court to request dismissal of the case there for lack of jurisdiction in order to have both related actions heard in Miami-Dade County. Both lawsuits are in their early stages, atthe discovery stage. The Miami actions are scheduled for trial on May 27, 2014; no trial date has been set for the Dominican Republic case. The parties began settlement discussions on January 16, 2014, which discussions are still ongoing. At this time we do not believe itthese matters will have a material adverse effect on our financial condition. However, the ultimate legal and financial liability with respect to these matters cannot be estimated with certainty and the Dominican Republic case is complicated by its foreign venue.

Steelhead Litigation

On January 14, 2013, Steelhead Licensing LLC (“Steelhead”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the District of Puerto Rico, alleging that certain of our products infringe claims of U.S. Patent No. 5,491,834. Steelhead iswas seeking injunctive relief as well as the recovery of

unspecified monetary damages. On May 24, 2013 we entered into a Settlement and Patent License Agreement with Steelhead whereby we denied any wrongdoing and received a fully paid up and perpetual license to Steelhead patents in exchange for a one-time cash payment of an immaterial amount. The lawsuit has now been dismissed with prejudice.

Wyncomm Litigation

On April 12, 2013, Wyncomm LLC (“Wyncomm”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the District of Delaware, alleging that certain of our products infringe claims of U.S. Patent No. 5,506,866. Wyncomm is seeking recovery of unspecified monetary damages. We do not believe we infringe the SteelheadWyncomm patent and intend to defend ourselves vigorously. On February 13, 2014 we filed an answer with the Court stating that we do not infringe and setting forth multiple defenses. We are currently in settlement discussions with Wyncomm, and do not believe this lawsuit will have a material adverse effect on our financial condition.

Blue Spike Litigation

On October 8, 2013, Blue Spike, LLC (“Blue Spike”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the Eastern District of Texas, alleging that certain of our products infringe claims of U.S. Patent No. 5,745,569. Blue Spike is seeking recovery of unspecified monetary damages. We do not believe we infringe the Blue Spike patent and intend to defend ourselves vigorously. On February 10, 2014 we filed an answer with the Court stating that we do not infringe and setting forth multiple defenses. Due to the inherent uncertainty of litigation, we cannot identify probable or estimable damages related to the lawsuit at this time.

The Company may become involved in certain other legal proceedings and claims which arise in the normal course of business. Other than as described above, as of the filing date of this report, the Company did not have any significant litigation outstanding.

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 expirations.

Employee Agreements and Compensation

The Company provides a 401(k) retirement savings plan for all full-time employees. Employees are eligible after 90 days of service with the Company. The Company does not currently provide matching contributions.

The Company entered into an employment agreement with its President and Chief Executive Officer in April 2012 that expires in April 2016. The employment agreement provides for an annual salary of $365,000. The agreement also provides that the Company may terminate the agreement without cause upon 30 days written notice. The Company’s only obligation would be to pay its President and Chief Executive Officer the greater of (a) 18 months’ salary or (b) one-half of the salary payable over the remaining term of the agreement.

The Company entered into an employment agreement with its Chief Financial Officer in March 2012 that expires in March 2014. The employment agreement provides for an annual salary of $195,000. The agreement also provides that the Company may terminate the agreement upon 30 days written notice if termination was without cause. The Company’s only obligation would be to pay its Chief Financial Officer 6 months salary.

NOTE 10—9—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’s common stock holders. As of December 31, 20122013 and 2011,2012, the Company did not have any preferred shares outstanding.

Common Stock

The Company has authorized the issuance of 40,000,000 shares of common stock. As of December 31, 20122013 and 2011,2012, a total of 14,184,14614,184,145 shares were outstanding.

Stock Options and Warrants

The Company has two stock-based compensation plans: the 2006 Equity Incentive Plan (“2006 Plan”) and the 2003 Stock Option Plan (“2003 Plan”). Each of the plans was approved by the Company’s stockholders. As of December 31, 2012,2013, options to purchase 631,000881,000 shares and 12,000 shares were outstanding under the 2006 Plan and the 2003 Plan, respectively, and a total of 717,000467,000 shares were available for grant under the 2006 Plan. There are no options available for grant under the 2003 Plan. The Company is also a party to non-plan option agreements with several non-employee directors.

