Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10- Q**

 

**x****     ****QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2010**

 

**OR**

 

**o****        ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition periodfrom                to                **

 

**CommissionFile Number - 001-32217**

 

**InfoSonicsCorporation**

(Exact name of registrant as specified in its charter)

 

| **Maryland**                                                    | ** ** | **33-0599368**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (IRS Employer Identification Number) |

 

**4350Executive Drive, Suite #100, San Diego, CA 92121**

(Address of principal executive offices including zip code)

 

**(858)373-1600**

(Registrant’s telephone number, includingarea code)

 

**Not Applicable**

(Former Name or Former Address, if Changed Since Last Report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporatewebsite, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large  accelerated filer o                |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                  |   | Smaller  reporting company x |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

As of May 14, 2010, the Registrant had 14,184,146 sharesoutstanding of its $0.001 par value common stock.

 

 

 

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**InfoSonicsCorporation and Subsidiaries**

 

**QuarterlyReport on Form 10-Q For The Three Months Ended March 31, 2010**

 

**Table of Contents**

 
| **PART I.  FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |   |   |
| Item 1.                                 | Financial Statements | 2 |
|                                    |   |   |
| ·                                  | Consolidated Balance  Sheets at March 31, 2010 (unaudited) and December 31, 2009 | 2 |
|                                    |   |   |
| ·                                  | Consolidated  Statements of Operations for the three months ended March 31, 2010 and  2009 (unaudited) | 3 |
|                                    |   |   |
| ·                                  | Consolidated  Statements of Comprehensive Operations for the three months ended  March 31, 2010 and 2009 (unaudited) | 4 |
|                                    |   |   |
| ·                                  | Consolidated  Statements of Cash Flows for the three months ended March 31, 2010 and  2009 (unaudited) | 5 |
|                                    |   |   |
| ·                                  | Condensed  Notes to Consolidated Financial Statements (unaudited) | 6 |
|                                    |   |   |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12 |
|                                    |   |   |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk | 18 |
|                                    |   |   |
| Item 4.                                 | Controls and  Procedures | 18 |
| ** **                              | ** ** | ** ** |
| **PART II. OTHER  INFORMATION**    |
|                                    |   |   |
| Item 1.                                 | Legal Proceedings | 19 |
|                                    |   |   |
| Item 1A.                                | Risk Factors | 19 |
|                                    |   |   |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds | 21 |
|                                    |   |   |
| Item 3.                                 | Defaults  Upon Senior Securities | 21 |
|                                    |   |   |
| Item 4.                                 | Reserved | 21 |
|                                    |   |   |
| Item 5.                                 | Other Information | 21 |
|                                    |   |   |
| Item 6.                                 | Exhibits | 21 |

 

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**Part I.  FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                    | ** ** | **March 31,  2010** | ** **     | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|----------------|-----------------------------|------------|
| ** **                                                                                                                                                    | ** ** | **(unaudited)**          | ** **     | **(audited)**               | ** ** |
| **ASSETS**                                                                                                                                                    |       |                     |           |                        |       |
| **Current assets:**                                                                                                                                           |       |                     |           |                        |       |
| Cash and cash equivalents                                                                                                                                     |       | $                        | 25,734,245     |                        | $          | 18,418,066 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $184,814 (unaudited) and $589,720                                                             |       | 19,195,460               |           | 41,914,231                  |       |
| Accounts receivable other                                                                                                                                     |       | 796,394                  |           | 1,003,940                   |       |
| Inventory, net of reserves of $99,693 (unaudited)  and $112,135                                                                                               |       | 3,363,184                |           | 3,423,244                   |       |
| Prepaid assets                                                                                                                                                |       | 388,504                  |           | 368,959                     |       |
| Assets of discontinued operations                                                                                                                             |       | 923,453                  |           | 879,896                     |       |
|                                                                                                                                                          |       |                     |           |                        |       |
| Total current assets                                                                                                                                          |       | 50,401,240               |           | 66,008,336                  |       |
|                                                                                                                                                          |       |                     |           |                        |       |
| Property and equipment, net                                                                                                                                   |       | 332,952                  |           | 315,669                     |       |
| Other assets                                                                                                                                                  |       | 58,520                   |           | 97,768                      |       |
|                                                                                                                                                          |       |                     |           |                        |       |
| **Total assets**                                                                                                                                              | ** ** | **$**                    | **50,792,712** | ** **                  | **$**      | **66,421,773** | ** ** |
|                                                                                                                                                          |       |                     |           |                        |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                | ** ** | ** **               | ** **     | ** **                  | ** ** |
|                                                                                                                                                          |       |                     |           |                        |       |
| **Current liabilities:**                                                                                                                                      |       |                     |           |                        |       |
| Accounts payable                                                                                                                                              |       | $                        | 7,737,659      |                        | $          | 9,618,865 |   |
| Accrued expenses                                                                                                                                              |       | 6,012,872                |           | 5,665,460                   |       |
| Line of credit                                                                                                                                                |       | 12,626,234               |           | 25,494,140                  |       |
| Income taxes payable                                                                                                                                          |       | 93,846                   |           | 91,096                      |       |
| Liabilities of discontinued operations                                                                                                                        |       | 63,136                   |           | 724,366                     |       |
|                                                                                                                                                          |       |                     |           |                        |       |
| Total current liabilities                                                                                                                                     |       | 26,533,747               |           | 41,593,927                  |       |
| ** **                                                                                                                                                    | ** ** | ** **               |           | ** **                  |       |
| **Total liabilities**                                                                                                                                         |       | 26,533,747               |           | 41,593,927                  |       |
| ** **                                                                                                                                                    |       |                     |           |                        |       |
| **Commitments and Contingencies  (Note 12)**                                                                                                                  |       |                     |           |                        |       |
|                                                                                                                                                          |       |                     |           |                        |       |
| **Stockholders’ equity:**                                                                                                                                |       |                     |           |                        |       |
| Preferred stock, $0.001 par value, 10,000,000  shares authorized (no shares issued and outstanding as of applicable period  end)                              |       | —                   |           | —                      |       |
| Common stock, $0.001 par value, 40,000,000 shares  authorized; 14,184,146 shares issued and outstanding as of March 31,  2010 and December 31, 2009 |       | 14,184                   |           | 14,184                      |       |
| Additional paid-in capital                                                                                                                                    |       | 31,738,360               |           | 31,727,090                  |       |
| Accumulated other comprehensive loss                                                                                                                          |       | (19,945                  | )              | (6,944                      | )          |
| Accumulated deficit                                                                                                                                           |       | (7,473,634               | )              | (6,906,484                  | )          |
|                                                                                                                                                          |       |                     |           |                        |       |
| Total stockholders’ equity                                                                                                                               |       | 24,258,965               |           | 24,827,846                  |       |
|                                                                                                                                                          |       |                     |           |                        |       |
| **Total liabilities and  stockholders’ equity**                                                                                                          | ** ** | **$**                    | **50,792,712** | ** **                  | **$**      | **66,421,773** | ** ** |

 

*Accompanying notes are anintegral part of these financial statements.*

 

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**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements ofOperations**

**(unaudited)**

 
| ** **                                                                      | ** ** | **For the  Three Months  Ended March 31,** | ** **   |
|---------------------------------------------------------------------------------|------------|--------------------------------------------|--------------|
| ** **                                                                      | ** ** | **2010**                                   | ** **   | **2009** | ** ** |
| ** **                                                                      | ** ** | ** **                                 | ** **   | ** ** | ** ** |
| **Net sales**                                                                   |       | $                                          | 27,541,043   |   | $ | 42,625,118 |   |
| **Cost of sales**                                                               |       | 26,099,608                                 |         | 39,270,497 |   |
|                                                                            |       |                                       |         |   |   |
| **Gross profit**                                                                |       | 1,441,435                                  |         | 3,354,621 |   |
| **Operating expenses**                                                          |       | 1,974,431                                  |         | 2,876,972 |   |
|                                                                            |       |                                       |         |   |   |
| **Operating income (loss) from  continuing operations**                         |       | (532,996                                   | )            | 477,649 |   |
|                                                                            |       |                                       |         |   |   |
| **Other income (expense)**                                                      |       |                                       |         |   |   |
| Other income (expense)                                                          |       | (405                                       | )            | 42 |   |
| Interest expense (net)                                                          |       | (23,331                                    | )            | (27,878 | ) |
|                                                                            |       |                                       |         |   |   |
| **Income (loss) from continuing  operations before provision for income taxes** |       | (556,732                                   | )            | 449,813 |   |
| **Provision for income taxes**                                                  |       | 4,350                                      |         | 9,700 |   |
|                                                                            |       |                                       |         |   |   |
| **Income (loss) from continuing  operations**                                   |       | (561,082                                   | )            | 440,113 |   |
| **Loss from discontinued  operations, net of tax (Note 10)**                    |       | (6,068                                     | )            | (193,061 | ) |
| ** **                                                                      | ** ** | ** **                                 | ** **   | ** ** | ** ** |
| **Net income (loss)**                                                           | ** ** | **$**                                      | **(567,150** | **)** | **$** | **247,052** | ** ** |
|                                                                            |       |                                       |         |   |   |
| **Basic earnings (loss) per share**                                             |       |                                       |         |   |   |
| From continuing operations                                                      | ** ** | **$**                                      | **(0.04**    | **)** | **$** | **0.03** | ** ** |
| From discontinued operations                                                    | ** ** | **$**                                      | **0.00**     | ** ** | **$** | **(0.01** | **)** |
| Net income (loss)                                                               | ** ** | **$**                                      | **(0.04**    | **)** | **$** | **0.02** | ** ** |
| **Diluted earnings (loss) per  share**                                          | ** ** | ** **                                 | ** **   | ** ** | ** ** |
| From continuing operations                                                      | ** ** | **$**                                      | **(0.04**    | **)** | **$** | **0.03** | ** ** |
| From discontinued operations                                                    | ** ** | **$**                                      | **0.00**     | ** ** | **$** | **(0.01** | **)** |
| Net income (loss)                                                               | ** ** | **$**                                      | **(0.04**    | **)** | **$** | **0.02** | ** ** |
|                                                                            |       |                                       |         |   |   |
| **Basic weighted-average number  of common shares outstanding**                 | ** ** | **14,184,146**                             | ** **   | **14,881,774** | ** ** |
| ** **                                                                      | ** ** | ** **                                 | ** **   | ** ** | ** ** |
| **Diluted weighted-average number  of common shares outstanding**               | ** ** | **14,184,146**                             | ** **   | **14,885,887** | ** ** |

 

*Accompanying notes are an integral part of these financialstatements*.

