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IGOI > SEC Filings for IGOI > Form 10-Q on 12-Aug-2013All Recent SEC Filings

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Form 10-Q for IGO, INC.


12-Aug-2013

Quarterly Report


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

Certain Terms

In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, the terms "the Company," "we," "us" and "our" refer to the consolidated company, which is iGo, Inc. and its wholly owned subsidiaries Adapt, Aerial 7, Mobility California, Inc., Mobility Idaho, Inc., iGo EMEA Limited, Mobility Texas, Inc. and iGo Direct Corporation.

iGo®, iGo Green®, Adapt Mobile®, and Aerial7® are registered trademarks of iGo, Inc. or its subsidiaries in the United States and other countries. Other names and brands may be claimed as the property of others.

Forward Looking Statements

This report contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words "believe," "expect," "anticipate," "estimate" and other similar statements of expectations identify forward-looking statements. Forward-looking statements in this report can be found in the "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements and Supplementary Data" sections as well as other sections of this report and include, without limitation, statements concerning our expectations regarding our anticipated revenue, costs, cash flows, gross profit, gross margins, operating efficiencies, and related expenses for 2013; our expectations of the completion of the transactions contemplated by the Sale Agreement (including the Offer) as described elsewhere herein, including the ability of the parties' to the Sale Agreement to satisfy the conditions set forth therein and the possibility of any termination of the Sale Agreement, and other statements regarding the timing and the closing of the tender offer and transactions contemplated by the Sale Agreement; our expectations regarding our strategy, including but not limited to, our intentions to expand the market availability and broaden the distribution base of our products, thus decreasing our reliance on sales to Walmart, beliefs regarding the market need for our products, the expected sources, availability and sufficiency of cash and liquidity; expected market and industry trends; our expectations regarding the success of new product introductions; our efforts to continue to reduce costs while retaining and pursuing existing and new customer relationships; our expectations about competition; trends in key operating metrics, including days outstanding in accounts receivable and inventory turns; the results of future tax audits and tax settlements; the realizability of our deferred tax asset and the outcome of uncertain tax positions; the recognition of unrecognized equity compensation cost; other initiatives, including plans for internal product development, sourcing products from third-parties, joint marketing ventures, product bundling, expanding our distribution beyond consumer retail by selling products into additional distribution channels and the resulting positive impact on our revenue and earnings of these initiatives; our intention to retain cash balances in the United Kingdom; the possible disposition of assets; future payments to suppliers for letters of authorization; the possibility that we may issue additional shares of stock, including in connection with the transactions contemplated under the Sale Agreement; the possibility that we may attempt to access a credit facility; our intention and ability to hold marketable securities to maturity; our intentions about employing hedging strategies; and our expectations regarding the outcome and anticipated impact of various legal proceedings in which we may be involved.

These forward-looking statements are based largely on our management's expectations and involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include those discussed in our Annual Report on Form 10-K for the year ended December 31, 2012 under the heading "Risk Factors" and those set forth in other sections of this report and in other reports that we file with the SEC. Additional factors that could cause actual results to differ materially from those expressed in these forward-looking statements include, among others, the following:

? the sufficiency of our revenue to absorb expenses;

? our ability to expand our revenue base and develop new products and product enhancements;

? our dependence on large purchases from significant customers, namely Walmart;

? our ability to expand and diversify our customer base;

? our reliance upon Walmart, as well as other distributors and resellers;

? increased focus by consumer electronics retailers on their own private label brands;
? increased use of slotting fees by our traditional customers;


? fluctuations in our operating results due to increases in product costs from our suppliers, our suppliers' ability to perform, the timing of potential product and technology introductions and product enhancements relative to our competitors, market acceptance of our products, the size and timing of customer orders, our ability to effectively manage inventory levels, delay or failure to fulfill orders for our products on a timely basis, distribution of or changes in our revenue among distribution partners and retailers, our inability to accurately forecast our contract manufacturing needs, difficulties with new product production implementation or supply chain, product defects and other product quality problems, the degree and rate of growth in our markets and the accompanying demand for our products, our ability to expand our internal and external sales forces and build the required infrastructure to meet anticipated growth, and seasonality of our sales;

