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IFON > SEC Filings for IFON > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for INFOSONICS CORP

Form 10-Q for INFOSONICS CORP


14-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements, Safe Harbor Statement and Other General Information

This discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and condensed notes thereto and other information included in this report and our Annual Report on Form 10-K for the year ended December 31, 2012 (including our 2012 audited consolidated financial statements and related notes thereto and other information). Our discussion and analysis of financial condition and results of operations are based upon, among other things, our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of financial statements in conformity with GAAP requires us to, among other things, make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent liabilities as of the date of our most recent balance sheet, and the reported amounts of revenues and expenses during the reporting periods. We review our estimates and assumptions on an ongoing basis. Our estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from these estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations, although they may. Our critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments are outlined in "Critical Accounting Policies" in our Annual Report on Form 10-K. All references to results of operations in this discussion generally are to results from continuing operations, unless otherwise noted.

This report contains "forward-looking statements," including, without limitation, statements about customer relationships, marketing of our verykool® products, sales levels, cost reductions, operating efficiencies, profitability and adequacy of working capital, that are based on current management expectations and which involve certain risks and uncertainties. These risks and uncertainties, in whole or in part, could cause such expectations to fail to be achieved and have a material adverse effect on our business, financial condition and results of operations, and include, without limitation: (1) intense competition internationally, including competition from alternative business models, such as manufacturer-to-carrier sales, which may lead to reduced prices, lower sales, lower gross margins, extended payment terms with customers, increased capital investment and interest costs, bad debt risks and product supply shortages; (2) the ability of our China R&D group to develop new verykool® handsets and successfully introduce them into new emerging markets;
(3) the ability of the Company to have access to adequate capital to fund its operations; (4) extended general economic downturn in world markets;
(5) inability to secure adequate supply of competitive products on a timely basis and on commercially reasonable terms; (6) foreign exchange rate fluctuations, devaluation of a foreign currency, adverse governmental controls or actions, political or economic instability, or disruption of a foreign market, including, without limitation, the imposition, creation, increase or modification of tariffs, taxes, duties, levies and other charges and other related risks of our international operations which could significantly increase selling prices of our products to our customers and end-users; (7) the ability to attract new sources of profitable business from expansion of products or services or risks associated with entry into new markets, including geographies, products and services; (8) an interruption or failure of our information systems or subversion of access or other system controls may result in a significant loss of business, assets, or competitive information; (9) significant changes in supplier terms and relationships or shortages in product supply; (10) loss of business from one or more significant customers; (11) customer and geographical accounts receivable concentration risk and other related risks; (12) rapid product improvement and technological change resulting in inventory obsolescence; (13) uncertain political and economic conditions internationally, including terrorist or military actions; (14) the loss of a key executive officer or other key employees and the integration of new employees;
(15) changes in consumer demand for multimedia wireless handset products and features; (16) our failure to adequately adapt to industry changes and to manage potential growth and/or contractions; (17) seasonal buying patterns; (18) the resolution of any litigation for or against the Company; and (19) the ability of the Company to generate taxable income in future periods. Reference is also made to other factors detailed from time to time in our periodic reports filed with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this release and we undertake no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after the date of this release. We have instituted in the past, and continue to institute, changes to our strategies, operations and processes to address risks and uncertainties and to mitigate their impacts on our results of operations and financial condition. However, no assurances can be given that we will be successful in these efforts. For a further discussion of significant risk factors to consider, see "Risk Factors" below in this report and "Item 1A. Risk Factors" of our Annual Report on Form 10-K. In addition, other risks or uncertainties may be detailed from time to time in our future SEC filings.


Overview

We are a provider of wireless handsets and accessories to carriers, distributors and original equipment manufacturers ("OEMs") in Latin America, Asia Pacific, Europe, Africa and the United States. We design, develop, source and sell our proprietary line of products under the verykool® brand and on a private label basis to certain customers (collectively referred to as our "verykool® products"). We first introduced our verykool® brand in 2006 and verykool® products include entry-level, mid-tier and high-end products.

For the five years prior to March 2012, our business had two primary components:
(1) legacy distribution of wireless handsets supplied by major manufacturers, primarily Samsung, and (2) provision of our own proprietary verykool® 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 product 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 stage of our distribution business. Our distribution agreement with Samsung expired March 31, 2012. Since April 1, 2012, our business has and is expected to continue to be centered on our verykool® product line.

The verykool® brand is now our flagship product. In order to better control the roadmap for this product line, in April 2010 we established an in-house design center in Beijing, China where we are now designing a number of phones in our product portfolio. We continue to source many of our phones from independent design houses. We contract with electronic manufacturing services ("EMS") providers to manufacture all of our verykool®products, and maintain personnel in China to oversee production and conduct quality control.

Industry and Market Trends and Risks

The wireless business is extremely competitive. The industry is characterized by rapid technological development driven by faster and more capable chipsets, innovative software features and applications and faster networks provided by wireless carriers. In this environment, it is extremely difficult to differentiate our products, and price pressure is constant.

Over the past several years, our business has been concentrated in countries in Latin America. In addition, during that time, the majority of our revenue was derived from distribution sales of Samsung products in Argentina, typically at very thin margins. As mentioned above, in late 2009, Argentina enacted a significant import tariff on certain electronic devices, including wireless handsets, that threatened our distribution business and largely eroded our sales during 2010 and 2011.