 

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**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements ofComprehensive Operations**

**(unaudited)**

 
| ** **                                | ** ** | **For  the Three Months  Ended March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
|                                      |       |                                       |       |   |   |
| Net  profit income (loss)                 |       | $                                          | (567,150   | ) | $ | 247,052 |   |
| Other  comprehensive income (loss):       |       |                                       |       |   |   |
| Foreign  currency translation adjustments |       | (13,001                                    | )          | 16,954 |   |
| Comprehensive  income (loss)              |       | $                                          | (580,151   | ) | $ | 264,006 |   |

 

*Accompanying notes are an integral part of these financial statements.*

 

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**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements of CashFlows**

**(unaudited)**

 
| ** **                                                                                         | ** ** | **For the Three Months Ended  March 31,** | ** **     |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------|----------------|
| ** **                                                                                         | ** ** | **2010**                                  | ** **     | **2009** | ** ** |
| **Cash flows from operating  activities:**                                                         | ** ** | ** **                                | ** **     | ** ** | ** ** |
| Net income (loss)                                                                                  |       | $                                         | (567,150       | ) | $ | 247,052 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities |       |                                      |           |   |   |
| Depreciation                                                                                       |       | 71,456                                    |           | 74,097 |   |
| Provision for bad debt                                                                             |       | (404,906                                  | )              | (5,079 | ) |
| Impairment on fixed assets                                                                         |       | 398                                       |           | — |   |
| Provision for obsolete inventory                                                                   |       | (12,442                                   | )              | — |   |
| Stock -based compensation expense                                                                  |       | 11,270                                    |           | 13,445 |   |
| (Increase) decrease in                                                                             |       |                                      |           |   |   |
| Accounts receivable                                                                                |       | 23,123,677                                |           | (14,014,159 | ) |
| Accounts receivable other                                                                          |       | 207,546                                   |           | 2,867,913 |   |
| Inventory                                                                                          |       | 72,502                                    |           | 376,592 |   |
| Prepaids                                                                                           |       | (19,543                                   | )              | (364,814 | ) |
| Other assets                                                                                       |       | 39,248                                    |           | 5,726 |   |
| Increase (decrease) in                                                                             |       |                                      |           |   |   |
| Accounts payable                                                                                   |       | (1,881,206                                | )              | (8,303,771 | ) |
| Accrued expenses                                                                                   |       | 347,412                                   |           | (1,044,953 | ) |
| Income tax liabilities                                                                             |       | 2,750                                     |           | 8,030 |   |
| Cash provided by (used in) continuing operations                                                   |       | 20,991,012                                |           | (20,139,921 | ) |
| Cash provided by (used in) discontinued operations                                                 |       | (704,787                                  | )              | 163,504 |   |
| Net cash provided by (used in) operating  activities                                               |       | 20,286,225                                |           | (19,976,417 | ) |
|                                                                                               |       |                                      |           |   |   |
| **Cash flows from investing  activities:**                                                         | ** ** | ** **                                | ** **     | ** ** | ** ** |
| Purchase of property and equipment                                                                 |       | (89,139                                   | )              | (111,839 | ) |
| Net cash used in investing activities                                                              |       | (89,139                                   | )              | (111,839 | ) |
|                                                                                               |       |                                      |           |   |   |
| **Cash flows from financing  activities:**                                                         | ** ** | ** **                                | ** **     | ** ** | ** ** |
| Net Borrowings (Payments on) line of credit                                                        |       | (12,867,906                               | )              | 7,250,523 |   |
| Cash paid for treasury stock                                                                       |       | —                                    |           | (36,557 | ) |
| Net cash provided by (used in) financing  activities                                               |       | (12,867,906                               | )              | 7,213,966 |   |
|                                                                                               |       |                                      |           |   |   |
| Effect of exchange rate changes on cash                                                            |       | 13,001                                    |           | 16,032 |   |
|                                                                                               |       |                                      |           |   |   |
| Net increase (decrease) in cash and cash equivalents                                               |       | 7,316,179                                 |           | (12,858,258 | ) |
|                                                                                               |       |                                      |           |   |   |
| **Cash and cash equivalents,  beginning of period**                                                |       | 18,418,066                                |           | 24,714,753 |   |
|                                                                                               |       |                                      |           |   |   |
| **Cash and cash equivalents, end  of period**                                                      | ** ** | **$**                                     | **25,734,245** | ** ** | **$** | **11,856,495** | ** ** |
| **Cash paid for interest**                                                                         | ** ** | **23,331**                                | ** **     | **27,885** | ** ** |
| **Cash paid for taxes**                                                                            |       | **—**                                |           | — |   |

 

*Accompanyingnotes are an integral part of these financial statements.*

 

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**InfoSonicsCorporation**

**Condensed Notes to ConsolidatedFinancial Statements**

**(unaudited)**

 

**NOTE 1. Basisof Presentation**

 

Theaccompanying unaudited consolidated financial statements and these condensednotes have been prepared in accordance with accounting principles generallyaccepted in the United States (“GAAP”) for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-Xof the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Accordingly, they do not include all of the information and notes required byGAAP for complete financial statements. The preparation of financial statementsrequires management to make estimates and assumptions that affect amountsreported in the financial statements and accompanying notes. Actual results arelikely to differ from those estimates, but management does not believe suchdifferences will materially affect the financial position or results ofoperations of InfoSonics Corporation (the “Company”), although they may. Theseunaudited consolidated financial statements and condensed notes should be readin conjunction with the financial statements and notes as of and for the yearended December 31, 2009 included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2009. These unaudited consolidated financial statements reflect alladjustments considered, in the opinion of the Company’s management, necessaryto fairly present the results for the periods covered herein and suchadjustments are considered of a normal recurring nature.

 

The unaudited consolidated financial statements include theaccounts of the Company and its subsidiaries, Axcess Mobile LLC, InfoSonicsLatin America, Inc., InfoSonics de Mexico S.A. de C.V., InfoSonics deGuatemala S.A., InfoSonics El Salvador S.A. de C.V., InfoSonics S.A.,InfoSonics De Panama S.A, InfoSonics Colombia S.A., verykool Hong Kong Limitedand verykool USA, Inc., all of which are wholly owned. Significantintercompany accounts and transactions have been eliminated in consolidation ofthese consolidated financial statements.

 

Theunaudited consolidated balance sheet as of March 31, 2010, the unauditedconsolidated statements of operations and the unaudited consolidated statementsof comprehensive operations for the three months ended March 31, 2010 andthe unaudited consolidated statement of cash flows for the three months ended March 31,2010 are not necessarily indicative of the financial condition, operatingresults or cash flows that may be expected for the full fiscal year of 2010 orfor any future period.

 

**NOTE 2.****Stock-BasedCompensation**

 

The Company has three equity incentive plans, the 2006Equity Incentive Plan (“2006 Plan”), the 2003 Stock Option Plan (“2003 Plan”)and the 1998 Stock Option Plan (“1998 Plan”). Each of the plans has been approved by our stockholders. The 2006 Planauthorizes the grant of up to 1,000,000 shares for equity incentives.  There are no options available for grantunder the 2003 and the 1998 Plans.

 

As of March 31, 2010, options to purchase 273,500shares, 12,444 shares and 400,000 shares were outstanding under the 2006 Plan,the 2003 Plan and the 1998 Plan, respectively. As of March 31, 2010,options to purchase 113,500 shares were forfeited under the 2006 Plan.  The Company is also a party to non-planoption agreements with several non-employee directors.

 

The Company’s stock-basedcompensation is classified in the same expense line items as cash compensation.Information about stock-based compensation included in the unaudited results ofoperations for the three months ended March 31, 2010 and 2009 is asfollows:

 
| ** **                                                        | ** ** | **For  the Three Months Ended********March 31,********(unaudited)** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2010**                                                                           | ** ** | **2009** | ** ** |
|                                                              |       |                                                                               |       |   |   |
| Officer  compensation                                             |       | $                                                                                  | 4,004      |   | $ | — |   |
| Sales,  general and administrative                                |       | 7,266                                                                              |       | 13,445 |   |
| Total  stock option expense, included in total operating expenses |       | $                                                                                  | 11,270     |   | $ | 13,445 |   |

 

The Company’s stock options vest on an annual or amonthly basis.  The Company recognizes stock-based compensation expense on astraight-line basis over the requisite service period of the award, which isgenerally the option vesting term. Such amount may change as a result of additional grants, forfeitures,modifications in assumptions and other factors. Income tax effects ofshare-based payments are recognized in the financial statements for thoseawards which will normally result in tax deductions under existing tax law.During the three months ended March 31, 2010, we recorded an expense of$11,270 related to options previously granted. During 

 

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the three months ended March 31, 2009, werecorded an expense of $13,445 related to options previously granted. Undercurrent U.S. federal tax law, we receive a compensation expense deductionrelated to non-qualified stock options only when those options are exercisedand vested shares are received. Accordingly, the financial statementrecognition of compensation expense for non-qualified stock options creates adeductible temporary difference which results in a deferred tax asset and acorresponding deferred tax benefit in our consolidated statements ofoperations.

