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IGOI > SEC Filings for IGOI > Form 10-K on 21-Mar-2014All Recent SEC Filings

Show all filings for IGO, INC.

Form 10-K for IGO, INC.


21-Mar-2014

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 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 products 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.


In August 2013, we began a comprehensive, strategic review of our business in light of declining revenue and margins, continuing operating losses and cash usage. Our goal was to determine how to continue to operate the business while taking steps to reduce operating expenses, reduce and/or eliminate operating losses and improve cash flow.

Effective October 1, 2013, as a cost reduction measure, we executed a management services agreement with SP Corporate. The management services agreement, as approved by our independent directors, allowed us to reduce our operating expenses by consolidating executive positions and by using the services of SP Corporate for administrative functions on a shared services model.

In November 2013, we announced our intention to voluntarily delist our common stock from The NASDAQ Stock Market ("NASDAQ") and to deregister our common stock under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Both decisions were made after a review of the respective benefits from a NASDAQ listing and registration of our common stock under the Exchange Act, respectively, as compared to the costs of such activities. On November 22, 2013, we filed a Form 25 with the Securities and Exchange Commission to voluntarily delist our common stock from NASDAQ and deregister our common stock under
Section 12(b) of the Exchange Act. On December 18, 2013, we filed a Form 15 with the Securities and Exchange Commission to voluntarily deregister our common stock under Section 12(g) of the Exchange Act.

In December 2013, we signed an inventory Purchase and License Agreement (the "License Agreement") with Incipio Technologies, Inc., (the "Licensee") pursuant to which Licensee will manage the manufacture, sales and distribution of our iGoŠ branded line of battery, charger and power supply products and accessories and other future products that may be developed by us or Licensee. Based on our strategic review, we concluded that the License Agreement would allow us to generate ongoing revenue, while allowing us to minimize operating expenses and working capital. We are currently taking steps for the implementation of the License Agreement. We expect to substantially complete these activities in the first quarter of 2014.

Concurrent with the execution of the License Agreement, we determined that certain of our battery, audio and protection products were not generating sufficient revenue and margins and determined that we will no longer offer such products once we have fulfilled existing orders and depleted current stock.

The Licensee will manage all aspects of selling and distributing the substantial majority of the Company's remaining inventory as well as future procurement, distribution and sale of iGo branded products. We will generate future revenue through license fees earned from Licensee under the terms of the License Agreement. Therefore, most accounts receivable will result from the revenue earned through license fees, in the form of royalties and profit-sharing with the Licensee.

In concert with the processes described above we have reduced headcount, terminated contractor and supplier agreements, and determined that we will no longer need to lease our current office building in Scottsdale, Arizona, as our ongoing functions will be supported by a combination of SP Corporate and our Licensee. The lease will expire in April 2014.

Power

Power management, which remains our core product line, includes portable power, device power, and laptop power solutions. We continually strive to bring to market high quality, uniquely differentiated power solutions that meet our customers' needs and exceed their expectations.

Batteries

Since June 2011, through our relationship with Pure Energy Solutions ("Pure Energy"), we have been 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. However, as a result of the License Agreement and directing our focus primarily toward power products, we do not expect batteries and related battery chargers to provide a significant contribution to revenue in the future, and we do not plan to offer such products for sale once we deplete our existing inventories.


Audio

As a result of our acquisition of Aerial7 in 2010, we have offered a line of ear-buds and headphones. As mobile phones 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 have been designed to provide enhanced sound quality compared to competitive products at similar price points. They have offered 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 have been designed to appeal to the fashion sense of consumers, allowing them to express their unique and personal style through their mobile electronic devices.. Our audio products have been offered primarily through lifestyle and music retailers around the world. However, as a result of the License Agreement and directing our focus primarily toward power products, we do not expect audio products to provide a significant contribution to revenue in the future, and we do not plan to offer such products for sale once we deplete our existing inventories.

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 was 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. Our cases, skins, screen protectors and other similar products have been offered primarily in Europe.

However, as a result of the License Agreement and directing our focus primarily toward power products, we do not expect protection products to provide a significant contribution to revenue in the future, and we do not plan to offer such products for sale once we deplete our existing inventories.