In late 2010, we expanded sales of our verykool® products into the Asia Pacific market with initial sales to customers in both China and India, and in 2011, we added customers in Western Europe, Russia, Singapore, Africa and certain other Southeast Asian countries. The economic profile of the consumer markets in both Latin America and Asia Pacific are similar in that they are extremely price sensitive. As a consequence, unlike the U.S. domestic market that is dominated by large providers, these markets are more open to smaller providers such as InfoSonics who are able to supply more competitively priced handsets with similar features. We expect this situation to continue for the foreseeable future. The Latin America and Asia Pacific markets are also more attractive to us because the current level of cellular customer penetration is significantly lower in most countries in these regions in comparison to North America and Western Europe.


Results of Operations

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



                                                   Three Months Ended
                                                        March 31,
                                                   2013           2012
           Net sales                                 100.0 %       100.0 %
           Cost of sales                              82.3 %        81.7 %

           Gross profit                               17.7 %        18.3 %

           Operating expenses:
           Selling, general and administrative        22.3 %        12.8 %
           Research and development                    5.1 %         4.1 %

                                                      27.4 %        16.9 %

           Operating income (loss)                    (9.7 %)        1.4 %
           Other income (expense), net:
           Other                                       0.6 %        (0.5 %)
           Interest                                    0.1 %          -

           Income (loss) before income taxes          (9.0 %)        0.9 %
           Provision for income taxes                 (0.1 %)         -

           Net income (loss)                          (9.1 %)        0.9 %

Three months ended March 31, 2013 compared with three months ended March 31, 2012

Net Sales

For the three months ended March 31, 2013, our net sales amounted to $7.8 million, a decrease of $4.5 million, or 37%, from $12.3 million in the same period last year. There are two primary reasons for the decrease. First, our Samsung distribution business ended on March 31, 2012 and our distribution sales in the first quarter of 2012 amounted to $2.6 million. There were no distribution sales in the first quarter of 2013. Secondly, private label sales to customers in Western Europe, Russia and Asia Pacific in the first quarter of 2012 amounted to $3.3 million, and there were only deminimus private labels sales in the first quarter of 2013. Partially offsetting these declines was a $1.3 million, or 20%, increase in net sales of verykool® products to customers in Latin America, as well as $151,000 in net sales to customers in the United States, a market we reentered in the third quarter of 2012. In terms of unit shipments, the first quarter of 2013 represented the second consecutive record quarter with unit volume rising 14% above the unit volume in the fourth quarter of 2012 and 34% above the unit volume in the first quarter of 2012. However, our average unit selling price declined by 19% compared to the fourth quarter of 2012 and declined by 39% compared to the first quarter of 2012. The decline in average selling price is the result of a shift in product mix to a higher volume of lower-priced phones in our Latin American markets.

Gross Profit and Gross Margin

For the three months ended March 31, 2013, our gross profit amounted to $1,382,000, a decrease of $874,000, or 39%, from $2,256,000 in the same period last year primarily as a result of the absence of both Samsung distribution revenues and private label sales in the first quarter of 2013. Our gross profit margin for the three months ended March 31, 2013 declined to 17.7% from 18.3% in the same period last year, due primarily to price competition and lower margins generated on lower-priced phones that represented the majority of our sales in the first quarter of 2013.

Operating Expenses

For the three months ended March 31, 2013, total operating expenses amounted to $2,141,000, an increase of 3% compared to $2,084,000 in the same period last year. The slight increase in these expenses in combination with the decline in net sales resulted in an increase in operating expenses as a percentage of net sales to 27.4% in the first quarter of 2013, compared with 16.9% for the same period last year. Selling, general and administrative expenses for the three months ended March 31, 2013 amounted to $1,743,000, an increase of $159,000, or 10%, compared to $1,584,000 in the prior year quarter. The increase was primarily related to increases in professional fees, marketing and compensation expense for new employees and contractors. R&D expenses for the three months ended March 31, 2013 amounted to $398,000, a decrease of $102,000, or 20%, compared to $500,000 in the prior year quarter. The decrease was primarily due to the restructuring of the development team and reduction of the employee base implemented during the quarter.

Other Income (Expense)

For the three months ended March 31, 2013, other income of $51,000 was principally composed of a forfeited customer deposit and foreign exchange losses. We also recorded $6,000 of interest income on a customer installment obligation. For the three months ended March 31, 2012, other expense of $65,000 included $48,000 of foreign exchange losses as well as losses on disposal of fixed assets.


Provision for Income Taxes

Because of our prior operating losses, our tax provisions for the three months ended March 31, 2013 and 2012 were nominal.

Liquidity and Capital Resources

Historically, our primary sources of liquidity have been cash generated from operations, lines of credit (bank and vendor) and, from time to time, the sale and exercise of securities to provide capital needed to support our business. However, we have incurred losses for the last six fiscal years and negative cash flow from operations in three of those years. In the three months ended March 31, 2013, we used $1.6 million in cash for operations. Primary uses of cash included a $0.8 million increase in prepaid inventories, a $0.5 million decrease in accounts payable and accruals, and a $0.6 million net loss before non-cash charges. These uses were partially offset by $0.3 million generated by reductions in receivables and inventories. Although we do not currently have a bank credit line, we believe that our current cash resources and working capital are sufficient to fund our operations for the foreseeable future.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates affecting the application of those accounting policies since our Annual Report on Form 10-K for the year ended December 31, 2012.

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