The 2006 Plan was approved by stockholders in June 2006, with 1,000,000 shares of the Company’s common stock authorized for issuance there-under. An additional 348,208 shares of the Company’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 consultants who provide significant services to the Company. The exercise price is determined by the Compensation Committee, but must 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 10 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.

The Company’s stock options vest on an annual or a monthly basis. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Options granted generally vest over a three-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. 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 2013, 2012 2011 and 2010:2011: risk-free interest rates of 0.91%1.81%, 0.63%0.91% and 0.49%0.63%, 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’s options. For grants in 2013, 2012 2011 and 2010,2011, the expected volatility used ranged from 108%102% to 109% based on the Company’s historical stock price fluctuations for a period matching the expected life of the options.

A summary of option activity under all of the above plans for the year ended December 31, 20122013 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, 2011

   633    $0.90      

Granted during fiscal year 2012

   10    $0.74      

Expired during fiscal year 2012

           

Forfeited during fiscal year 2012

           
  

 

 

       

Outstanding at December 31, 2012

   643    $0.90     4.63 years    $19  
  

 

 

       

Vested and expected to vest

   643    $0.90     4.63 years    $19  
  

 

 

       

Exercisable at December 31, 2012

   504    $0.97     4.48 years    $17  
  

 

 

       
   Shares  Wtd. Avg.
Exercise Price
   Wtd. Avg.
Remaining
Contractual Life
   Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2012

   643   $0.90      

Granted during fiscal year 2013

   275   $0.73      

Expired during fiscal year 2013

   (25 $5.44      

Forfeited during fiscal year 2013

          
  

 

 

      

Outstanding at December 31, 2013

   893   $0.72     4.76 years    $741  
  

 

 

      

Vested and expected to vest

   861   $0.72     4.63 years    $715  
  

 

 

      

Exercisable at December 31, 2013

   617   $0.71     3.79 years    $519  
  

 

 

      

The aggregate intrinsic value in the stock option summary table above is based on our closing stock price of $0.65$1.53 per share as of December 31, 2012,2013, 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 marketing efforts of its proprietary line ofverykool® products in Asia Pacific.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 iswas $1.00, with vesting occurringto occur one-third upon the first anniversary of the warrant and the remaining two-thirds occurringto vest on a monthly basis over the succeeding 24 months. The warrant hashad a 6-year life, but willwas not be exercisable until May 5, 2013, the third anniversary of its issuance. However, on April 24, 2013, the memorandum of understanding underlying the warrant was terminated as a consequence of the departure of key management members, which resulted in immediate cancellation of the unexercised warrant.

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 theirits 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 of the warrant at the date of grant was $365,000. The Company is recordingrecorded the expense for this warrant based upon its estimated fair value on a straight-line basis over the three-yearthree year performance period. The amount of expense recorded during the years ended December 31, 2013, 2012 and 2011 and 2010 was $122,000,$40,000, $122,000 and $81,000,$122,000, respectively.

A summary of the status of the Company’s non-vested options at December 31, 2012,2013, and changes during the year then ended are presented below (shares in thousands):

 

  Shares Weighted-average
grant-date fair value
   Shares Weighted-average
grant-date  fair value
 

Non-vested at December 31, 2011

   349   $0.50  

Non-vested at December 31, 2012

   139   $0.50  

Granted

   10   $0.54     275   $0.58  

Vested

   (220 $0.50     (138 $0.49  

Forfeited

                  
  

 

    

 

  

Non-vested at December 31, 2012

   139   $0.50  

Non-vested at December 31, 2013

   276   $0.58  
  

 

    

 

  

The weighted-average per share grant-date fair value of options granted during 2013, 2012 and 2011 were $0.58, $0.54 and 2010 were $0.54, $0.47, and $0.58, respectively. There were no option exercises during the three years ended December 31, 2012.2013. The unrecognized stock-based compensation expense for future periods as of December 31, 20122013 is $66,000,$137,000, which is expected to be recognized over a weighted-average period of approximately 0.641.9 years. Such amount may change as a result of future grants, forfeitures, modifications in assumptions and other factors. The total fair value of options that vested during 2013, 2012 and 2011 was $68,000, $110,000 and 2010 was $110,000, $79,000, and $41,000, respectively.