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option pricing model with thefollowing weighted-average assumptions used for grants in 2009 (there have beenno grants in 2010): risk-free interest rate of 0.91% in 2009, based on the U.S.Treasury yields in effect at the time of grant; expected dividend yields of 0%as the Company has not, and does not intend to, declare dividends; and expectedlife of 3 to 6 years based upon the historical life of options. For grants in2009, the expected volatility used ranged from 88% to 108%, based on theCompany’s historical stock price fluctuations for a period matching theexpected life of the options.  As of March 31,2010, there was $89,000 of total unrecognized compensation expense related tonon-vested stock options.  That expenseis expected to be recognized over the remaining weighted-average period of 3.75years.

 

Asummary of option activity under all of the above plans as of March 31, 2010and changes during the three months then ended is presented in the table below:

 
| ** **                            | ** ** | **Shares** | ** ** | **Wtd. Avg.  Exercise Price** | ** ** | **Wtd. Avg.  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at December 31, 2009 |       | 1,282,444  |       | $                                       | 1.65       |                                             | 3.25       |                            | —     |   |
| Granted                               |       | —     |       | $                                       | —     |                                             | —     |                            | —     |   |
| Exercised                             |       | —     |       | $                                       | —     |                                             | —     |                            | —     |   |
| Forfeited                             |       | 596,500    |       | $                                       | 0.51       |                                             | —     |                            | —     |   |
| Outstanding at March 31, 2010    |       | 685,944    |       | $                                       | 1.07       |                                             | 2.67       |                            | —     |   |
| Vested and expected to vest           |       | 685,944    |       | $                                       | 1.07       |                                             | 2.67       |                            | —     |   |
| Exercisable at March 31, 2010    |       | 490,305    |       | $                                       | 1.21       |                                             | 1.51       |                            | —     |   |

 

A summary of the status of the Company’s non-vestedoptions at March 31, 2010 and changes during the three months ended March 31,2010 is presented below:

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted-average  grant-date fair value** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| Non-vested at December 31, 2009 |       | 255,285    |       | $                                                     | 0.72       |   |
| Granted                              |       | —     |       | $                                                     | —     |   |
| Vested                               |       | 7,146      |       | $                                                     | 1.97       |   |
| Forfeited                            |       | 52,500     |       | $                                                     | 0.51       |   |
| Non-vested at March 31, 2010    |       | 195,639    |       | $                                                     | 0.73       |   |

 

**NOTE 3. Earnings Per Share**

 

Basicearnings per share are computed by dividing income available to commonstockholders by the weighted-average number of common shares outstanding.Diluted earnings per share is computed similarly to basic earnings per share,except that the denominator is increased to include the number of additionalcommon shares that would have been outstanding if the potential additionalcommon shares that were dilutive had been issued. Common share equivalents areexcluded from the computation if their effect is anti-dilutive. The Company’scommon share equivalents consist of stock options and warrants.

 

Common shares from the potential exercise of certainoptions and warrants have been excluded from the computation of dilutedearnings per share because their exercise prices are greater than the Company’sweighted-average stock price for the period.  Forthe three months ended March 31, 2010 and 2009, the numberof shares excluded was 503,038 and 1,600,944, respectively.

 

**NOTE 4. IncomeTaxes**

 

The Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with applicable standards of the Financial Accounting Standards Board (“FASB”). In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, the Company concluded that at this time there are no uncertain tax positions, and there has been no cumulative effect on retained earnings.

 

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The Companyis subject to U.S. federal income tax as well as income tax in multiple statesand foreign jurisdictions. For all major taxing jurisdictions, the tax years2004 through 2008 remain open to examination. As of March 31, 2010, theCompany does not expect any material changes to unrecognized tax positionswithin the next twelve months.

 

The Companyrecognizes the amount of taxes payable or refundable for the current year anddeferred tax liabilities and assets for the future tax consequences of eventsthat have been recognized in an entity’s financial statements or tax returns.Judgment is required in assessing the future tax consequences of events thathave been recognized in our financial statements or tax returns. Fluctuationsin the actual outcome of these future tax consequences could materially impactthe Company’s financial position or results of operations.  For the three months ended March 31,2010, deferred income tax assets and the corresponding valuation allowanceincreased by $224,200.

 

**NOTE 5.Inventory**

 

Inventory is stated at the lower of cost (first-in,first-out) or market and consists primarily of cellular phones and cellularphone accessories.  The Company providesfor the possible inability to sell its inventory by recording a reserve.  As of March 31, 2010 and December 31,2009, the inventory reserve was $99,693 and $112,135, respectively.  From time to time, the Company has prepaidinventory as a result of payments for products which have not been received bythe balance sheet date.  As of March 31,2010 and December 31, 2009, the prepaid inventory balance was $84,053 and$119,145, respectively, which are included in prepaid assets in theaccompanying consolidated balance sheets. Inventory consists of the following:

 
| ** **         | ** ** | **March 31,  2010  (unaudited)** | ** ** | **December 31,  2009  (audited)** | ** ** |
|--------------------|------------|---------------------------------------|------------|----------------------------------------|------------|
| Finished  goods    |       | $                                     | 3,462,877  |                                   | $          | 3,535,379 |   |
| Inventory  reserve |       | (99,693                               | )          | (112,135                               | )          |
| Net  inventory     |       | $                                     | 3,363,184  |                                   | $          | 3,423,244 |   |

 

**NOTE 6.Property and Equipment**

 

Property and equipment are primarily located in theUnited States, with the exception of certain tooling and product molds locatedin Asia, and consisted of the following as of the dates presented:

 
| ** **                    | ** ** | **March 31,  2010  (unaudited)** | ** ** | **December 31,  2009  (audited)** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|
| Machinery and equipment       |       | $                                     | 396,337    |                                   | $          | 471,953 |   |
| Furniture and fixtures        |       | 127,594                               |       | 106,314                                |       |
| Tooling and molds             |       | 549,779                               |       | 481,984                                |       |
| Subtotal                      |       | 1,073,710                             |       | 1,060,251                              |       |
| Less accumulated depreciation |       | 740,758                               |       | 744,582                                |       |
| Total                         |       | $                                     | 332,952    |                                   | $          | 315,669 |   |

 

Depreciationexpense was $71,456 and $74,097 for the three months ended March 31, 2010and 2009, respectively.

 

**NOTE 7. Accrued Expenses**

 

As of March 31,2010 and December 31, 2009, accrued expenses consisted of the following:

 
| ** **                       | ** ** | **March 31,  2010  (unaudited)** | ** ** | **December 31,  2009  (audited)** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|
| Accrued product costs            |       | $                                     | 2,133,572  |                                   | $          | 1,476,677 |   |
| Other accruals (including taxes) |       | 3,879,300                             |       | 4,188,783                              |       |
| Total                            |       | $                                     | 6,012,872  |                                   | $          | 5,665,460 |   |

 

**NOTE 8.********Borrowings**

 

Pursuant to the Company’s Loan, Security and BulkPurchase Agreement and a Letter of Credit and Security Agreement (collectively,the “Agreement”) with Wells Fargo Century, Inc. (“Lender”), the Lender mayadvance up to $45,000,000 to the Company based on the expected collections ofeligible receivables as well as value of the Company’s eligible inventorydetermined in accordance with the 

 

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Agreement. The outstanding advances may not exceed the lesser of (i) $45,000,000or (ii) the sum of the value of the eligible receivables and eligibleinventory multiplied by their respective advance rates as set forth in theAgreement ($12.8 million as of March 31, 2010).At March 31,2010, the majority of the Company’s debt was based on foreign accountsreceivable, a majority of which is insured. This credit facility is secured by all of the assets of the Company.The terms automatically roll over annually; however, the terms and conditionsof such credit facility (including, without limitation, rates, eligibility,borrowing base and maximum line) may change. Subsequent to March 31, 2010,the Agreement was renewed under its current terms and conditions through April 2011.The interest rate for each borrowing under the credit facility is, at theoption of the Company, either the Wells Fargo Bank N.A. prime rate minus 0.50% (3.25%minus 0.50%  at March 31, 2010) or the LIBORrate plus 2.00% (0.292% plus 2.00% at March 31,2010).  At March 31,2010, the amount drawn against the line of credit was $12,626,234 and the totalamount available at March 31, 2010 was $12,778,276.  As of March 31, 2010, the Company was incompliance with the covenants of the credit facility.

 

The Company has no other notes payable.

 

**NOTE 9. RecentAccounting Pronouncements**

 

Recently Adopted:

 

On January 1, 2010,the Company adopted changes issued by the FASB to accounting forvariable-interest entities. These changes require an enterprise to perform ananalysis to determine whether the enterprise’s variable interest or interestsgive it a controlling financial interest in a variable-interest entity; torequire ongoing reassessments of whether an enterprise is the primarybeneficiary of a variable-interest entity; to eliminate the solely quantitativeapproach previously required for determining the primary beneficiary of avariable-interest entity; to add an additional reconsideration event fordetermining whether an entity is a variable-interest entity when any changes infacts and circumstances occur such that holders of the equity investment atrisk, as a group, lose the power from voting rights or similar rights of thoseinvestments to direct the activities of the entity that most significantlyimpact the entity’s economic performance; and to require enhanced disclosuresthat will provide users of financial statements with more transparentinformation about an enterprise’s involvement in a variable-interest entity. Theadoption of these changes had no impact on the condensed consolidated financialstatements.

 

On January 1, 2010,The Company adopted changes issued by the FASB to accounting for transfers offinancial assets. These changes remove the concept of a qualifyingspecial-purpose entity and remove the exception from the application ofvariable interest accounting to variable-interest entities that are qualifyingspecial-purpose entities; limit the circumstances in which a transferorderecognizes a portion or component of a financial asset; define aparticipating interest; require a transferor to recognize and initially measureat fair value all assets obtained and liabilities incurred as a result of atransfer accounted for as a sale; and require enhanced disclosure. The adoptionof these changes had no impact on the condensed consolidated financialstatements.

