**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q/A(Amendment #1)**

 

| x | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934.** |
|---|----------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended March 31, 2006**

**OR**

 

| o | **TRANSITION REPORT PURSUANT TO SECTION 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) |

 

**5880Pacific Center Blvd San Diego, CA 92121**(Address of principal executive offices including zip code)

**(858)373-1600**(Registrant’s telephone number, including area code)

**NotApplicable**(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 is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).

Large AcceleratedFiler  o           AcceleratedFiler  o           Non-AcceleratedFiler  x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes  o   No  x

As of May 10, 2006,the Registrant had6,766,346 shares outstanding of its $.001 par value common stock.

 

 

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**InfoSonicsCorporation and Subsidiaries**

**QuarterlyReport on Form 10-Q/A For The Period Ended March 31, 2006**

**Tableof Contents**

 
| **PART I. FINANCIAL  INFORMATION** | ** ** | ** **                                                                                                                            | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.                                 |       | Financial Statements                                                                                                                  |       |   |   |
|                                    |       |                                                                                                                                  |       |   |   |
|                                    |       | Consolidated  Balance Sheets as of March 31, 2006 (unaudited) and December 31,  2005                         |       |   |   |
|                                    |       |                                                                                                                                  |       |   |   |
|                                    |       | Consolidated  Statements of Income for the Three Months Ended March 31, 2006  (unaudited) and 2005 (unaudited)                   |       |   |   |
|                                    |       |                                                                                                                                  |       |   |   |
|                                    |       | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2006  (unaudited) and 2005 (unaudited)               |       |   |   |
|                                    |       |                                                                                                                                  |       |   |   |
|                                    |       | Notes to Unaudited Consolidated Financial Statements                                                                                  |       |   |   |
|                                    |       |                                                                                                                                  |       |   |   |
| Item 2.                                 |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations        |       |   |   |
|                                    |       |                                                                                                                                  |       |   |   |
| Item 3.                                 |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                           |       |   |   |
|                                    |       |                                                                                                                                  |       |   |   |
| Item 4.                                 |       | Controls and  Procedures                                                                                                              |       |   |   |
|                                    |       |                                                                                                                                  |       |   |   |
| **PART II.  OTHER INFORMATION**    | ** ** | ** **                                                                                                                            | ** ** |
|                                    |       |                                                                                                                                  |       |   |   |
| Item 1.                                 |       | Legal Proceedings                                                                                                                     |       |   |   |
|                                    |       |                                                                                                                                  |       |   |   |
| Item 1A.                                |       | Risk Factors                                                                                                                          |       |   |   |
|                                    |       |                                                                                                                                  |       |   |   |
| Item  6.                                |       | Exhibits                                                                                                                              |       |   |   |
|                                         |            |                                                                                                                                       |            |  |  |  |  |

 

2

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**EXPLANATORYNOTE**

The purpose ofthis Amendment No. 1 to Quarterly Report on Form 10-Q/A is torestate our unaudited Consolidated Financial Statements (the “Company”) for thequarter ended March 31, 2006, to change the accounting treatment ofcertain financing related warrants. In our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2006, filed May 15, 2006 we reporteda non-cash gain to income associated with certain financing related warrantsthat we issued during January 2006. Upon issuance of these warrants weproperly classified them as a liability pursuant to the provisions of EmergingIssues Task Force (EITF) 00-19,*  Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled In, a Company’s Own Stock.  *However, when our registration statement related to thesewarrants was declared effective by the SEC on February 17, 2006, we shouldhave reclassified the warrants as equity and ceased marking them to market onthat date. Instead, we had continued the warrants’ classification as aliability and marked them to market through the end of the quarter ended, March 31,2006.  This restatement clarifies thereclassification of the warrants as equity as of February 17, 2006. TheItems which are amended and restated herein are:

1.   Part I, Item 1 - Financial Statements (includingapplicable footnotes);

2.   Part I, Item 2 - Management’s Discussion andAnalysis of Financial Condition and Results of Operations; and

3.   Part II,Item 6 - Exhibits

While the Companybelieves that the reclassification is appropriate, the Company cannot assurethat the Financial Accounting Standards Board (FASB), the Emerging Issues TaskForce (EITF) and/or the SEC will provide contrary guidance in the future as theEITF further refines their position under EITF 00-19.

The remainingItems contained within this Amendment No. 1 to our Quarterly Report on Form 10-Q/Aconsist of all other Items originally contained in our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2006 in the form filed with the SEC on May 15,2006. These remaining Items are not amended hereby, but are included for theconvenience of the reader. In order to preserve the nature and character of thedisclosures set forth in such Items as originally filed, except as expresslynoted herein, this report continues to speak as of the date of the originalfiling, and we have not updated the disclosures in this report to speak as of alater date. While this report primarily relates to the historical periodscovered, events may have taken place since the original filing that might havebeen reflected in this report if they had taken place prior to the originalfiling.