? our ability to manage our inventory levels;

? decreasing sales prices on our products over their sales cycles;

? our failure to integrate acquired businesses, products and technologies;

? our reliance on and the risk relating to outsourced manufacturing fulfillment of our products, including potential increases in manufacturing costs;

? our reliance on sole sources for key components;

? the negative impacts of product returns;

? design and performance issues with our products;

? liability claims;

? our failure to expand or protect our proprietary rights and intellectual property;

? intellectual property infringement claims against us;

? our ability to hire and retain qualified personnel;

? our ability to meet our future capital needs, including to secure additional financing;

? increased competition and/or reduced demand in our industry;

? our failure to comply with domestic and international laws and regulations;

? economic conditions, political events, war, terrorism, public health issues, natural disasters and similar circumstances;

? the possibility that our common stock could be delisted from the NASDAQ Capital Market, whether voluntarily upon the completion of the transactions contemplated under the Sale Agreement, or otherwise;

? the possible suspension of our reporting obligations under the Exchange Act after the completion of the transactions contemplated under the Sale Agreement;

? volatility in our stock price;

? concentration of stock ownership among our executive officers and principal stockholders;

? provisions in our certificate of incorporation, bylaws and Delaware law, as well as our amended and restated stockholder rights plan, that could make a proposed acquisition of the Company more difficult;

? the possibility that the tender offer by Steel and the subsequent top-up purchase (if necessary), as contemplated under the Sale Agreement, may not be consummated; and

? dilution resulting from potential future stock issuances.

In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will prove to be accurate. We undertake no obligation to publicly update or revise any forward-looking statements, or any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements.

Overview and Operating Outlook

We design and develop products that make mobile electronic devices more efficient and cost effective, thus allowing professionals and other consumers to better utilize their mobile devices and access information more readily. Our current product offering primarily consists of power, batteries, audio and protection solutions for mobile electronic devices.

We have historically generated the majority of our revenue from the sale of chargers for laptops. However, consumers are increasingly using smartphones and tablets as their primary mobile electronic devices. As a result of this shift, we have seen increased competition and a decline in demand for our power products from our traditional customer base as well as increased competition from retail customers who offer traditional power products under their own private-label brands. Although we have expanded our offering of products beyond our traditional power products to include a variety of accessories to support the increased utilization of smartphones and tablets, including audio and protection products, the revenue generated from the sales of these products has not offset the decline in revenue from historical sales of our traditional power products.


Second Quarter 2013 Highlights

? Total revenue decreased by 35.4% to $4.7 million, compared to $7.3 million for the second quarter of 2012. Total revenue for the six months ended June 30, 2013 decreased by 33.8% to $10.3 million, compared to $15.5 million for the six months ended June 30, 2012.

? Gross margin decreased to 4.8% as a percentage of total revenue, compared to 19.7% for the second quarter of 2012. Gross margin decreased to 10.8% as a percentage of total revenue for the six months ended June 30, 2013, compared to 18.5% for the six months ended June 30, 2012.

? Total operating expenses decreased by 31.4% to $2.7 million, compared to $4.0 million for the second quarter of 2012. Total operating expenses decreased by 27.6% to $5.9 million, compared to $8.2 million for the second quarter of 2012.

? Net loss per share was ($0.81), compared to ($1.24) during the second quarter of 2012, as adjusted for the 1-for-12 reverse stock split effective on January 28, 2013. Net loss per share was ($1.67) during the six months ended June 30, 2013, compared to ($2.23) for the six months ended June 30, 2012, as adjusted for the 1-for-12 reverse stock split effective on January 28, 2013.