 

Effective January 1,2010, The Company adopted changes issued by the FASB on January 6, 2010,for a scope clarification to the FASB’s previously issued guidance onaccounting for noncontrolling interests in consolidated financial statements.These changes clarify the accounting and reporting guidance for noncontrollinginterests and changes in ownership interests of a consolidated subsidiary. Anentity is required to deconsolidate a subsidiary when the entity ceases to havea controlling financial interest in the subsidiary. Upon deconsolidation of asubsidiary, an entity recognizes a gain or loss on the transaction and measuresany retained investment in the subsidiary at fair value. The gain or lossincludes any gain or loss associated with the difference between the fair valueof the retained investment in the subsidiary and its carrying amount at thedate the subsidiary is deconsolidated. In contrast, an entity is requiredto account for a decrease in its ownership interest of a subsidiary thatdoes not result in a change of control of the subsidiary as an equitytransaction. The adoption of these changes had no impact on the condensedconsolidated financial statements.

 

Effective January 1,2010, The Company adopted changes issued by the FASB on January 21, 2010,to disclosure requirements for fair value measurements. Specifically, thechanges require a reporting entity to disclose separately the amounts ofsignificant transfers in and out of Level 1 and Level 2 fair value measurementsand describe the reasons for the transfers. The changes also clarify existingdisclosure requirements related to how assets and liabilities should be groupedby class and valuation techniques used for recurring and nonrecurring fairvalue measurements. The adoption of these changes had no impact on thecondensed consolidated financial statements.

 

Effective January 1,2010, The Company adopted changes issued by the FASB on February 24, 2010,to accounting for and disclosure of events that occur after the balance sheetdate but before financial statements are issued or available to be issued,otherwise known as “subsequent events.” Specifically, these changes clarifiedthat an entity that is required to file or furnish its financial statementswith the SEC is not required to disclose the date through which subsequentevents have been evaluated. Other than the elimination of disclosing the datethrough which management has performed its evaluation for subsequent events(see Note 12), the adoption of these changes had no impact on the condensedconsolidated financial statements.

 

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ISSUED (Not adopted yet):

 

In October 2009, theFASB issued changes to revenue recognition for multiple-deliverablearrangements. These changes require separation of consideration received insuch arrangements by establishing a selling price hierarchy (not the same asfair value) for determining the selling price of a deliverable, which will bebased on available information in the following order: vendor-specificobjective evidence, third-party evidence, or estimated selling price; eliminatethe residual method of allocation and require that the consideration beallocated at the inception of the arrangement to all deliverables using therelative selling price method, which allocates any discount in the arrangement toeach deliverable on the basis of each deliverable’s selling price; require thata vendor determine its best estimate of selling price in a manner that isconsistent with that used to determine the price to sell the deliverable on astand-alone basis; and expand the disclosures related to multiple-deliverablerevenue arrangements. These changes become effective for the Company on January 1,2011. Management has determined that the adoption of these changes will nothave an impact on the condensed consolidated financial statements, as theCompany does not currently have any such arrangements with its customers.

 

In January 2010, theFASB issued changes to disclosure requirements for fair value measurements.Specifically, the changes require a reporting entity to disclose, in thereconciliation of fair value measurements using significant unobservable inputs(Level 3), separate information about purchases, sales, issuances andsettlements (i.e., on a gross basis rather than as a single net number). Thesechanges become effective for The Company beginning January 1, 2011. Otherthan the additional disclosure requirements, management has determined thesechanges will not have an impact on the condensed consolidated financialstatements.

 

In March 2010, theFASB issued changes related to existing accounting requirements for embeddedcredit derivatives. Specifically, the changes clarify the scope exceptionregarding when embedded credit derivative features are not considered embeddedderivatives subject to potential bifurcation and separate accounting. Thesechanges become effective for the Company on July 1, 2010. Management hasdetermined these changes will not have an impact on the condensed consolidatedfinancial statements.

 

**NOTE10.  Discontinued Operations**

 

During the quarter ended June 30,2008, the Company assessed opportunities in the United States and Mexico, andthe Company began to implement actions necessary to close sales operations inboth of those countries, which actions continue, although were substantiallycompleted by the end of 2009. These two areas accounted for less than 1% of theCompany’s net sales in the first three months of 2010 and 2009.Due to the changing environment andconsolidation in the United States of the regional cellular carriers, alongwith the challenges of opening sales relations with the cellular carriers inMexico, management determined that it was necessary to take decisive actions tomitigate further losses.  The results of the unaudited discontinuedoperations are as follows:

 
| ** **               | ** ** | **For  the Three Months Ended  March 31,********(unaudited)** | ** ** |
|--------------------------|------------|--------------------------------------------------------------------|------------|
| ** **               | ** ** | **2010**                                                           | ** ** | **2009** | ** ** |
| Net  Sales               |       | $                                                                  | 24,000     |   | $ | 246,946 |   |
| Gross  profit            |       | 24,000                                                             |       | (155,304 | ) |
| Operating  income (loss) |       | (6,068                                                             | )          | (192,040 | ) |
| Identifiable  assets     |       | 923,453                                                            |       | 3,104,980 |   |
|                          |            |                                                                    |            |  |  |  |  |

 

Liabilities ofdiscontinued operations consist primarily of accounts payable.  Assets of discontinued operations are asfollows:

 
| ** **           | ** ** | **March 31,  2010********(unaudited)** | ** ** | **December 31,2009********(audited)** | ** ** |
|----------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| Accounts  Receivable |       | $                                           | 47,551     |                                       | $          | 13,228 |   |
| Prepaid  Taxes       |       | 847,671                                     |       | 850,694                                    |       |
| Other  Assets        |       | 28,231                                      |       | 15,974                                     |       |
| Total                |       | $                                           | 923,453    |                                       | $          | 879,896 |   |

 

As of March 31,2010, the plans for the discontinued operations, although continuing to beimplemented, were largely completed. However, the Company expects to continue to record potentiallysignificant adjustments and expenses through discontinued operations asnecessary.

 

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The Company re-evaluatedits discontinued operations as of March 31, 2010 in accordance withapplicable FASB guidance due to the Company’s remaining discontinued operationsbeing outstanding for more than one year since the declaration to discontinue. Theprepaid taxes identified above are in the process of being recovered from aforeign government, with the ability to settle beyond the Company’s control. Asthis matter is beyond the Company’s control classification as discontinuedoperations is still deemed appropriate.

 

**NOTE 11. Geographic Information**

 

The Company currently operates in one businesssegment.  All fixed assets are located inCompany or third-party facilities in the United States and Asia. The unauditednet sales by geographical area for the three months ended March 31, 2010and 2009 were:

 
| ** **       | ** ** | **For  the Three Months Ended**       | ** ** |
|------------------|------------|-------------------------------------------------|------------|
| ** **       | ** ** | **March 31, 2010********(unaudited)** | ** ** | **March 31, 2009********(unaudited)** | ** ** |
| Central  America |       | $                                               | 1,494,540  |   | $ | 3,114,597 |   |
| South  America   |       | 26,046,503                                      |       | 39,510,521 |   |
| Total            |       | $                                               | 27,541,043 |   | $ | 42,625,118 |   |

 

The unaudited net sales for the Company’s discontinuedoperations in the United States and Mexico for the three months ended March 31,2010 and 2009 were $24,000 and $246,946, respectively.

 

**NOTE 12.  Commitments and Contingencies**

 

*LGElectronics Litigation*

 

On July 1, 2009, theCompany filed suit in the Superior Court of the State of California, County ofSan Diego (Case No. 37-2009-00092797-CU-BT-CTL) against defendants LGElectronics, Inc., LG Electronics USA, Inc., LG Electronics PanamaS.A., LG Electronics Inc. Chile LTDA, LG Electronics Guatemala S.A. de C.V. andDOES 1-10.  The complaint alleges claimsfor interference with contractual relations/inducing breach of contract,intentional interference with prospective economic relations, negligent interferencewith prospective economic relations, breach of contract, breach of impliedcovenant of good faith and fair dealing, unjust enrichment, fraud, promissoryestoppel and violation of California Business and Professions Code §§ 17200, etseq.  The Company is seeking in excess of$5 million in damages   On July 31, 2009, the defendants removedthe case to federal court in San Diego, CA. On April 23, 2010, the Company filed an amended complaint.

 

*NasdaqDelisting Notice*

 

On May 4, 2010, theCompany received a Nasdaq Staff Deficiency letter indicating that for the priorthirty consecutive business days the bid price for its common stock had closedbelow the minimum $1.00 per share requirement for continued listing on TheNASDAQ Global Market under Nasdaq Marketplace Rule 5450(a)(1). Inaccordance with Nasdaq Marketplace Rule 5810(c)(3)(A), the Company wasprovided an initial period of 180 calendar days, or until November 1,2010, to regain compliance.  The letterstated that the Nasdaq staff would provide written notification that theCompany had achieved compliance with Rule 5450(a)(1) if at any timeprior to November 1, 2010, the bid price of its common stock closed at$1.00 per share or more for a minimum of ten consecutive business days.

 

During this period beforeNovember 1, 2010, absent the occurrence of any unexpected events, theCompany’s common stock is expected to continue to trade on The NASDAQ GlobalMarket. If compliance with Nasdaq Marketplace 5450(a)(1) cannot bedemonstrated by November 1, 2010, the staff of The Nasdaq Stock Market ListingQualifications department is expected to deliver a written notification to theCompany that its common stock will be delisted from The NASDAQ GlobalMarket.  If the Company receives adelisting notice, it may appeal the Nasdaq staff’s determination to a ListingQualifications Panel. Alternatively, it may apply to transfer the listing ofits common stock to The NASDAQ Capital Market or another exchange or tradingmarket.  The Company intends to monitorthe bid price of its common stock and consider available options if its commonstock does not trade at a level likely to result in its regaining compliancewith Nasdaq’s minimum bid price rule.

 

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The Companymay become involved in certain other legal proceedings and claims which arisein the normal course of business. Other than as described above, as of thefiling date of this report, the Company did not have any significant litigationoutstanding.

 

**NOTE 13.  Fair Value of Financial Instruments**

 

The Company’s financial instruments include cash and cashequivalents, accounts receivable, prepaid expenses, accounts payable andaccrued expenses. The book value of all other financial instruments isrepresentative of their fair values. Cash and cash equivalents are the Company’s onlyfinancial instruments required to be measured at fair value and are measuredusing quoted prices for identical assets in an identical market.