The following table summarizes share-based compensation expense for the years ended December 31 (in thousands):

 

   2012   2011   2010 

Selling, general and administrative:

      

Non-employee directors

  $18    $10    $6  

Officers

   63     39     21  

Others

   28     24     21  
  

 

 

   

 

 

   

 

 

 

Total SG&A

   109     73     48  

Research and development

   122     122     81  
  

 

 

   

 

 

   

 

 

 

Total share-based compensation expense before taxes

   231     195     129  

Related deferred income tax benefits

               
  

 

 

   

 

 

   

 

 

 

Share-based compensation expense

  $231    $195    $129  
  

 

 

   

 

 

   

 

 

 

   2013   2012   2011 

Selling, general and administrative:

      

Non-employee directors

  $11    $18    $10  

Officers

   40     63     39  

Others

   18     28     24  
  

 

 

   

 

 

   

 

 

 

Total SG&A

   69     109     73  

Research and development

   40     122     122  
  

 

 

   

 

 

   

 

 

 

Total share-based compensation expense before taxes

   109     231     195  

Related deferred income tax benefits

               
  

 

 

   

 

 

   

 

 

 

Share-based compensation expense

  $109    $231    $195  
  

 

 

   

 

 

   

 

 

 

NOTE 11—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 20122013 remain open to examination by the taxing authorities due to the carryforward of unutilized net operating losses. As of December 31, 2012,2013, 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):

 

  2012 2011 2010   2013 2012 2011 

Current tax benefit (provision):

        

Federal

  $   $   $423    $(49 $   $  

State

   (2  (2  (2   (2  (2  (2

Foreign

           (5             
  

 

  

 

  

 

   

 

  

 

  

 

 

Total

   (2  (2  416     (51  (2  (2
  

 

  

 

  

 

   

 

  

 

  

 

 

Deferred tax benefit (provision):

        

Federal

   485    (603  999     (205  485    (603

State

   26    359    253     (200  26    359  
  

 

  

 

  

 

   

 

  

 

  

 

 

Total

   511    (244  1,252     (405  511    (244
  

 

  

 

  

 

   

 

  

 

  

 

 

Change in valuation allowance

   (511  227    (1,240   405    (511  227  
  

 

  

 

  

 

   

 

  

 

  

 

 

Benefit (provision) for income taxes from discontinued operations

       17    (12           17  
  

 

  

 

  

 

   

 

  

 

  

 

 

Total benefit (provision) for income taxes from continuing operations

  $(2 $(2 $416    $(51 $(2 $(2
  

 

  

 

  

 

   

 

  

 

  

 

 

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):

 

   2012  2011  2010 

U.S. federal income tax at statutory rate

  $849   $845   $1,362  

State taxes, net of federal benefit

   64    112    169  

Non-deductible expenses

   (20  (13  (28

Foreign income tax rate differential

   (309  (1,493  135  

Valuation allowance

   (511  (765  (1,252

Foreign earnings

   (52  1,320    (421

Other

   (23  (8  451  
  

 

 

  

 

 

  

 

 

 

Total benefit (provision) for income taxes

  $(2 $(2 $416  
  

 

 

  

 

 

  

 

 

 

   2013  2012  2011 

U.S. federal income tax at statutory rate

  $185   $849   $845  

State taxes, net of federal benefit

   (23  64    112  

Non-deductible expenses

   (8  (20  (13

Foreign income tax rate differential

   (283  (309  (1,493

Valuation allowance

   405    (511  (765

Foreign earnings

   (182  (52  1,320  

Other

   (145  (23  (8
  

 

 

  

 

 

  

 

 

 

Total benefit (provision) for income taxes

  $(51 $(2 $(2
  

 

 

  

 

 

  

 

 

 

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,   December 31, 
  2012 2011   2013 2012 

Current deferred tax assets:

      

Allowance for bad debts

  $131   $10    $131   $131  

Share-based payment expense

   142    100     152    142  

Allowance for obsolete inventory

   104    42     29    104  

State tax expense

   1    1  

Accrued compensation

   65    53     67    65  

Contribution carryover

   10    12     9    10  

Other accruals

   155    148     175    155  
  

 