During the second quarter of 2013, we continued to see increases in component costs from our major Asian suppliers, primarily due to a decrease in our volume of purchases, combined with pricing pressure from our customers. We also continued to experience the effects of market trends away from third-party branded products and toward private label products, as well as increased competition from traditional competitors with the ability to pay high slotting fees. In response, we continue pursuing actions to reduce costs while simultaneously implementing sales and marketing initiatives intended to develop new and retain existing customer relationships. Unless these events and initiatives reverse current trends, of which there is no assurance, we will experience further decreases in sales and continue to incur losses from operations for the foreseeable future.

(1) Recent Events

Tender Offer

On July 25, 2013 Steel Excel Inc. ("Steel") commenced a third-party cash tender offer to acquire up to 1,316,866 of the outstanding shares of the Company's common stock, representing a 44.0% ownership position in the Company on a fully-diluted basis, at a price of $3.95 per share (the "Offer"). The Offer is scheduled to expire at 5:00 p.m. Eastern Standard Time on August 22, 2013, unless extended or earlier terminated.

The Offer was made pursuant to a Stock Purchase and Sale Agreement entered into by the Company and Steel on July 11, 2013 (the "Sale Agreement"), which, together with the transactions contemplated thereby, was unanimously approved by the Board on July 1, 2013. Under the Sale Agreement, the Offer is conditioned upon, among other things, the valid tender of at least 897,864 (or 30.0%) of the outstanding shares of the Company's common stock. If at least 897,864, but less than 1,316,866, of the outstanding shares of the Company's common stock are tendered in the tender offer, Steel is obligated to purchase from the Company such number of newly issued shares of common stock, when added to the number of shares of common stock owned by Steel following consummation of the Offer, constitutes 44.0% of the Company's common stock then outstanding on a fully-diluted basis.

Adage Capital Partners, L.P., a stockholder owning approximately 21.0% of the Company's outstanding common stock, has entered into a tender and voting agreement with Steel and the Company pursuant to which Adage has agreed to, among other things, tender all of its shares of the Company's common stock in the Offer, subject to proration for tenders by other stockholders.

Upon the consummation of the Offer, Steel will have the right to designate two of the four directors on the Board. Also, immediately after the closing of the transactions contemplated by the Sale Agreement, Michael D. Heil will be terminated from his position as an executive officer of the Company and a new president and chief executive officer will be appointed.

Concurrent with the commencement of the Offer, on July 25, 2013 we filed a Solicitation/Recommendation Statement on Schedule 14D-9 setting forth a detailed description of the terms and background of the Offer, the Board's recommendation that Company stockholders tender their shares in the Offer, and the Board's rationale for its recommendation.


In conjunction with the tender offer, in May 2013 the Company provided Steel a quarterly financial forecast for 2013. For the second quarter, the Company forecasted total revenues of $5.5 million, gross margin of $1.0 million and negative EBITDA of ($970,000). Actual results, as more fully discussed herein, were lower, at $4.7 million, $230,000 and ($2.0 million), respectively. As discussed elsewhere herein, our second quarter results were adversely impacted by the transition of customers toward private label products, loss of shelf space due to the payment by competitors of slotting fees, and the receivership of Pure Energy, our rechargeable battery supplier. These and other events that may occur could cause our results for the balance of the year to be lower than the Company's forecast. The forecasted information referenced herein and additional risks and uncertainties relating to it are more fully set forth in the Company's Schedule 14D-9 filed in connection with the tender offer and available at
http://www.sec.gov/Archives/edgar/data/1075656/000143774913009416/igoi20130724_sc14d9.htm

Pure Energy Receivership

On July 11, 2013, we reported in a Current Report on Form 8-K that Pure Energy Solutions, the Company's main supplier of rechargeable alkaline batteries, had been placed into receivership, causing a delay in shipments of the Company's then existing orders. As of August 8, 2013, Pure Energy remains in receivership and the shipments continue to be delayed as no replacement supplier has been identified As a result, and after further analysis, the Company has determined that its investment in Pure Energy Visions (which holds Pure Energy as a subsidiary) is fully impaired and has written off the remaining value of its investment in Pure Energy Visions, along with the net book value of its technology license and distribution rights from Pure Energy, which were recorded at approximately $60,000 and $456,000, respectively, on the Company's balance sheet. Due in part to the receivership matter, revenue from the sale of Pure Energy Products during the second quarter declined by approximately $93,000, representing a 16.6% decrease from sales of Pure Energy Products during the first quarter . The Company expects further sales declines as it sells through its existing inventory.