Recent Developments

On November 22, 2013, we filed a notification of removal from listing and registration on Form 25 with the U.S. Securities and Exchange Commission (the "SEC") to voluntarily delist our common stock, par value $0.10 per share, from NASDAQ and deregister our common stock, with associated Series H Junior Participating Preferred Stock Purchase Rights, under Section 12(b) of the Exchange Act. On December 18, 2013, we filed a notice of termination of registration on Form 15 with the SEC to voluntarily deregister our common stock, with associated Series G Junior Participating Preferred Stock Purchase Rights, under Section 12(g) of the Exchange Act. Our obligation to file periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, under Section 13(a) of the Exchange Act was suspended upon the filing of the Form 15 under Section 12(g) of the Exchange Act. The deregistration under Section 12(g) of the Exchange Act was effective as of March 18, 2014, 90 days after the filing of the Form 15 under Section 12(g) of the Exchange Act, at which time our other filing requirements under Section 13(a) of the Exchange Act terminated.

As of January 1, 2014, we had less than 300 holders of record of its securities, as determined pursuant to Rule 12g5-1 promulgated under the Exchange Act. Accordingly, we expect that our obligation to file periodic reports under
Section 15(d) of the Exchange Act will also be suspended upon the filing of this 2013 Annual Report on Form 10-K. We have no intention of continuing to file periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K under Exchange Act once our obligations to do so under Sections 13(a) and 15(d) of the Exchange Act are terminated or otherwise suspended.


On December 23, 2013, the Company, and Incipio Technologies, Inc., a California corporation (the "Licensee"), entered into an Inventory Purchase and License Agreement (the "License Agreement"), pursuant to which Licensee will manage the manufacture, sales and distribution of our iGOŽ branded line of battery, charger, and power supply products and accessories and other future products that maybe developed by us and Licensee (the " Licensed Products"). We believe the License Agreement offers us a means to significantly reduce overhead, consistent with its previous cost-saving decisions, by transferring to Licensee the costs of the manufacture and distribution of the our line of products, from which we will receive an ongoing revenue stream.

Under the terms of the License Agreement, we granted Licensee a non-exclusive license to use our iGOŽ trademarks and other intellectual property as necessary for Licensee to manufacture, promote, sell and distribute the licensed products worldwide through Licensee's network of distributors and retail partners and our online store. In consideration for the rights granted under the Agreement, Licensee will pay us a percentage of net sales of certain licensed products and the net profits of certain other licensed product sold worldwide and Licensee will bear all the costs of manufacture, inventory management, distribution and sale of licensed products, as well as the costs of developing new products at its discretion.

Also in consideration for the rights granted under the License Agreement and to facilitate the transition to Licensee's management of our iGOŽ branded line of licensed products, Licensee purchased for resale our existing, on hand inventory of licensed products and outstanding, unfulfilled purchase orders for licensed products, except for certain product inventory that had been identified by us and Licensee as obsolete or which lacked sufficient market demand. Licensee purchased such inventory of licensed products at pre-determined prices based on the parties' joint inspection of such inventory, the estimated retail value of such inventory, Licensee's anticipated costs of reworking, repackaging and distributing such inventory and the current market opportunities for such inventory.

The License Agreement contains customary representations and warranties and indemnities by each of us and Licensee. The License Agreement also includes certain restrictions on our ability to directly or indirectly sell licensed products during the term of the License Agreement, except for inventory not otherwise purchased by Licensee.

The License Agreement has a term of two years, which will automatically renew for successive one-year periods unless and until terminated: (i) by a party alleging a material breach of the License Agreement by giving written notice to the other party and a reasonable period of time to cure such breach; (ii) immediately by either party upon the bankruptcy, insolvency, liquidation, dissolution of the other party; (iii) immediately by either party if any material representation or warranty made by a party is found to be materially incorrect or misleading; (iv) ) immediately by either party upon a "change in control" (as defined in the License Agreement) of the other party; and (v) without cause upon six (6) months written notice. Either party may also terminate the License Agreement upon thirty (30) days written notice if the parties are unable to resolve, in good faith, disputes arising under the License Agreement concerning Licensee's use of our iGOŽ trademarks , the quality of the licensed products sold by Licensee, or the extent or scope of Licensee's efforts to manufacture and sell licensed products.

