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IGOI > SEC Filings for IGOI > Form 10-K on 1-Apr-2013All Recent SEC Filings

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Form 10-K for IGO, INC.


1-Apr-2013

Annual Report


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

The following discussion and analysis of our financial condition and results of operations should be read together with our selected consolidated financial data and the consolidated financial statements and notes thereto contained in this report. The following discussion contains forward-looking statements. Our actual results may differ significantly from the results discussed in these forward-looking statements. Please see the "Disclosure Concerning Forward-Looking Statements" and "Risk Factors" above for a discussion of factors that may affect our future results.

Overview

Our vision is to be a globally leading mobile accessories company by providing premium power solutions for laptop computers and electronic mobile devices that elevate the mobile consumer experience across all pursuits and passions. The mobile electronic device market changes rapidly as consumers increasingly integrate smartphones and tablets into their daily business and personal routines. Increased functionality and the ability to access and manage information remotely are driving the proliferation of mobile electronic devices and applications. The popularity of these devices is increasing due to reductions in size, weight and cost and improvements in functionality, storage capacity and reliability. Each of these devices needs to be powered and connected when in the home, in the office, or on the road, and can be accessorized, representing opportunities for one or more of our products.

We design and develop products that make mobile electronic devices more efficient and cost effective, thus enabling professionals and consumers higher utilization of their mobile devices and the ability to access information more readily. Our current product offering primarily consists of power, batteries, audio and protection solutions for mobile electronic devices, and we intend to continue to introduce new accessories for mobile electronic devices.

Power

Power management, which remains our core product line, includes portable power, device power, and laptop power solutions. These products utilize our proprietary iGO Green® technology, which reduces energy consumption and almost completely eliminates standby power. We continually strive to bring to market high quality, uniquely differentiated power solutions that meet our customers' needs and exceed their expectations.

Batteries

Through our relationship with Pure Energy, we are the exclusive marketer and distributor of Pure Energy's patented rechargeable alkaline (RAMcell) batteries to retailers worldwide (excluding China) with non-exclusive distribution rights in Africa. RAMcell batteries are pre-charged and hold a charge for up to seven years. Approximately three billion single-use alkaline batteries are sold annually in the United States. RAMcell batteries provide users an environmentally friendly, cost-effective alternative to disposable alkaline batteries. We believe that RAMcell batteries and related battery chargers are complementary to our power-saving technology and contribute to lower levels of electronic waste

Audio

As a result of our acquisition of Aerial7 in 2010, we offer a line of earbuds and headphones. As mobile phones have evolved into smartphones and new portable media devices capable of playing music and video, many consumers utilize a variety of mobile electronic devices for both communication and entertainment purposes. Our audio products are uniquely designed to provide enhanced sound quality compared to competitive products at similar price points. They also offer consumers the ability to both communicate with others via an integrated microphone that can be used with a portable computer, mobile phone, computer or other portable media device as well as the ability to listen to music or video from these devices. In addition to delivering quality sound output, our line of audio products is designed to appeal to the fashion sense of consumers, allowing them to express their unique and personal style through their mobile electronic devices. Currently, our audio products are offered primarily through lifestyle and music retailers around the world. We intend, however, to expand our line of audio products and increase its distribution through global, broad-based consumer electronics retailers as well.


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Protection

As a result of our acquisition of Adapt in 2010, we also offer a line of skins, cases and screen protectors for mobile electronic devices. Consumers value the protection of their mobile electronic devices as they rely on them heavily in their daily lives to both connect with others and store information. Consumers also view our protection products as a way to express personal fashion and style, much like they do with our audio products, clothing and other personal accessories. Our line of protection products is designed to meet both of these consumer needs by providing consumers with a high degree of protection and a unique, fashionable design that fits their personal styles. Currently, we offer our cases, skins, screen protectors and other similar products primarily in Europe. Our ability to execute successfully on our near and long-term objectives depends largely on general market acceptance of our power, protection and audio products, our ability to protect our unique proprietary rights, including notably our iGo Green technology, our ability to generate additional major customers, and general economic conditions. Additionally, we must execute on the customer relationships that we have developed and continue to design, develop, manufacture and market new and innovative technology and products that are embraced by these customers and the overall market.

Recent Developments

As of January 28, 2013, we effected a 1-for-12 reverse stock split, primarily to increase the per-share market price of our common stock in order to maintain its listing on the NASDAQ Capital Market. As a result of the reverse stock split, each twelve shares of the Company's common stock issued and outstanding immediately prior to the reverse stock split were automatically combined into one share of common stock. In addition, the number of shares of common stock underlying all outstanding equity awards, the number of shares available for issuance, and the exercise price, grant price or purchase price, as applicable, relating to any award under our stock plans, were proportionately adjusted based on the 1-for-12 split ratio in accordance with their terms. No fractional shares of common stock were issued in connection with the reverse stock split. Stockholders of record who otherwise would be entitled to receive fractional shares became entitled to a cash payment in lieu of any fractional shares. Unless otherwise noted, all share and per share amounts in this annual report have been retrospectively adjusted to reflect the reverse stock split.