(2) Critical Accounting Policies and Estimates

There were no changes in our critical accounting policies during the six months ended June 30, 2013 from those set forth in Part II, Item 7, "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2012.

(3) Results of Operations

The following table presents certain selected consolidated financial data for the three and six months ended June 30, 2013 and 2012 expressed as a percentage of total revenue:


                                Three Months Ended           Six Months Ended
                                     June 30,                    June 30,
                                2013           2012          2013         2012

Revenue                           100.0 %       100.0 %       100.0 %      100.0 %
Cost of revenue                    95.2 %        80.3 %        89.2 %       81.5 %
Gross profit                        4.8 %        19.7 %        10.8 %       18.5 %

Operating expenses:
Sales and marketing                18.6 %        21.3 %        16.9 %       20.1 %
Research and development            3.7 %         8.6 %         6.1 %        8.2 %
General and administrative         26.1 %        24.8 %        30.2 %       24.5 %
Asset Impairment                    9.7 %         0.0 %         4.4 %        0.0 %
Total operating expenses           58.1 %        54.7 %        57.6 %       52.8 %
Loss from operations              (53.3 )%      (35.0 )%      (46.8 )%     (34.3 )%

Other income, net:
Interest income, net                0.0 %         0.0 %         0.0 %        0.0 %
Other income (expense), net         3.0 %       (13.5 )%       (0.3 )%      (6.5 )%
Net Loss                          (50.3 )%      (48.5 )%      (47.1 )%     (40.8 )%

Comparison of Three and Six Months Ended June 30, 2013 and 2012

Revenue.

Revenue generally consists of sales of products, net of returns and allowances. To date, our revenues have come predominantly from sales of laptop chargers. The following tables summarize the year-over-year comparison of our consolidated revenue for the three and six months ended June 30, 2013 and 2012 (dollars in thousands):

                                                                                             Percentage
                                   Three months      Three months                           change from
                                       Ended             Ended          Decrease from       same period
                                   June 30, 2013     June 30, 2012      same period in        in prior
                                                                          prior year            year
Revenue                            $       4,708     $       7,292     $         (2,584 )          (35.4 )%




                                                                                                       Percentage
                                                                                                      change from
                                                                                  Decrease from       same period
                                    Six Months Ended       Six Months Ended       same period in        in prior
                                    June 30, 2013          June 30, 2012            prior year            year
Revenue                            $           10,290     $           15,539     $         (5,249 )          (33.8 )%


Following is a breakdown of revenue by significant account for the three and six months ended June 30, 2013 and 2012 with the corresponding dollar and percent changes (dollars in thousands):

                                           For the Three Months Ended June 30
                                       2013                                   2012
                          Sales           % of Total Sales         Sales       % of Total Sales       $ Change       % Change

Walmart                 $    1,778                       38 %    $   2,349                    32 %   $     (571 )        (24.3 )%
Woot                           375                        8 %          354                     5 %           21            5.9 %
Hudson Group                   184                        4 %          378                     5 %         (194 )        (51.3 )%
Aqipa                          156                        3 %          155                     2 %            1            0.6 %
Micro-P                        157                        3 %           70                     1 %           87          124.3 %
RadioShack                       -                        -          1,169                    16 %       (1,169 )       (100.0 )%
All other customers          2,058                       44 %        2,817                    39 %         (759 )        (26.9 )%
                        $    4,708                      100 %        7,292                   100 %   $   (2,584 )        (35.4 )%