 

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

**Forward-LookingStatements and Other General Information**

 

Thisdiscussion and analysis of financial condition and results of operations shouldbe read in conjunction with the accompanying unaudited consolidated financialstatements and condensed notes thereto and other information included in thisreport and our Annual Report on Form 10-K for the year ended December 31,2009 (including our 2009 audited consolidated financial statements and relatednotes thereto and other information). Our discussion and analysis of financialcondition and results of operations are based upon, among other things, ourunaudited consolidated financial statements, which have been prepared inaccordance 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 amountsof assets and liabilities, the disclosures of contingent liabilities as of thedate of our most recent balance sheet, and the reported amounts of revenues andexpenses during the reporting periods. We review our estimates and assumptionson an ongoing basis. Our estimates are based on our historical experience andother assumptions that we believe to be reasonable under the circumstances.Actual results are likely to differ from these estimates under differentassumptions or conditions, but we do not believe such differences willmaterially affect our financial position or results of operations, althoughthey may. Our critical accounting policies, the policies we believe are mostimportant to the presentation of our financial statements and require the mostdifficult, subjective and complex judgments are outlined below in “CriticalAccounting Policies.”  All references toresults of operations in this discussion generally are to results fromcontinuing operations, unless otherwise noted.

 

We decidedduring the second quarter of 2008 to discontinue our operations in Mexico andthe U.S.  Although we have largelycompleted this process, we continue to implement and record potentiallysignificant adjustments required in the financial statements, which affectscertain amounts of our results of operations and the classifications on thebalance sheet, statement of operations and statement of cash flows for priorperiods, and as of prior dates, as well as our disclosure in this report,including management’s discussion and analysis. The amounts related to our discontinued operations are shown separatefrom our continuing operations in our consolidated financial statements.

 

**Safe HarborStatement**

 

Thisreport contains “forward-looking statements,” including, without limitation,statements about future impacts of a new Argentina tariff and possible actionsto be taken in response, customer relationships, marketing of our *verykool*® products, sales levels, cost reductions, operatingefficiencies and profitability, that are based on current managementexpectations and which involve certain risks and uncertainties.  These risks and uncertainties, in whole or inpart, could cause such expectations to fail to be achieved and have a materialadverse 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 asmanufacturer-to-carrier sales, which may lead to reduced prices, lower sales,lower gross margins, extended payment terms with customers, increased capitalinvestment and interest costs, bad debt risks and product supply shortages; (2) ourdependency on Latin American sales, a majority of which are from Argentina,which may be significantly reduced or eliminated as a result of the recentlyadopted tariff in Argentina; (3) our ability to successfully design,manufacture, introduce and sell our *verykool*®products and the related inventory risk of such products; (4) our abilityto successfully establish, integrate and operate our new design facility inBeijing, China, (5) the extended effects of the global economic downturn; (6) aninability to secure adequate supply of competitive products on a timely basisand on commercially reasonable terms; (7) foreign exchange ratefluctuations, devaluation of a foreign currency, adverse governmental controlsor actions, political or economic instability, or disruption of a foreignmarket, including, without limitation, the imposition, creation, increase ormodification of tariffs, taxes, duties, levies and other charges and otherrelated risks of our international operations, such as the recently adoptedtariff in Argentina on certain electronics (including cellular phones), whichcould significantly increase selling prices to our customers and end-users; (8) ourability to attract new sources of profitable business from the expansion ofproducts or services and risks associated with entry into new markets,including geographies, products and services; (9) an interruption orfailure of our information systems or subversion of access or other systemcontrols, which may result in a significant loss of business, assets, orcompetitive information; (10) significant changes in supplier terms andrelationships; (11) termination of a 

 

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supply or servicesagreement with a major supplier or product supply shortages; (12) continuedconsolidation in the wireless handset carrier market; (13) loss of businessfrom one or more significant customers, such as what we have experienced with alarge customer in Argentina; (14) customer and geographical accounts receivableconcentration risk and other related risks; (15) rapid product improvement andtechnological change resulting in inventory obsolescence; (16) terrorist ormilitary actions; (17) the loss of a key executive officer or other keyemployees; (18) changes in consumer demand for multimedia wireless handsetproducts and features; (19) our failure to adequately adapt to industry changesand to manage potential growth and/or contractions; (20) seasonal buyingpatterns; (21) uncertain political and economic conditions internationally;(22) the resolution of any litigation for or against the Company; and (23) ourability to generate taxable income in future periods in order to utilize andrealize any quarterly tax benefits recorded. Our actual results and condition could differ materially from thoseanticipated in our forward-looking statements.

 

Wehave instituted in the past, and continue to institute, changes to ourstrategies, operations and processes to address risks and uncertainties and tomitigate their impacts on our results of operations and financial condition.However, no assurances can be given that we will be successful in theseefforts. For a further discussion of significant risk factors to consider, see “RiskFactors” below in this report and “Item 1A. Risk Factors” of our Annual Reporton Form 10-K for the year ended December 31, 2009. In addition, otherrisks or uncertainties may be detailed from time to time in our future SECfilings.

 

**Overview**

 

We area leading distributor and provider of wireless handsets and accessories inLatin America. We provide end-to-end handset and wireless terminal solutionsfor carriers in Latin America, and we distribute products of several keyoriginal equipment manufacturers (OEMs) such as Samsung.  We are also involved in the designing,sourcing and distribution of a proprietary line of products under our own *verykool®*brand, which includes entry-level, mid-tier and high-end products.

 

Ourdistribution and solution services include product testing, approval andcertification, warehousing, logistics services (packing, shipping anddelivery), marketing campaigns, warranty services and end-user support. Theseservices are provided for OEMs and our *verykool*®-brandedwireless handsets and accessories to facilitate sales to network carriers,agents, resellers, distributors, independent dealers and retailers in Centraland South America.  In addition, for our *verykool*®-branded products, we design, test and contractwith manufacturers to build these products.

 

Ourinterimfinancial condition or operating results may not be indicative of the entirefiscal year 2010 or other future financial condition or operating results. Ourfinancial condition and operating results are influenced by several seasonal,general economic and other factors, which may cause our financial condition andoperating results to fluctuate on a quarterly basis, including, but not limitedto, inventory management and obsolescence, the timing and introduction of newproducts by our suppliers and competitors, promotions and subsidies by networkoperators, technical and certification delays by industry bodies and operators,purchasing and payment patterns of customers, the timing of holidays, thesuccess of our proprietary *verykool®*products line and other events affecting our consumers.

 

**Areas ofManagement Focus and Performance Indicators**

 

We focus on the needs of our customers, developing andmaintaining close relationships with manufacturers, seeking expansion incurrent and new markets, and sourcing and developing new and innovativeproducts, while maintaining close attention to operational efficiencies andcosts. We are particularly focused on increasing shipping volumes and improvingefficiencies to achieve profitability and earnings growth, as well as monitoringand managing levels of accounts receivable and inventory.  We providedistribution and other services for OEMs such as Samsung and for our ownproprietary line of *verykool®*handsets.  Performance indicators that are important for the monitoringand management of our business include operating and net income, cost of salesand gross margin percentage, operating expenses as a percent of revenues, andoverall net sales growth, as well as balances of accounts receivable andinventory. We make extensive use of our customized information system toclosely monitor all aspects of our business, including customer relationshipmanagement, intelligent purchasing, inventory control, inventory flow,line-item margin control for every order, and weighted-average cost andstatistical data for products, customers and suppliers, as deemed appropriate.We believe a strong focus on providing better service to customers leads toincreased customer satisfaction and retention and potential increases in sales.

 

Management and employeesfrequently travel to Latin America and Asia to spend time with key customers,suppliers and employees. We believe that these relationships are vital to oursuccess, and we will continue to dedicate a significant amount of time todeveloping these relationships.

 

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**IndustryTrends and Risks**

 

Since 2008, a rapiddecline in wireless handset sales in the Central and South American markets weserve has negatively impacted and could continue to negatively impact our netsales. Excess supply conditions and the extended effects of the recent globaleconomic downturn have reduced and may continue to reduce demand for ourproducts and the market prices of the products we sell.  These reductions affect our ability togenerate net sales, margins and gross profit at expected levels and couldcontinue to affect the value of our inventory, as well as customer paymenttrends. Conversely, should manufacturers be unable to respond to anunanticipated increase in demand as the global economy recovers on a timelybasis, we, along with others in our industry, could experience supplyconstraints that would affect our ability to deliver products. We are unable toquantify these effects, as it is difficult to predict future supply conditionsand demand patterns that affect our ability to meet customer demand or sellhandsets at an acceptable gross profit.

 

During the second half of 2008, and continuing throughthe period of this report, our industry has been impacted by the recentworldwide economic slowdown.  Some of thecountries in the regions where we operate, particularly in Central America, haveclose economic relations with the United States, and we believe that weakeconomic conditions in the United States have adversely impacted consumerdemand for the wireless handsets we sell in those countries, and as a resultour overall operations, including net sales, during the first quarter of2010.  Although we began to experience asmall increase in the demand for handsets in the third quarter of 2009, we havealso begun to observe a decrease in some subsidies offered by operators in theregion, which increases the handset price to the consumer, reducing overallhandset volumes.  We are also beginningto see more low-cost manufacturers gaining traction with entry-level products,which is negatively affecting both our OEM and *verykoolTM*sales in the entry-level segment.

 

**Company-SpecificTrends and Risks**

 

Our long-term strategy targets market growth for thevarious elements for our business, which we hope will result in future growthas global economic conditions recover. Our *verykool®*proprietary line of products, for which we had several models selling as of March 312010, is expected to become an increasing part of our overall business in thefuture.