  

 

   

 

  

 

 

Total

   608    366     563    608  
  

 

  

 

   

 

  

 

 

Non-current deferred tax assets:

      

Depreciation

   30    77     (4  30  

Capital loss

   195    197     176    195  

APB 23 un-repatriated foreign earnings

   (621  (568       (621

Net operating loss

   4,512    4,141     3,535    4,512  

Credit carryover

   49      
  

 

  

 

   

 

  

 

 

Total

   4,116    3,847     3,756    4,116  
  

 

  

 

   

 

  

 

 

Valuation allowance

   (4,724  (4,213   (4,319  (4,724
  

 

  

 

   

 

  

 

 

Net deferred tax assets

  $   $    $   $  
  

 

  

 

   

 

  

 

 

At December 31, 2012,2013, the Company had federal and state net operating loss carry forwards of approximately $13,097,000$10,525,000 and $15,280,000,$13,674,000, respectively. The federal and state net operating loss carry forwards begin to expire in 2024 and 2016, respectively.

Included in the net operating loss carryforward balances noted above are approximately $1,821,000 and $1,061,000, for federal and state purposes, 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’s adoption on January 1, 2007 of FIN-48 regarding accounting for uncertainty in income taxes, 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’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 that review, the Company concluded there were no uncertain tax positions and no cumulative effect on retained earnings at the time of adoption. Subsequent to that date of adoption through December 31, 2012,2013, the Company has continued to evaluate its tax positions and concluded that it has not had any material uncertain tax positions.

NOTE 12—11—SEGMENT AND GEOGRAPHIC INFORMATION

The Company reports segment data based on the management approach, which designates the internal reporting that is used by management for making operating and investment decisions and evaluating performance

as the source of the Company’s reportable segments. The Company uses one measurement of profitability and does not disaggregate its business for internal reporting. The Company has determined that it operates in one segment, providing wireless handsets and accessories to carriers, distributors and OEM customers in Latin America, Asia Pacific, Europe, Africa and the United States. The following table summarizes the Company’s net sales by geographic area for the years ended December 31, 2013, 2012 2011 and 20102011 (in thousands):

 

  2012   2011   2010   2013   2012   2011 

Central America

  $11,767    $11,755    $9,935    $17,296    $11,767    $11,755  

U.S.-based distributors selling to Latin America

   6,295     5,321     241     6,422     6,295     5,321  

South America

   8,633     14,813     61,224     9,048     8,633     14,813  

Asia Pacific

   430     908     1,130     209     430     908  

EMEA

   4,799     1,090          961     4,799     1,090  

Mexico

   1,960     997          2,908     1,960     997  

United States

   410               1,051     410       
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $34,294    $34,884    $72,530    $37,895    $34,294    $34,884  
  

 

   

 

   

 

   

 

   

 

   

 

 

During the yearsyear ended December 31, 2012, 2011, and 2010,2013, sales to customers in ArgentinaPeru, Guatemala and Puerto Rico represented 2%20%, 25%15% and 71%13% of the Company’s consolidated net revenue.revenue, respectively. In addition, sales to a U.S.-based distributor who sells into the open market in Central America represented 14% in 2013. In 2012, sales to a U.S.-based distributorsdistributor who sellsells into the open market in Central America and sales to a carrier customer in Peru represented 18%16% and 11%, respectively. In 2011, sales to customers in Argentina represented 25%. Sales in no other individual country amounted to 10% or more of the Company’s consolidated net revenue in any of the three years.

Fixed assets, which represent approximately 2%1% of the Company’s net assets, are principally located in the Company’s offices in the United States or in China at the Company’s R&D office or contract manufacturing facilities.

NOTE 13—12—QUARTERLY FINANCIAL INFORMATION (Unaudited)

The following table presents unaudited selected quarterly financial information (in thousands, except per share data) for the 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.