                                           For the Six Months Ended June 30,
                                       2013                                  2012
                           Sales          % of Total Sales        Sales       % of Total Sales       $ Change       % Change

Walmart                 $     4,322                      42 %   $   4,368                    28 %   $      (46 )         (1.1 )%
Hudson Group                    580                       6 %         674                     4 %          (94 )        (13.9 )%
Woot                            462                       4 %         802                     5 %         (340 )        (42.4 )%
Aqipa                           437                       4 %         314                     2 %          123           39.2 %
Micro-P                         333                       3 %          70                     1 %          263          375.7 %
RadioShack                      167                       2 %       2,503                    16 %       (2,336 )        (93.3 )%
All other customers           3,989                      39 %       6,808                    44 %       (2,819 )        (41.4 )%
                        $    10,290                     100 %      15,539                   100 %   $   (5,249 )        (33.8 )%

The decrease in revenue for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 was primarily due to declines in sales volume of power products to Radio Shack and Hudson Group, combined with a decline in the average selling price for power products to Walmart. The decline in sales to all other customers is primarily attributable to lower sales of power products in North American markets, as well as a decrease in the sale of audio products of $121,000 to $479,000 for the three months ended June 30, 2013, compared to $600,000 for the 3 months ended June 30, 2012, and a decrease in sales of batteries of $93,000 to 342,000 for the three months ended June 30, 2013, compared to $435,000 for the three months ended June 30, 2012.

The decrease in revenue for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 was primarily due to declines in sales volume of power products to Radio Shack, Hudson Group, and Woot, combined with a decline in average selling price for power products to Walmart, partially offset by an increase in sales volume of power products to Walmart, Aquipa, and Micro-P. The decline in sales to all other customers is primarily attributable to lower sales of power products in North American. markets, as well as a $435,000 decrease in the sale of audio products to $943,000 for the six months ended June 30, 2013, compared to $1,378,000 for the six months ended June 30, 2012, and a $316,000 decrease in sales of batteries to $777,000 for the six months ended June 30, 2013, compared to $1,093,000 for the six months ended June 30, 2012.

We are working to continue to broaden our distribution base and expand sales of product categories other than power during 2013 with the goal of reducing our dependence on sales of power products to Walmart.


Cost of revenue, gross profit and gross margin.

Cost of revenue generally consists of costs associated with components, outsourced manufacturing, in-house labor for 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 table summarizes the year-over-year comparison of our cost of revenue, gross profit and gross margin for the three and six months ended June 30, 2013 and 2012 (in thousands, except percentages):

                                                                                              Percentage
                                   Three months      Three months                            change from
                                       Ended             Ended          Decrease from        same period
                                   June 30, 2013     June 30, 2012      same period in         in prior
                                                                          prior year             year
Cost of Revenue                    $       4,480     $       5,855     $         (1,375 )           (23.5 )%
Gross Profit                       $         228     $       1,437     $         (1,209 )           (84.1 )%
Gross Margin                                 4.8 %            19.7 %              (14.9 )%        NA




                                                                                                        Percentage
                                                                                                       change from
                                                                                  Decrease from        same period
                                    Six Months Ended       Six Months Ended       same period in         in prior
                                    June 30, 2013          June 30, 2012            prior year             year
Cost of Revenue                    $            9,181     $           12,657     $         (3,476 )           (27.5 )%
Gross Profit                       $            1,109     $            2,882     $         (1,773 )           (61.5 )%
Gross Margin                                     10.8 %                 18.5 %               (7.7 )%        NA

The decrease in cost of revenue for the three and six months ended June 30, 2013 as compared to the same periods in 2012 was primarily due to the decline in overall sales, shift in product mix, and decline in average selling prices to Walmart and other customers. Labor and overhead expenses decreased by $400,000 to $1.0 million, or 21.3% of revenue, for the three months ended June 30, 2013, compared to $1.4 million, or 18.7% of revenue, for the three months ended June . . .

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