On February 4, 2013, the Company announced that it had implemented a number of cost-savings initiatives that resulted in a reduction in its workforce and that are expected to reduce annual operating expenses.

On March 27, 2013, Texas Instruments terminated its agreement with iGO, Inc. to create an integrated circuit based on iGO Green technology, after multiple technical issues were encountered during the development process.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make a number of estimates and judgments which impact the reported amounts of assets, liabilities, revenue and expenses and the related disclosure of contingent assets and liabilities.

On an on-going basis, we evaluate our estimates, including those related to bad debt expense, warranty obligations, inventories, sales returns and price protection, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue Recognition. Revenue from product sales is generally recognized upon shipment and transfer of ownership from us or our contract manufacturers to our customers. Allowances for sales returns and credits are provided for in the same period the related sales are recorded. Should the actual return or sales credit rates differ from our estimates, revisions to our estimated allowance for sales returns and credits may be required.

Our recognition of revenue from product sales to distributors, resellers and retailers, or the "retail and distribution channel," is affected by agreements we have with certain customers giving them rights to return up to 15% of their prior quarter's purchases, provided that the customer places a new order for an equal or greater dollar value of the amount returned. We also have agreements with certain customers that allow them to receive credit for subsequent price reductions, or "price protection." At the time we recognize revenue related to these agreements, we reduce revenue for the gross sales value of estimated future returns, as well as our estimate of future price protection. We also reduce cost of revenue for the gross product cost of estimated future returns. We record an allowance for sales returns in the amount of the difference between the gross sales value and the cost of revenue as a reduction of accounts receivable. We also have agreements with certain customers that provide them with a 100% right of return prior to the ultimate sale to an end user of the product. Accordingly, we have recorded deferred revenue of $307,000 as of December 31, 2012 and $1,305,000 as of December 31, 2011, which we expect to recognize as revenue when the product is sold to the end user. Gross sales to the retail and distribution channel accounted for approximately 89% of revenue for the year ended December 31, 2012 and 86% of revenue for the year ended December 31, 2011.


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Historically, a correlation has existed between the amount of retail and distribution channel inventory and the amount of returns that actually occur. The greater the inventory held by our distributors, the more product returns we expect. As part of our effort to reach an appropriate accounting estimate for returns, for each of our products, we monitor levels of product sales and inventory at our distributors' warehouses and at retailers. In estimating returns, we analyze historical returns, current inventory in the retail and distribution channel, current economic trends, changes in consumer demand, the introduction of new competing products and market acceptance of our products.

In recent years, as a result of a combination of the factors described above, we have reduced our gross sales to reflect our estimated amounts of returns and price protection. It is possible that returns could increase rapidly and significantly in the future. Accordingly, estimating product returns requires significant judgment on the part of management. Slight differences in the assumptions management uses to estimate sales returns could have a material impact on our reported sales and thus could have a material impact on the presentation of the results of our operations.

Inventory Valuation. Inventories consist of finished goods and component parts purchased both partially and fully assembled. We experience all the typical risks and rewards of inventory held by contract manufacturers. Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories include material, labor and overhead costs. Labor and overhead costs are allocated to inventory based on a percentage of material costs. We monitor usage reports to determine if the carrying value of any items should be adjusted due to lack of demand. We make a downward adjustment to the value of our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Deferred Tax Valuation Allowance. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction in which we operate. Historically, we have recorded a deferred tax valuation allowance in an amount equal to our net deferred tax assets. If we determine that we will ultimately be able to utilize all or a portion of deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be released to income as a credit to income tax expense. During 2010, we released $1,002,000 of the valuation allowance as a result of deferred tax liabilities incurred in connection with the acquisitions of Adapt and Aerial7.

Goodwill and Long-Lived Asset Valuation. We test goodwill for impairment on an annual basis as of October 1. The goodwill impairment evaluation process is based on both a discounted future cash flows approach and a market comparable approach. The discounted cash flows approach uses our estimates of future market growth rates, market share, revenue and costs, as well as appropriate discount rates. We evaluated goodwill for impairment as of October 1, 2011 and determined that recorded goodwill was impaired at that time. We test our recorded long-lived assets whenever events indicate the recorded intangible assets may be impaired. Our long-lived asset impairment approach is based on an undiscounted cash flows approach. As a result of the assessment of goodwill impairment at October 1, 2011, we tested long-lived assets for impairment at that time and determined some of these assets were impaired. As a result of the assessment of additional goodwill impairment at October 1, 2012, we tested long-lived assets for impairment at that time and determined all of these assets in connection with the acquisition of Aerial7 were impaired. We have recorded long-lived asset impairment charges in the past, and if we fail to achieve our assumed growth rates or assumed gross margin, we may incur additional charges for impairment in the future.