 

  First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 

Year Ended December 31, 2013

     

Net sales

  $7,821   $8,342   $9,867   $11,865  

Gross profit

   1,382    1,730    1,828    2,002  

Net income (loss)

   (709  (47  34    125  

Basic and diluted net income (loss) per share

   (0.05  (0.00  0.00    0.01  
  First
Quarter
 Second
Quarter
 Third
Quarter
 Fourth
Quarter
 

Year Ended December 31, 2012

          

Net sales

  $12,358   $8,111   $5,373   $8,452    $12,358   $8,111   $5,373   $8,452  

Gross profit

   2,256    2,055    1,139    1,356     2,256    2,055    1,139    1,356  

Net income (loss)

   105    (265  (1,189  (1,151   105    (265  (1,189  (1,151

Basic and diluted net loss per share

   0.01    (0.02  (0.08  (0.08

Year Ended December 31, 2011

     

Net sales

  $9,469   $6,318   $7,173   $11,924  

Gross profit

   812    903    1,218    1,607  

Loss from continuing operations

   (942  (767  (420  (359

Income (loss) from discontinued operations

   48    (55  7      

Net loss

   (894  (822  (413  (359

Basic and diluted net loss per share

   (0.06  (0.06  (0.03  (0.03

Basic and diluted net income (loss) per share

   0.01    (0.02  (0.08  (0.08

Schedule Valuation and Qualifying Accounts

SUPPLEMENTAL INFORMATION

Valuation and Qualifying Accounts—Schedule II

 

  (Amounts in thousands)   (Amounts in thousands) 
  Balance,
beginning
of year
   Additions
charged to
operations
   Deletions
from
Reserve
   Balance,
end
of year
   Balance,
beginning
of year
   Additions
charged to
operations
   Deletions
from
Reserve
   Balance,
end
of year
 

Allowance for doubtful accounts:

                

Year ended December 31, 2013

  $339    $34    $    $373  

Year ended December 31, 2012

  $97    $242    $    $339     97     242          339  

Year ended December 31, 2011

   197          100     97     197          100     97  

Year ended December 31, 2010

   590     263     656     197  

EXHIBIT INDEX

 

Number

  

Description

    3.1  Articles of Incorporation (1)
    3.2  Amended and Restated Bylaws (7)
    4.1  Specimen Common Stock Certificate (1)
  10.1  2003 Stock Option Plan, as amended (5)(*)
  10.2  Form of Stock Option Agreement—2003 Stock Option Plan—Non Employee Director (2)(*)
  10.3  Form of Stock Option Agreement—2003 Stock Option Plan—Incentive Stock Option (2)(*)
  10.4  2006 Equity Incentive Plan (3)(*)
  10.5  Form of Stock Option Grant Notice/Stock Option Agreement (4)(*)
  10.6  Form of Amended and Restated Stock Option Agreement (Non-Employee Directors’ Option) (3)(*)
  10.7  Employment Agreement effective of March 1, 2012 between InfoSonics and Vernon A. LoForti (9)(*)
  10.8Employment Agreement effective of April 9, 2012 between InfoSonics and Joseph Ram (9)(*)
  10.910.8  Office Space Lease, dated September 10, 2007, by and between UTC Properties LLC and the Company (6)
  10.1010.9  FX Trading Master Agreement between HSBC Bank USA, National Association and InfoSonics Corporation dated December 9, 2011 (8)
  10.1110.10  Pledge Agreement between HSBC Bank USA, National Association and InfoSonics Corporation dated December 20, 2011 (8)
  10.1210.11  First Amendment to Lease, dated May 23, 2012, by and between UTC Properties LLC and the Company (10)
  21  Subsidiaries of InfoSonics (+)
  23  Consent of Independent Registered Public Accounting Firm (+)
  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 2002 (+)
  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 2002 (+)
  32.1  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (+)
101.INS  XBRL Instance Document
101.SCH  XBRL Taxonomy Extension Schema Document
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document

 

(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 Registration Statement on Form S-8, filed on June 12, 2006.
(4)Incorporated by reference to the Company’s Current Report on Form 8-K, filed on June 12, 2006.


(5)Incorporated by reference to the Company’s Annual Report on Form 10-K, filed on March 31, 2006.


(6)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed on November 14, 2007.
(7)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed on May 14, 2010.
(8)Incorporated by reference to the Company’s Annual Report on Form 10-K, filed on March 16, 2012.
(9)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed on May 4, 2012
(10)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed on August 14, 2012.
(*)Indicates a management contract or compensatory plan or arrangement
(+)Filed herewith