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

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Form 10-Q for IGO, INC.


12-Nov-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 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 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:

? our ability to implement a reduced cost structure while evaluating alternative business models

? the sufficiency of our revenue to absorb expenses;

? our ability to expand our revenue base;

? 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;

? 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 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 will be delisted from the NASDAQ Capital Market, unless we are able to comply with NASDAQ listing requirements, whether voluntarily or otherwise;

? the possible suspension of our reporting obligations under the Exchange Act after the completion of the transactions contemplated under the Stock Purchase and Sale Agreement entered into by the Company and Steel on July 11, 2013 (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;

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.

While we have taken action to reduce costs, we are assessing opportunities to implement a further-reduced cost structure while evaluating alternative business models. We are exploring opportunities that may allow us to utilize our brand to expand our higher volume products, and potential strategic alliances that could provide for expanded product lines. If those opportunities are implemented, there could be different sales models, different distribution methods and elimination of some product lines. Any such changes could impact sales volumes, inventory levels and the overall cost structure as these have historically existed.

Third quarter 2013 highlights

? Total revenue decreased by 57.0% to $3.4 million, compared to $7.9 million for the third quarter of 2012. Total revenue for the nine months ended September 30, 2013 decreased by 41.6% to $13.7 million, compared to $23.5 million for the nine months ended September 30, 2012.

? Gross margin decreased to (13.8)% as a percentage of total revenue, compared to 19.0% for the third quarter of 2012. Gross margin decreased to 4.6% as a percentage of total revenue for the nine months ended September 30, 2013, compared to 18.7% for the nine months ended September 30, 2012.


? Total operating expenses increased by 33.3% to $4.4 million, compared to $3.3 million for the second quarter of 2012. Total operating expenses decreased by 10.4% to $10.3 million for the nine months ended September 30, 2013, compared to $11.5 million for the nine months ended September 30, 2012.

? Net loss per share was ($1.65), compared to ($0.64) 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 ($3.32) during the nine months ended September 30, 2013, compared to ($2.87) for the nine months ended September 30, 2012, as adjusted for the 1-for-12 reverse stock split effective on January 28, 2013.

During the third quarter of 2013, we 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 focusing our marketing initiatives on the highest margin products and 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 Completion

On August 23, 2013 Steel Excel Inc. ("Steel") completed its previously announced tender offer to acquire up to 1,316,866 of the outstanding shares of the Company's common stock, representing a 44.7% ownership position in the Company on a fully-diluted basis, at a price of $3.95 per share (the "Offer").

The Offer was made pursuant to the Sale Agreement, which, together with the transactions contemplated thereby, was unanimously approved by the Board on July 1, 2013. As of the expiration of the guaranteed delivery period associated with tender offer on August 27, 2013, a total of 2,058,422 shares of the Company's common stock were validly tendered and not properly withdrawn pursuant to the tender offer, representing approximately 68.8% of the outstanding shares of the Company's common stock on a fully diluted basis as of July 11, 2013.

On August 23, 2013, Steel accepted for payment 1,316,866 shares of the Company's common stock that were validly tendered and not properly withdrawn pursuant to the tender offer. Because the tender offer was oversubscribed, the number of shares of the Company's common stock that Steel accepted for purchase from each of the tendering stockholders was prorated. The final proration factor was approximately 63.97% of the tendered shares.

Payment for shares of the Company's common stock accepted for payment by Steel, based on the final proration factor and any adjustments to avoid purchases of fractional shares of the Company's common stock, was made promptly in accordance with the terms of the tender offer. All shares of the Company's common stock tendered but not accepted for payment in the tender offer were returned to the tendering stockholders.

In accordance with the Sale Agreement, as of the closing of the Offer, two designees of Steel became directors of the Company, replacing Michael D. Heil and Frederic Welts, whose resignations from the Board of Directors of the Company (the " Board") became effective immediately after the consummation of the Offer. At the time of his resignation, Mr. Welts served as a member of the Corporate Governance and Nominating Committee, the Audit Committee, and the Compensation and Human Resources Committee of the Board. Mr. Heil did not serve on any of the Board's committees. Neither of the resigning directors was removed from the Board due to disagreements with the Company on any matter relating to the Company's operations, policies or practices.