During the term of the License Agreement and for a period of six (6) months after expiration or termination of the License Agreement, we will not sell our iGOŽ trademarks to any unaffiliated third party unless we have first offered our iGOŽ trademarks to Licensee at a price not greater than and on material terms no less favorable to Licensee than the price and terms Licensor offers to any third party. .

A copy of License Agreement is included as an exhibit this Form 10-K for the year ending December 31, 2013.

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, including those of WalMart, in the amount of the difference between the gross sales value and the cost of revenue as a reduction of accounts receivable. We have historically maintained agreements with certain customers that provided them with a 100% right of return prior to the ultimate sale to an end user of the product. Accordingly, we recorded $307,000 deferred revenue as of December 31, 2012. At December 31, 2013, we recorded no deferred revenue for our remaining customer base. Gross sales to the retail and distribution channel accounted for approximately 97% of revenue for the year ended December 31, 2013 and 89% of revenue for the year ended December 31, 2012.

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. At December 31, 2013, a significant portion of our inventory has been written-down to the value agreed upon with the Licensee. Additional inventory write-downs may be required if the Licensee determines the market value is less than the agreed-upon value.

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.


Goodwill and Long-Lived Asset Valuation. We have historically tested 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. The value of goodwill remained at zero throughout 2013.

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.

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,
                                                                2013                2012

Revenue                                                            100.0 %             100.0 %
Cost of revenue                                                    103.0 %              82.3 %
Gross profit (loss)                                                 (3.0 )%             17.7 %

Operating expenses:
Sales and marketing                                                 16.7 %              17.5 %
Research and development                                             6.9 %               7.4 %
General and administrative                                          45.1 %              23.6 %
Asset impairment                                                     2.7 %               4.8 %
Total operating expenses                                            71.4 %              53.3 %
Loss from operations                                               (74.4 )%            (35.6 )%

Other income (expense):
Interest income, net                                                 0.0 %               0.0 %
Gain on disposal of assets and other income (expense), net           0.2 %              (4.6 )%
Loss before income tax                                             (74.2 )%            (40.2 )%
Income tax benefit                                                     -                   -
Net loss                                                           (74.2 )%            (40.2 )%

Comparison of Years Ended December 31, 2013 and 2012

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):


                                                           Decrease from        Percentage Change
      Year                             Annual Amount         Prior Year          from Prior Year
      2013                            $        16,928              (12,948 )                 (43.3 )%
      2012                                     29,876               (8,496 )                 (22.1 )%

Following is a breakdown of revenue by significant account for the years ended December 31, 2013 and 2012 with corresponding dollar and percent changes (dollars in millions):

                                               Change from 2012 to 2013
                        $          $             $                  %
                       2013       2012        Change             Change
Walmart                  7.5        8.3            (0.8 )              (9.6 )%
Convoy                   0.5        0.4             0.1                25.0 %
RadioShack               0.1        3.8            (3.7 )             (97.4 )%
Belkin                     -        0.8            (0.8 )            (100.0 )%
Office Depot             0.2        0.7            (0.5 )             (71.4 )%
All other customers      8.6       15.9            (7.3 )             (45.8 )%
                        16.9       29.9           (13.0 )             (43.5 )%

The 2013 decrease in revenue was primarily due to declines in sales volume of power products to Radio Shack, Hudson Group, and In Motion 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 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 $500,000 decrease in the sale of audio products to $1.8 million for the year ended December 31, 2013, compared to $2.3 million for the year ended December 31, 2012, a $1.2 million decrease in sales of batteries to $1 million for the year ended December 31, 2013, compared to $2.2 million for the year ended December 31, 2012, and a $500,000 decrease in the sale of protection products to $200,000 for the year ended December 31, 2013, compared to $700,000 for the year ended December 31, 2012. We will generate reduced future revenue through the license fees earned from Licensee under the terms of the License Agreement, primarily a percentage of net sales of certain Licensed Products and the net profits of certain other Licensed Products.

Cost of revenue, gross profit and gross margin. Cost of revenue generally . . .

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