Investments. The Company assesses its long-term investments for other-than-temporary declines in value by considering various factors that include, among other things, events that may affect the creditworthiness of a security's issuer, the length of time the security has been in a loss position, and the Company's ability and intent to hold the security until a forecasted recovery of fair value.


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Results of Operations

The following table sets forth certain consolidated financial data for the periods indicated expressed as a percentage of total revenue for the periods indicated:

                                                              Year Ended December 31,
                                                       2012            2011            2010
Revenue                                                 100.0 %         100.0 %         100.0 %
Cost of revenue                                          82.3 %          77.9 %          66.8 %

Gross profit                                             17.7 %          22.1 %          33.2 %

Operating expenses:
Sales and marketing                                      17.5 %          20.1 %          18.0 %
Research and development                                  7.4 %           6.1 %           3.5 %
General and administrative                               23.6 %          20.2 %          17.5 %
Asset impairment                                          4.8 %           5.9 %            -

Total operating expenses                                 53.3 %          52.3 %          39.0 %

Loss from operations                                    (35.6 )%        (30.2 )%         (5.8 )%
Other income (expense):
Interest income, net                                       -              0.2 %           0.4 %
Gain on disposal of assets and other income
(expense), net                                           (4.6 )%           -              5.0 %

Loss before income tax                                  (40.2 )%        (30.0 )%         (0.4 )%
Income tax benefit                                         -               -             (2.3 )%

Net income (loss)                                       (40.2 )%        (30.0 )%          1.9 %

Comparison of Years Ended December 31, 2012, 2011, and 2010

Revenue. Revenue generally consists of sales of products, net of returns and
allowances. To date, our revenues have come predominantly from our laptop
chargers. The following table summarizes the year-over-year comparison of our
consolidated revenue for the periods indicated (dollars in thousands):



                                                             Percentage
                                            Decrease           Change
                                           from Prior        from Prior
               Year    Annual Amount          Year              Year
               2012   $        29,876           (8,496 )           (22.1 )%
               2011            38,372           (4,985 )           (11.5 )%
               2010            43,357           (5,587 )           (11.4 )%


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Following is a breakdown of revenue by significant account for the years ended December 31, 2012, 2011 and 2010 with corresponding dollar and percent changes (dollars in millions):

                                                                        Change from 2011 to 2012              Change from 2010 to 2011
                                      $          $          $            $                   %                  $                   %
                                     2012       2011       2010        Change              Change            Change              Change
Walmart                                8.3        8.0        7.5            0.3                  3.8 %             0.5                 6.7 %
RadioShack                             3.8        3.8       14.7             -                    -              (10.9 )             (74.1 )%
Belkin                                 0.8        2.5        3.0           (1.7 )              (67.9 )%           (0.5 )             (16.7 )%
Office Depot                           0.7         -          -             0.7                100.0 %              -                   -
All other customers                   16.3       24.1       18.2           (7.8 )              (32.3 )%            5.9                32.4 %

                                      29.9       38.4       43.4           (8.5 )              (22.1 )%           (5.0 )             (11.5 )%

The 2012 decrease in revenue was primarily due to declines in sales volume of power products to Belkin and all other customers combined with a decline in average selling price for power products to Wal-Mart, partially offset by an increase in sales volume to Wal-Mart. The decline in sales to all other customers is primarily attributable to lower sales of power products in international markets and the wireless carrier channel, as well as a decrease in the audio and protection product lines which contributed $2.5 million to revenue for the year ended December 31, 2012, compared to $5.4 million for the year ended December 31, 2011. The decrease in power product revenue was also partially offset by an increase in sales of batteries of $467,000 to $2.2 million for the year ended December 31, 2012, compared to $1.8 million for the year ended December 31, 2011 primarily due to increased distribution in Europe and North America.

The 2011 decrease in revenue was primarily due to the decreases in sales to RadioShack and Belkin, as indicated in the table above, as a result of a shift in RadioShack's retail strategy to place greater emphasis on its own private label brands during 2011. This decrease in revenue was partially offset by the addition of battery, audio and protection product lines as a result of Adapt and Aerial7 acquisitions in the second half of 2010 and the establishment of our Pure Energy relationship in the first quarter of 2011, combined with increases in sales to Wal-Mart as indicated in the table above. The battery, audio and protection product lines contributed $7.2 million to revenue for the year ended December 31, 2011, compared to $892,000 for the year ended December 31, 2010, and the corresponding revenue is included in the table above under the caption "All other customers".