As of August 23, 2013, Jack L. Howard and Terry R. Gibson each assumed the role of director of the Company. Mr. Howard is the Vice Chairman, principal executive officer, and Director of Steel. Mr. Gibson has been appointed as interim President, Chief Executive Officer, Chief Financial Officer, and Secretary of the Company. Leonard J. McGill, Vice President and General Counsel of Steel, has been appointed General Counsel of the Company.


Pure Energy Receivership

On July 11, 2013, we reported 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 November 12, 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 determined that its investment in Pure Energy Visions (which holds Pure Energy as a subsidiary) was fully impaired and, during the second quarter of 2013, wrote 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 third quarter compared to the second quarter of 2013, continued to decline by approximately $193,000, representing a 56.4% decrease. The Company expects further sales declines as it sells through its existing inventory.

NASDAQ Notices

On September 27, 2013, iGo, Inc. (the "Company") received a letter from the Listing Qualifications Department of The NASDAQ OMX Group ("NASDAQ") notifying the Company that it was not in compliance with the majority independent director requirement as set forth in Listing Rule 5605(b)(1) and the audit committee requirement as set forth in Listing Rule 5605(c)(2). In addition, on September 30, 2013, the Company received a letter from the Listing Qualifications Department of NASDAQ reminding the Company of the requirement to hold an annual meeting of shareholders no later than December 31, 2013.

In light of these developments, the Board of Directors of the Company is evaluating alternatives and the cost effectiveness of the Company's continued listing on NASDAQ.

(2) Critical Accounting Policies and Estimates

There were no changes in our critical accounting policies during the nine months ended September 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 nine months ended September 30, 2013 and 2012 expressed as a percentage of total revenue:

                                Three Months Ended           Nine Months Ended
                                   September 30,               September 30,
                                 2013          2012          2013          2012

Revenue                            100.0 %      100.0 %        100.0 %      100.0 %
Cost of revenue                    113.8 %       81.0 %         95.4 %       81.3 %
Gross profit                       (13.8 )%      19.0 %          4.6 %       18.7 %

Operating expenses:
Sales and marketing                 19.2 %       14.2 %         17.5 %       18.1 %
Research and development            14.9 %        6.1 %          8.3 %        7.5 %
General and administrative          93.4 %       21.2 %         46.0 %       23.4 %
Asset Impairment                     0.0 %        0.0 %          3.3 %        0.0 %
Total operating expenses           127.5 %       41.5 %         75.1 %       49.0 %
Loss from operations              (141.3 )%     (22.5 )%       (70.5 )%     (30.3 )%

Other income, net:
Interest income, net                 0.0 %        0.0 %          0.0 %        0.0 %
Other income (expense), net          1.3 %       (0.6 )%        (0.1 )%      (4.5 )%
Net Loss                          (140.0 )%     (23.1 )%       (70.4 )%     (34.8 )%


Comparison of Three and Nine Months Ended September 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 nine months ended September 30, 2013 and 2012 (dollars in thousands):

                                                                                             Percentage
                                      Three months     Three months                         change from
                                         Ended            Ended          Decrease from      same period
                                       September        September       same period in        in prior
                                        30, 2013         30, 2012         prior year            year
Revenue                               $      3,429     $      7,931     $        (4,502 )          (56.8 )%

                                                                                             Percentage
                                      Nine Months      Nine Months                          change from
                                         Ended            Ended          Decrease from      same period
                                       September        September       same period in        in prior
                                        30, 2013         30, 2012         prior year            year
Revenue                               $     13,718     $     23,470     $        (9,752 )          (41.6 )%