 

Argentina, one of thecountries where we have historically sold a significant amount of OEMproducts and where we generated 87% of our net sales in 2009, passed a newtariff in November 2009 affecting certain importedelectronics, including wireless handsets.  This newtariff could impact the pricing at the point of sale inexcess of 30%, and it will reduce significantly ouroverall OEM sales volume in Argentina. This tariff hada material adverse impact on our sales, results of operations and prospects forour OEM products in Argentina in the first three months of 2010. We believethat this tariff will continue to have a material adverse impact on our sales,results of operations and prospects for our OEM products in Argentina.

 

During the first three months of 2010, we providedproducts and services to approximately 25 customers in Central and SouthAmerica.  Our three largest customers inthis period, all carriers in South America, represented 43%, 28% and 11% of ournet sales.  In 2010, a customeraccounting for 28% of our net sales for 2009 began significantly reducing itspurchases from us as a result of the newly enacted Argentina tariff.  Additional Argentina customers are expectedto decrease or eliminate their purchases of imported wireless handsets in thecoming fiscal quarters.

 

**RecentEvents**

 

On May 4, 2010, wereceived a Nasdaq Staff Deficiency letter indicating that for the prior thirtyconsecutive business days the bid price for our common stock had closed belowthe minimum $1.00 per share requirement for continued listing on The NASDAQGlobal Market under Nasdaq Marketplace Rule 5450(a)(1). In accordance withNasdaq Marketplace Rule 5810(c)(3)(A), we were provided an initial periodof 180 calendar days, or until November 1, 2010, to regaincompliance.  The letter stated that theNasdaq staff would provide written notification that we had achieved compliancewith Rule 5450(a)(1) if at any time prior to November 1, 2010,the bid price of our common stock closed at $1.00 per share or more for aminimum of ten consecutive business days.

 

During the period before November 1,2010, absent the occurrence of any unexpected events, our common stock isexpected to continue to trade on The NASDAQ Global Market. If compliance withNasdaq Marketplace 5450(a)(1) cannot be demonstrated by November 1,2010, the staff of The Nasdaq Stock Market Listing Qualifications department isexpected to deliver a written notification to us that our common stock will bedelisted from The NASDAQ Global Market. If we receive a delisting notice, we may appeal the Nasdaq staff’sdetermination to a Listing Qualifications Panel. Alternatively, we may apply totransfer the listing of our common stock to The NASDAQ Capital Market oranother exchange or trading market.  Weintend to monitor the bid price of our common stock and consider availableoptions if our common stock does not trade at a level likely to result in our regainingcompliance with Nasdaq’s minimum bid price rule.

 

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**Results of Operations**

** **

***Three months endedMarch 31, 2010 compared with three months ended March 31, 2009***

*** ***

**Net Sales**

 

For the three months ended March 31, 2010, ournet sales from continuing operations decreased 35% compared to the same periodlast year, to $27.5 million from $42.6 million for the three months ended March 31,2009.  The average selling price ofwireless handsets sold in the three months ended March 31, 2010 decreased23% compared to the same period last year, due primarily to the slower globaleconomy, resulting in increased volumes of lower-priced handsets, includingsome of our *verykool®* and OEM products.  The geographic mix of net sales shiftedslightly in the three months ended March 31, 2010 as sales in SouthAmerica were 95% of net sales, compared to 93% of net sales for the same periodlast year.  Sales in Central Americadecreased to 5% of total net sales in the three months ended March 31,2010, compared to 7% for the same period last year.  Sales in Central America decreasedsequentially to 5% of total net sales in the three months ended March 31,2010, compared to 8% in the prior quarter. These regional shifts in net sales resulted from the factors discussedbelow.

 
| ** **                                                  | ** ** | **For the Three Months   Ended March 31,**           | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2010**                                                       | ** ** | **2009** | ** ** |
| ** **                                                  | ** ** | **(Dollar amounts in thousands)   (unaudited)** | ** ** |
| Net sales                                                   |       | $                                                              | 27,541     |   | $ | 42,625 |   |
| Units sold, increase (decrease) over prior year             |       | (16                                                            | )%         | (44 | )% |
| Average selling price, increase (decrease) over  prior year |       | (23                                                            | )%         | 15 | % |
|                                                             |            |                                                                |            |  |  |  |  |

 

**Net Salesby Geographic Region**

 

In South and Central America, we have continued towork to retain our customer base and geographic presence by seeking newcustomers and additional business with existing customers.  In addition, we have continued efforts tomarket and sell our proprietary *verykool*® lineof products in South and Central America. In South America, net sales were $26.0 million for the three monthsended March 31, 2010, a 34% decrease from the same period last year.  Our sales in Argentina, where we generated87% of our net sales in 2009 and 95% for the three months ending March 31,2010, has been materially adversely affected by the new tariff describedabove.  We have experienced a significantdecrease in sales to Argentina as of the date of this report, and we believethat in the coming quarters, the full impact of the tariff will necessitatesignificant steps by us in response. Such steps may include, without limitation, establishing manufacturingrelationships in Argentina that eliminate the tariff on our OEM and proprietaryproducts, focusing on increasing sales in other countries and aligning our coststructure with the level of sales.

 

In Central America, net sales decreased 52% to $1.5million for the three months ended March 31, 2010, which was primarily dueto the continuing low demand during the quarter, which we believe is related tothe worldwide and regional economic downturn.

 
| ** **      | ** ** | **For the Three Months  Ended March 31,**           | ** ** | ** ** | ** ** |
|-----------------|------------|---------------------------------------------------------------|------------|------------|------------|
| ** **      | ** ** | **2010**                                                      | ** ** | **2009**   | ** ** | **(Decrease)** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** ** | ** ** |
| Central America |       | $                                                             | 1,495      |       | $          | 3,115 |   | (52 | )% |
| South America   |       | 26,046                                                        |       | 39,510     |       | (34 | )% |
| Total           |       | $                                                             | 27,541     |       | $          | 42,625 |   | (35 | )% |

 

**Cost of Sales, Gross Profit and Gross Margin**

 

For the three months ended March 31, 2010, costof sales was $26.1 million, or 94.8% of net sales, and gross margin was 5.2%,compared with cost of sales of $39.3 million, or 92.1% of net sales, and grossmargin of 7.9% for the same period last year. The decreases in our cost ofsales and in gross margin were due to product mix shift, including increasedsales of lower-margin products (including our entry-level *verykool®*products.

 
| ** **    | ** ** | **For the Three months  Ended March 31,**           | ** ** | ** ** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|------------|------------|
| ** **    | ** ** | **2010**                                                      | ** ** | **2009**   | ** ** | **Decrease** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** ** | ** ** |
| Net sales     |       | $                                                             | 27,541     |       | $          | 42,625 |   | (35 | )% |
| Cost of sales |       | 26,100                                                        |       | 39,270     |       | (34 | )% |
| Gross profit  |       | $                                                             | 1,441      |       | $          | 3,355 |   | (57 | )% |
| Gross margin  |       | 5.2                                                           | %          | 7.9        | %          |   |   |

 

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**Operating Expense and Operating Income (Loss) fromContinuing Operations**

 

For the three months ended March 31, 2010,operating expense decreased 31% compared to the same period last year.  As a percentage of net sales from continuingoperations, operating expense increased to 7.2% in the three months ended March 31,2010, compared with 6.7% for the same period last year.  The decrease in total operating expense wasrelated to the decrease in net sales described above, as management took actionto reduce fixed operational costs to match current market conditions.  Management continues to review expenses in aneffort to better match the operational costs with the future businessopportunities, including by shifting expenses from fixed to variable componentswhen possible.   We believe such measureswill assist us as we strive to achieve profitability in the current volatilemarket.

 

For the three months ended March 31, 2010, ouroperating loss from continuing operations was $533,000, compared with operatingincome from continuing operations of $478,000 for the same period last year. Asa percentage of net sales, operating loss from continuing operations was 1.9%for the three months ended March 31, 2010, compared to operating incomefrom continuing operations of 1.1% for the same period last year. The operatingloss from continuing operations was a result of the decreases in net sales,gross margin and gross profit due to the factors discussed above.

 

**OperatingExpense**

 
| ** **              | ** ** | **For the Three Months  Ended March 31,**                | ** ** | ** ** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|------------|------------|
| ** **              | ** ** | **2010**                                                      | ** ** | **2009**   | ** ** | **Decrease** | ** ** |
|                    |       | **(Dollar amounts in thousands)  (unaudited)** |       |       |       |
| Net sales               |       | $                                                             | 27,541     |       | $          | 42,625 |   | (35 | )% |
| Operating expense       |       | $                                                             | 1,974      |       | $          | 2,877 |   | (31 | )% |
| Percentage of net sales |       | 7.2                                                           | %          | 6.7        | %          |   |   |

 

**Operating Income (Loss) from ContinuingOperations**

 
| ** **                                         | ** ** | **For the Three Months  Ended March 31,**                | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------------|------------|------------|------------|
| ** **                                         | ** ** | **2010**                                                      | ** ** | **2009**   | ** ** | **Decrease** | ** ** |
| ** **                                         | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** ** | ** ** |
| Net sales                                          |       | $                                                             | 27,541     |       | $          | 42,625 |   | (35 | )% |
| Operating income (loss) from continuing operations |       | $                                                             | (533       | )          | $          | 478 |   | (224 | )% |
| Percentage of net sales                            |       | (1.9                                                          | )%         | 1.1        | %          |   |   |

 

**OtherIncome and Expense**

 

Forthe three months ended March 31, 2010, we incurred $23,000 of interestexpense, compared with $28,000 for the same period last year.  This was primarily due to a lower averageoutstanding balance on our line of credit, resulting from, among other things,decreased sales and decreased accounts receivable levels compared to the sameperiod in the prior year.  We expect tocontinue to regularly draw on our revolving line of credit, which will impactour interest expense in future periods.

 
| ** **                   | ** ** | **For the Three Months  Ended March 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                   | ** ** | **2010**                                            | ** ** | **2009**   | ** ** | **(Decrease)** | ** ** |
| ** **                   | ** ** | **(Dollar amounts in thousands)**    | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **(unaudited)**                                     | ** ** | ** ** | ** ** |
| Other loss                   |       | $                                                   | (1         | )          | $          | — |   | 0 | % |
| Interest income (expense)    |       | (23                                                 | )          | (28        | )          | (17 | )% |
| Total other income (expense) |       | $                                                   | (24        | )          | $          | (28 | ) | (14 | )% |

 

**Loss from Discontinued Operations (net of tax)**

 

During the three monthsended June 30, 2008, we assessed opportunities in the United States andMexico and began to implement actions necessary to close sales operations inboth of those countries, which actions, although largely complete, continued inthe first quarter of 2010.  For the three months ended March 31,2010, we incurred a loss from discontinued operations of $6,000, compared to aloss of $193,000 from discontinued operations for the same period lastyear.  We expect to continue to record adjustments and expenses throughdiscontinued operations as necessary.