Cost of revenue, gross profit and gross margin. Cost of revenue generally consists of costs associated with components, outsourced manufacturing and in-house labor associated with assembly, testing, packaging, shipping and quality assurance, depreciation of equipment and indirect manufacturing costs. Gross profit is the difference between revenue and cost of revenue. Gross margin is gross profit stated as a percentage of revenue. The following tables summarize the year-over-year comparison of our cost of revenue, gross profit and gross margin for the periods indicated (dollars in thousands):

Cost of revenue:

                                       Increase/
                                       (Decrease)        Percentage
                          Annual       from Prior        Change from
                  Year    Amount          Year           Prior Year
                  2012   $ 24,593           (5,310 )            (17.8 )%
                  2011     29,903              956                3.3 %
                  2010     28,947           (4,829 )            (14.3 )%


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Gross profit and gross margin:

                                                  Decrease in
                                                  gross profit        Percentage
                                     Gross         from Prior         Change from
          Year    Gross Profit      Margin            Year            Prior Year
          2012   $        5,283        17.7 %    $       (3,186 )            (37.6 )%
          2011            8,469        22.1 %    $       (5,941 )            (41.2 )%
          2010           14,410        33.2 %              (758 )             (5.0 )%

The 2012 decrease in cost of revenue and corresponding decrease in gross margin for the year ended December 31, 2012 compared to the year ended December 31, 2011 were primarily due to the decline in overall sales, shift in product mix, and decline in average selling prices to Wal-Mart and other customers. Labor and overhead expenses decreased by $1.5 million to $5.1 million, or 17.1% of revenue, for the year ended December 31, 2012, compared to $6.6 million, or 17.2% of revenue, for the year ended December 31, 2011. The decrease in labor and overhead costs during 2012 was primarily due to decreases of $599,000 in third-party logistics costs, $384,000 in allowances for excess and obsolete inventory, $703,000 in offsite labor and supplies, and $181,000 in cycle count adjustments. Despite the decrease in labor and overhead costs, total cost of revenue as a percentage of revenue increased to 82.3% for the year ended December 31, 2012, from 77.9% for the year ended December 31, 2011, primarily due to the decline in overall sales and the fixed nature of certain of our costs. The decline in gross margin is primarily due to the decline in selling price relating to power products, audio and other accessories.

The 2011 increase in cost of revenue and corresponding decrease in gross margin were due primarily to a decrease in average direct margin, which excludes labor and overhead costs, to 39.4% for the year ended December 31, 2011 compared to 47.1% for the year ended December 31, 2010, as a result of increased product costs, reduced sales prices and shifts in product mix. Also contributing to the increase in cost of revenue and the corresponding decrease in gross margin was an increase in labor and overhead costs, which are mostly fixed, of $626,000, or 10.4% to $6.6 million for the year ended December 31, 2011, compared to $6.0 million for the year ended December 31, 2010. The increase in labor and overhead costs during 2011 was primarily due to increases of $375,000 in third-party logistics costs, $270,000 in allowances for excess and obsolete inventory, and $136,000 in cycle count adjustments. As a result of these factors, cost of revenue, as a percentage of revenue, increased to 77.9% for the year ended December 31, 2011, from 66.8% for the year ended December 31, 2010.

Sales and marketing. Sales and marketing expenses generally consist of salaries, commissions and other personnel-related costs of our sales, marketing and support personnel, advertising, public relations, promotions, printed media and travel. The following table summarizes the year-over-year comparison of our sales and marketing expenses for the periods indicated (dollars in thousands):

                                       Increase/
                                       (Decrease)        Percentage
                          Annual       from Prior        Change from
                   Year   Amount          Year           Prior Year
                   2012   $ 5,233           (2,462 )            (32.0 )%
                   2011     7,695             (110 )             (1.4 )%
                   2010     7,805            1,052               15.6 %

The 2012 decrease in sales and marketing expenses primarily resulted from decreases in advertising, market research, and personnel-related expenses. Specifically, marketing, advertising and promotional expenses decreased $1.1 million or 52.4%, to $1.0 million for the year ended December 31, 2012, compared to $2.1 million for the year ended December 31, 2011. In addition, there was a decrease in personnel-related and consulting expenses of $860,000, or 19.3%, to $3.6 million for the year ended December 31, 2012, compared to $4.5 million for the year ended December 31, 2011. As a percentage of revenue, sales and marketing expenses decreased to 17.5% for the year ended December 31, 2012 from 20.1% for the year ended December 31, 2011.

The 2011 decrease in sales and marketing expenses primarily resulted from decreases in advertising and market research expenses. Specifically, marketing and advertising expenses decreased $465,000 or 36.2%, to $820,000 for the year ended December 31, 2011, compared to $1.3 million for the year ended December 31, 2010. Partially offsetting these decreases was an increase in personnel-related and consulting expenses of $332,000, or 8.0%, to $4.5 million for the year ended December 31, 2011, compared to $4.1 million for the year . . .

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