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

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

Walmart                 $    1,786                52%            $    2,891            36%       $   (1,105 )        (38.2 )%
Convoy                         211                 6%                     -            0%               211          100.0 %
Aqipa                          158                 5%                   189            2%               (31 )        (16.4 )%
Hudson Group                     -                 0%                   513            6%              (513 )       (100.0 )%
RadioShack                       -                 0%                   726            9%              (726 )       (100.0 )%
All other customers          1,274                37%                 3,612            46%           (2,338 )        (64.7 )%
                        $    3,429                100%                7,931           100%       $   (4,502 )        (56.8 )%




                                      For the Nine Months Ended September 30,
                                       2013                                 2012
                                                                                % of Total
                           Sales          % of Total Sales         Sales          Sales          $ Change       % Change

Walmart                 $     6,108                45%               7,260            31%       $   (1,152 )        (15.9 )%
Aqipa                           649                 5%                 582            2%                67           11.5 %
Hudson Group                    606                 4%               1,205            5%              (599 )        (49.7 )%
Inmotion Pictures               461                 3%                 828            4%              (367 )        (44.3 )%
RadioShack                      184                 1%               3,229            14%           (3,045 )        (94.3 )%
All other customers           5,710                42%              10,366            44%           (4,656 )        (44.9 )%
                        $    13,718                100%             23,470           100%       $   (9,752 )        (41.6 )%

The decrease in revenue for the three months ended September 30, 2013 as compared to the three months ended September 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 $304,000 decrease in the sale of audio products to $339,000 for the three months ended September 30, 2013, compared to $643,000 for the 3 months ended September 30, 2012, and a $496,000 decrease in sales of batteries to 149,000 for the three months ended September 30, 2013, compared to $645,000 for the three months ended September 30, 2012.


The decrease in revenue for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 was primarily due to declines in sales volume of power products to Radio Shack, Hudson Group, and InMotion Pictures, 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 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 $739,000 decrease in the sale of audio products to $1,282,000 for the nine months ended September 30, 2013, compared to $2,021,000 for the nine months ended September 30, 2012, and a $812,000 decrease in sales of batteries to $926,000 for the nine months ended September 30, 2013, compared to $1,738,000 for the nine months ended September 30, 2012.

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 nine months ended September 30, 2013 and 2012 (in thousands, except percentages):


                                 Three months       Three months                             Percentage
                                     Ended              Ended          Decrease from         change from
                                 September 30,      September 30,     same period in       same period in
                                     2013               2012            prior year           prior year
Cost of Revenue                  $       3,903      $       6,424     $        (2,521 )              (39.2 )%
Gross Profit                     $        (474 )    $       1,507     $        (1,981 )             (131.5 )%
Gross Margin                             (13.8 )%            19.0 %             (32.8 )%                NA




                                  Nine Months       Nine Months                              Percentage
                                     Ended             Ended          Decrease from         change from
                                 September 30,     September 30,     same period in        same period in
                                     2013              2012            prior year            prior year
Cost of Revenue                  $      13,084     $      19,081     $        (5,997 )               (31.4 )%
Gross Profit                     $         634     $       4,389     $        (3,755 )               (85.6 )%
Gross Margin                               4.6 %            18.7 %             (14.1 )%                 NA

The decrease in cost of revenue and gross profit for the three and nine months ended September 30, 2013 as compared to the same periods in 2012 was primarily due to the decline in overall sales, shift in product mix, increased inventory writedowns, and decline in average selling prices to Walmart and other customers. Labor and overhead expenses were unchanged at $1.2 million, or 35.0% of revenue, for the three months ended September 30, 2013, compared to 15.7% of revenue for the three months ended September 30, 2012, and decreased by $773,000 to $3.2 million, or 23.3% of revenue, for the nine months ended September 30, 2013 compared to $4.0 million or 17.0% for the nine months ended September 30, 2012. Cost of revenue as a percentage of revenue increased to 113.8% for the three months ended September 30, 2013, from 81.0% for the three months ended September 30, 2012, and increased to 95.4% from 81.3% for the nine months ended September 30, 2013, primarily due to increased warranty charges, increased inventory write-downs, fixed labor and overhead costs being spread over reduced revenue, and a shift to lower margin customers.


Sales and marketing.

Sales and marketing expenses generally consist of salaries, commissions, other . . .

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