 

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**NetIncome (Loss)**

 

Forthe three months ended March 31, 2010, our net loss was $567,150, or aloss of $0.04 per diluted share, compared to net income of $247,052, orearnings of $0.02 per diluted share, for the same period last year.  This net loss was primarily due to thedecreased net sales, gross margin and gross profit discussed above.

 

**FinancialCondition, Liquidity and Capital Resources**

 

Wegenerally use cash from our sales of products, lines of credit (bank andvendor) and from time to time sale and exercise of securities to providecapital needed to support our business.

 

**Net CashProvided by (Used in) Operating Activities**

 

At March 31, 2010, we had $25.7 million in cash,an increase of $7.3 million from December 31, 2009 due to an increased level ofcollection of our accounts receivables. The net cash provided by operating activities was $20.3 million for thethree months ended March 31, 2010, which resulted primarily from decreasedaccounts receivable and inventory levels partially offset by decreased accountspayable and an increase in accrued expenses. The decrease in accountsreceivable was primarily due to the decrease in sales activity and the standardpayment terms of sales we provide our customers.  Accounts payable at March 31, 2010decreased $1.9 million from December 31, 2009, primarily due to a decreasein vendor-provided lines of credit and lower levels of purchases, whichresulted from the economic environment and our 2009 financial results, as wellas from beneficial purchasing terms offered by other vendors and partners inthe ordinary course during the period.

 

**Days of SalesOutstanding**

 

Days of sales outstanding (the average number of days ittakes to collect revenue after a sale is made) at March 31, 2010 was 63days, compared with 66 days at December 31, 2009.  This decrease was due to improved collectionrates. Normal payment terms require our customers to pay on a net 30-day or net60-day basis depending on the customer. We are constantly working with ourcustomers to reduce our days of sales outstanding. The extension of net 60-dayterms is required to remain competitive in the regions where we currently operate,Central and South America. In an effort to obtain new customers and penetratenew markets, we may extend our normal payment terms.

 

**Net Cash Usedin Investing Activities**

 

The net cash used in investing activities was $89,000 forthe three months ended March 31, 2010, compared to net cash used of$112,000 for the three months ended March 31, 2009. This use of cashcontinued to be primarily the result of our investment related to geographicexpansion, tooling and molds for our proprietary *verykool®*products.

 

**Net CashProvided by (Used in) Financing Activities**

 

The net cash used in financing activities for the threemonths ended March 31, 2010 of $12.9 million was primarily used to makepayments on our bank line of credit.  Thenet cash provided by financing activities for the three months ended March 31,2009 of $7.2 million was primarily the result of borrowings on our bank line ofcredit.

 

**WorkingCapital**

 

Our net working capital at March 31, 2010 was $23.9million, compared to $24.4 million at December 31, 2009. This slightdecrease was primarily due to the decrease in accounts receivable and thedecreases in accounts payable and the bank line of credit offset by an increasein cash and cash equivalents.

 

**Borrowings**

 

Pursuant to our Loan, Security and Bulk PurchaseAgreement and a Letter of Credit and Security Agreement (collectively, the “Agreement”)with Wells Fargo Century, Inc. (“Lender”), the Lender may advance up to$45,000,000 to us based on the expected collections of eligible receivables aswell as value of our eligible inventory determined in accordance with theAgreement.  The outstanding advances maynot exceed the lesser of (i) $45,000,000 or (ii) the sum of the valueof the eligible receivables and eligible inventory multiplied by their respectiveadvance rates as set forth in the Agreement ($12.8 million as of March 31,2010).At March 31, 2010, the majority of our debt was basedon foreign accounts receivable, a majority of which is insured. This creditfacility is secured by all of the assets of the Company. The termsautomatically roll over annually; however, the terms and conditions of suchcredit facility (including, without limitations, rates, eligibility, borrowingbase and maximum line) may change. Subsequent to March 31, 2010, the Agreementwas renewed under its current terms and conditions through April 2011. Theinterest rate for each borrowing under the credit facility is, at our option,either the Wells Fargo Bank N.A. prime rate minus 0.50% (3.25%minus 0.50% at March 31, 

 

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2010) or the LIBOR rate plus 2.00% (0.292%plus 2.00% at March 31, 2010).  At March 31,2010, the amount drawn against the line of credit was $12,626,234 and the totalamount available at March 31, 2010 was $12,778,276.  As of March 31, 2010, we were incompliance with the covenants of the credit facility.

 

We have no other notes payable.

 

Creditlines have been an important part of operating and growing our business, andmarket changes affecting accounts receivable have, and will in the future,diminish or increase the borrowing base of available funds under our currentcredit line. At March 31, 2010 our $12.6 million in advances were at 99%of the available borrowing base compared with advances of $25.5 million at 88%of the available borrowing base at December 31, 2009.

 

***Critical Accounting Policies***

*** ***

There have been nomaterial changes to our critical accounting policies and estimates affectingthe application of those accounting policies since our Annual Report on Form 10-Kfor the year ended December 31, 2009.

 

**Item 3. Quantitative and QualitativeDisclosures about Market Risk**

 

The primary objective of the following information is to provideforward-looking quantitative and qualitative information about our potentialexposure to market risks. The term “market risk” for us refers to the risk ofloss arising from adverse changes in interest rates and various foreign currencies.The disclosures are not meant to be precise indicators of expected futurelosses, but rather indicators of reasonably possible losses. Thisforward-looking information provides indicators of how we view and manage ourongoing market risk exposures.

 

**InterestRate Risk**

 

We are exposed to market risk from changes in interest rates on ouroutstanding revolving line of credit. At March 31, 2010, we had $12.6million outstanding under our line of credit, which could be affected bychanges in short-term interest rates. Under our current credit facility, theinterest rate for funds borrowed is, at our option, either the Wells Fargoprime rate minus 0.5% (3.25% minus 0.5% at March 31, 2010) or the LIBORrate plus 2.00% (0.292% plus 2.00% at March 31, 2010). For every 1%increase in Wells Fargo’s prime rate or the LIBOR rate, our interest expensewould increase by $126,000 annually, assuming $12.6 million remainedoutstanding for the entire year. Our actual borrowings will depend on changesin our working capital and other variables relating to our business, whichcould affect the foregoing sensitivity analysis.

 

**MarketRisk**

 

Almost all of our sales and expenses are transacted in markets outsidethe United States.  However, all salestransactions and accounts receivable are denominated in U.S. dollars. As aresult of our international sales, our future operating results could beadversely affected by a variety of factors, including changes in specificcountries’ political, economic or regulatory conditions, and trade protectionmeasures.  Our market risk managementincludes an accounts receivable insurance policy for our sales.  However, there can be no assurance that ourinsurance policy will substantially offset the impact of fluctuations incurrency exchange rates, political, economic or regulatory conditions on ourresults of operations and financial position. We do not believe that foreigncurrency fluctuations had a material impact on our financial results during thethree month ended March 31, 2010.   See “Consolidated Statements ofComprehensive Operations” in our financial statements included in this report.

 

**Item 4.Controls and Procedures**

 

**Disclosure Controls**

 

An evaluation wasperformed pursuant to Rule 13a-15(b) of the Securities Exchange Actof 1934 (the “Exchange Act”) under the supervision and with the participationof our management, including the Chief Executive Officer and President and theInterim Chief Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Exchange Act) as of the end of the period covered by thisquarterly report. These disclosure controls and procedures are designed toensure that information required to be disclosed by the Company in the reportsit files or submits under the Exchange Act is recorded, processed, summarized,and reported within the time periods specified in the SEC’s rules andforms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that this information is accumulated andcommunicated to our management, including our principal executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure. Based on the evaluation,the Chief Executive Officer and President and the Interim Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures wereeffective as of the end of the period covered by this quarterly report.

 

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**Changes in Internal Control over FinancialReporting**

 

There was no change inour internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f) of the Exchange Act) during our fiscal quarter ended March 31,2010, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II.OTHER INFORMATION**

 

**Item 1. LegalProceedings**

 

*LGElectronics Litigation*

 

On July 1, 2009, theCompany filed suit in the Superior Court of the State of California, County ofSan Diego (Case No. 37-2009-00092797-CU-BT-CTL) against defendants LGElectronics, Inc., LG Electronics USA, Inc., LG Electronics PanamaS.A., LG Electronics Inc. Chile LTDA, LG Electronics Guatemala S.A. de C.V. andDOES 1-10.  The complaint alleges claimsfor interference with contractual relations/inducing breach of contract,intentional interference with prospective economic relations, negligentinterference with prospective economic relations, breach of contract, breach ofimplied covenant of good faith and fair dealing, unjust enrichment, fraud,promissory estoppel and violation of California Business and Professions Code§§ 17200, et seq.    The Company isseeking in excess of $5 million in damages. On July 31, 2009, the defendants removed the case to federal courtin San Diego, CA.  On April 23,2010, the Company filed an amended complaint.

 

We maybecome involved in certain other legal proceedings and claims which arise inthe normal course of business. Other than as described above, as of March 31,2010, we did not have any significant litigation outstanding.

 

**Item 1A.  Risk Factors**

 

In addition to the riskfactors included below and other information set forth in this report, youshould carefully consider the factors discussed in “Part I. Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2009, which factors and information could materially affect our business,financial condition or operating results. The risk factors and uncertaintiesdescribed in our last Annual Report on Form 10-K and this report are notthe only risks and uncertainties facing us. Additional risks and uncertaintiesnot currently known to us or that we currently deem to be immaterial also maymaterially affect our business, financial condition or operating results.  Except as set forth below, there have been nomaterial changes to the risk factors included in our last Annual Report on Form 10-K.

 

***Arecently passed Argentina tariff will substantially increase the cost at thepoint of sale for certain imported electronics, including the products we sell,and this will have an adverse impact on our sales in Argentina.***

 

Argentina, one of thecountries where we currently sell a significant amount of OEMproducts and where we generated 95% of our net sales in the three months ended March 31,2010, passed a new tariff in November 2009affecting certain imported electronics, including wirelesshandsets.  This new tariff  impacts the pricing at the point ofsale in excess of 30%, and has reduced significantly ouroverall OEM sales volume in Argentina. This tariff hada material adverse impact on our sales, results of operations and prospects forour OEM products in Argentina in the first three months of 2010. We believethat this tariff will continue to have a material adverse impact on our sales,results of operations and prospects for our OEM products in Argentina on anongoing basis.

 

***The loss or reduction inorders from principal customers or a reduction in prices we are able to chargethese customers will have a negative impact upon our revenues and could causeour stock price to decline.***

 

Ourthree largest customers in the three months ended March 31, 2010, allcarriers in South America, represented 43%, 28% and 11% of our net sales duringthat period.  In 2010, a customeraccounting for 28% of our net sales for 2009 began significantly reducing itspurchases from us as a result of the newly enacted Argentina tariff.  Additional Argentina customers are expectedto decrease or eliminate their purchases of imported wireless handsets in thecoming fiscal quarters.  The markets weserve are subject to significant price competition. Additionally, our customersare not contractually obligated to purchase products from us. For these andother reasons, such as competitive pricing and pressures, customers may seek toobtain products or services from us at lower prices than we have been able tocharge in the past, and they could terminate our relationship or reduce theirpurchases from us in favor of lower-priced alternatives. In addition, we haveexperienced losses of certain customer bases through industry consolidation, atrend that may increase in our markets, and in the ordinary course of business.The further loss of any of our principal customers, a reduction in the amountof product or services our principal customers order from us or the inabilityto maintain current terms, including price, with these or other customers couldhave an adverse effect on our financial condition, results of operations andliquidity and could cause our stock price to decline.

 

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***We buy a significant amountof our products from a limited number of suppliers, who may not provide us withcompetitive products at reasonable prices when we need them in the future.***

 

Wepurchase wireless handsets and accessories principally from wirelesscommunications OEMs and distributors. We depend on these suppliers to provideus with adequate inventories of currently popular brand name products on atimely basis and on favorable pricing and other terms, as well as on thesesuppliers’ quality products and services and financial stability. Forthe period ended March 31, 2010, one vendor, Samsung Electronics deAmazonia, S.A., accounted for 93% of our total cost of sales. We currently have one exclusive and several non-exclusive agreementswith our principal suppliers, which can be terminated on short notice andprovide for certain territorial restrictions. Our suppliers may not offer uscompetitive products on favorable terms or with timely delivery. The increasedcosts on importation of wireless handsets and other products into Argentinaresulting from the recently enacted tariff will significantly reduce our supplyof competitive products for Argentina. In addition, new products from othermanufacturers could impact the demand for products from manufacturers werepresent. From time to time, we have been unable to obtain sufficient productsupplies. Any failure or delay by our suppliers, particularly our one primaryvendor, in supplying us with products on favorable terms may severely diminishour ability to obtain and deliver products to our customers on a timely andcompetitive basis. If we lose any of our principal suppliers, or if thesesuppliers are unable to fulfill our product needs, or if any principal supplierimposes substantial price increases and alternative sources of supply are notreadily available, it would have a material adverse effect on our results ofoperations and financial condition.

 

***We have recently experienced net losses and netlosses may continue in the future. If we continue to operate at a loss, ourbusiness may not be financially viable.***

 

We experienced losses for the three monthsended March 31, 2010 and the year ended December 31, 2009. Given theimpact of the recently passed Argentina tariff, the extended effects of theeconomic slowdown and contraction in the Central and South American marketsthat we serve, and general economic instability globally, we cannot adequatelyevaluate the financial viability of our business or our long-term prospects.

 

To achieve profitability, we must, among other things:

 

·              increase grossprofits while controlling operational expenses;

·              generate sales andconsumer demand for our *verykool®*products; and

·              continue to workwith our OEM vendors for increased margin opportunities.

 

Ifwe do not succeed in these objectives, our business, among other things, willcontinue to experience losses and may not be sustainable in the future.

 

***We may bedelisted from The NASDAQ Stock Market if we do not satisfy continued listingrequirements.***

 

On May 4, 2010, wereceived a Nasdaq Staff Deficiency letter indicating that for the prior thirtyconsecutive business days the bid price for our common stock had closed belowthe minimum $1.00 per share requirement for continued listing on The NASDAQGlobal Market under Nasdaq Marketplace Rule 5450(a)(1). In accordance withNasdaq Marketplace Rule 5810(c)(3)(A), we were provided an initial periodof 180 calendar days, or until November 1, 2010, to regaincompliance.  The letter stated that theNasdaq staff would provide written notification that we had achieved compliancewith Rule 5450(a)(1) if at any time prior to November 1, 2010,the bid price of our common stock closed at $1.00 per share or more for aminimum of ten consecutive business days.

 

If compliance with NasdaqMarketplace 5450(a)(1) cannot be demonstrated by November 1, 2010,the staff of The Nasdaq Stock Market Listing Qualifications department isexpected to deliver a written notification to us that our common stock will bedelisted from The NASDAQ Global Market. If we receive a delisting notice, we may appeal the Nasdaq staff’sdetermination to a Listing Qualifications Panel. Alternatively, we may apply totransfer the listing of our common stock to The NASDAQ Capital Market oranother exchange or trading market. However, our application may not be granted if we do not satisfy theapplicable listing requirements for The NASDAQ Capital Market at the time ofthe application.  Even if we successfullytransfer our common stock to The NASDAQ Capital Market, but are unable tosatisfy the minimum bid price requirement or any of the other continued listingstandards of The NASDAQ Capital Market, our common stock would be delisted fromThe NASDAQ Capital Market.

 

***If our commonstock were delisted from The NASDAQ Stock Market, you may find it difficult todispose of your shares and our share price may be adversely affected.***

 

If our common stock wereto be delisted from The NASDAQ Global Market and we could not satisfy thelisting standards of The NASDAQ Capital Market, trading of our common stockmost likely would be conducted in the over-the-counter market on an electronicbulletin board established for unlisted securities such as the OTCQXmarketplace or the OTC Bulletin Board. Such trading would reduce the market liquidity of our common stock.  As a result, an investor would find it moredifficult to dispose of, or obtain accurate quotations for the price of, ourcommon stock, thereby negatively impacting the share price of our common stock.

 

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If our common stock isdelisted from The NASDAQ Global Market and we could not satisfy the listingstandards of The NASDAQ Capital Market and the trading price remains below$5.00 per share, trading in our common stock might also become subject to therequirements of certain rules promulgated under the Securities ExchangeAct of 1934, which require additional disclosure by broker-dealers inconnection with any trade involving a stock defined as a “penny stock”(generally, any equity security not listed on a national securities exchange orquoted on The NASDAQ Stock Market that has a market price of less than $5.00per share, subject to certain exceptions). Many brokerage firms are reluctantto recommend low-priced stocks to their clients. Moreover, various regulationsand policies restrict the ability of shareholders to borrow against or “margin”low-priced stocks, and declines in the stock price below certain levels maytrigger unexpected margin calls. Additionally, because brokers’ commissions onlow-priced stocks generally represent a higher percentage of the stock pricethan commissions on higher priced stocks, the current price of the common stockcan result in an individual shareholder paying transaction costs that representa higher percentage of total share value than would be the case if our shareprice were higher. This factor may also limit the willingness of institutionsto purchase our common stock. Finally, the additional burdens imposed uponbroker-dealers by these requirements could discourage broker-dealers fromfacilitating trades in our common stock, which could severely limit the marketliquidity of the stock and the ability of investors to trade our common stock,thereby negatively impacting the share price of our common stock.

 

**Item 2.    Unregistered Sales of Equity Securities andUse of Proceeds**

 

None.

 

**Item 3.    Defaults Upon Senior Securities**

 

None.

 

**Item 4.    Reserved**

 

None.

 

**Item 5.    Other Information**

 

None.

 

**Item 6.****   ****Exhibits**

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                       |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2                 |       | Bylaws, as amended (+).                                                                                                                                          |
| 10.1                |       | Addendum to Distribution  Agreement by and between InfoSonics Corporation and Samsung Electronics  Argentina S.A. effective as of January 6, 2010 (1). |
| 31.1                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer (+).                                                                                |
| 31.2                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer (+).                                                                                |
| 32.1                |       | Section 1350  Certification of Chief Executive Officer (+).                                                                                                 |
| 32.2                |       | Section 1350  Certification of Chief Financial Officer (+).                                                                                                 |

 

----

(1)          Incorporated by reference to Exhibit 10.1to the Company’s Current Report on Form 8-K (File No. 001-32217),filed on January 12, 2010.

(+)         Filed herewith.

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, as amended, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| ** ** | ** **        | ** ** | **InfoSonics Corporation** |
|------------|-------------------|------------|----------------------------|
|       |              |       |                       |   |
|       |              |       |                       |   |
| Date:      | May 14, 2010 |       | By:                        | /s/  Joseph Ram |
|       |              |       |                       | Joseph Ram |
|       |              |       |                       | Chief Executive Officer and President |
|       |              |       |                       |   |
|       |              |       |                       |   |
| Date:      | May 14, 2010 |       | By:                        | /s/  Roger Laungani |
|       |              |       |                       | Roger Laungani |
|       |              |       |                       | Interim Chief Financial Officer |

 

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