3

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**Part I.FINANCIAL INFORMATION**

**Item1. Financial Statements**

**InfoSonics Corporation andSubsidiariesConsolidated Balance Sheets**

 
| ** **                                                                                                          | ** ** | **March 31  2006**     | ** **     | **December 31  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|----------------|----------------------------|------------|
| ** **                                                                                                          | ** ** | **(unaudited)  (restated)** | ** **     | ** **                 | ** ** |
| **ASSETS**                                                                                                          | ** ** | ** **                  | ** **     | ** **                 | ** ** |
| **Current  assets:**                                                                                                | ** ** | ** **                  | ** **     | ** **                 | ** ** |
| Cash and cash  equivalents                                                                                          |       | $                           | 12,346,313     |                       | $          | 7,712,915 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $865,290 (unaudited)  and $552,993            |       | 43,302,911                  |           | 19,962,630                 |       |
| Inventory, net  of reserves of $418,450 (unaudited) and $249,476                                                    |       | 7,849,851                   |           | 5,612,343                  |       |
| Prepaid  inventory                                                                                                  |       | 4,112,667                   |           | 1,680,086                  |       |
| Prepaid expenses                                                                                                    |       | 841,980                     |           | 478,196                    |       |
| Net assets of  discontinued operations                                                                              |       | 16,458                      |           | 18,931                     |       |
| Deferred tax  assets - current                                                                                      |       | 644,000                     |           | 550,000                    |       |
|                                                                                                                |       |                        |           |                       |       |
| Total current  assets                                                                                               |       | 69,114,180                  |           | 36,015,101                 |       |
|                                                                                                                |       |                        |           |                       |       |
| Property and  equipment, net                                                                                        |       | 422,074                     |           | 426,917                    |       |
| Intangible  assets                                                                                                  |       | 504,000                     |           | 504,000                    |       |
| Other assets                                                                                                        |       | 90,279                      |           | 90,791                     |       |
|                                                                                                                |       |                        |           |                       |       |
| **Total  assets**                                                                                                   | ** ** | **$**                       | **70,130,533** | ** **                 | **$**      | **37,036,809** | ** ** |
|                                                                                                                |       |                        |           |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                       | ** ** | ** **                  | ** **     | ** **                 | ** ** |
|                                                                                                                |       |                        |           |                       |       |
| **Current  liabilities:**                                                                                           | ** ** | ** **                  | ** **     | ** **                 | ** ** |
| Line of credit                                                                                                      |       | $                           | 17,911,931     |                       | $          | 10,000,000 |   |
| Accounts payable                                                                                                    |       | 15,958,692                  |           | 5,986,890                  |       |
| Accrued expenses                                                                                                    |       | 3,462,606                   |           | 2,983,880                  |       |
| Income taxes  payable                                                                                               |       | 244,629                     |           | —                     |       |
|                                                                                                                |       |                        |           |                       |       |
| Total current  liabilities                                                                                          |       | 37,577,858                  |           | 18,970,770                 |       |
|                                                                                                                |       |                        |           |                       |       |
| Deferred tax  liability non-current                                                                                 |       | 3,000                       |           | 22,207                     |       |
|                                                                                                                |       |                        |           |                       |       |
| **Total  liabilities**                                                                                              |       | 37,580,858                  |           | 18,992,977                 |       |
|                                                                                                                |       |                        |           |                       |       |
| **Stockholders’  equity:**                                                                                     | ** ** | ** **                  | ** **     | ** **                 | ** ** |
| Preferred stock,  $0.001 par value 10,000,000 shares authorized and no shares issued and  outstanding               |       | —                      |           | —                     |       |
| Common stock,  $0.001 par value 40,000,000 shares authorized 6,766,348 and 5,626,422 shares  issued and outstanding |       | 6,766                       |           | 5,626                      |       |
| Additional  paid-in capital                                                                                         |       | 26,758,313                  |           | 13,426,937                 |       |
| Retained  earnings                                                                                                  |       | 5,784,596                   |           | 4,611,269                  |       |
|                                                                                                                |       |                        |           |                       |       |
| Total  stockholders’ equity                                                                                    |       | 32,549,675                  |           | 18,043,832                 |       |
|                                                                                                                |       |                        |           |                       |       |
| **Total liabilities and  stockholders’ equity**                                                                | ** ** | **$**                       | **70,130,533** | ** **                 | **$**      | **37,036,809** | ** ** |

 

*Seeaccompanying notes.*

4

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**InfoSonics Corporation andSubsidiariesConsolidated Statements of Income(unaudited)**

 
| ** **                                                                              | ** ** | **For the Three Months  Ended March 31,** | ** **    |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|---------------|
| ** **                                                                              | ** ** | **2006**                                                           | ** **    | **2005** | ** ** |
| ** **                                                                              | ** ** | **(restated)**                                                     | ** **    | ** ** | ** ** |
| **Net  sales**                                                                          |       | $                                                                  | 54,127,089    |   | $ | 24,024,217 |   |
| **Cost of  sales**                                                                      |       | 49,947,224                                                         |          | 21,892,957 |   |
|                                                                                    |       |                                                               |          |   |   |
| **Gross  profit**                                                                       |       | 4,179,865                                                          |          | 2,131,260 |   |
| **Operating  expenses, including non-cash expense for stock options of $52,443 and $0** |       | 3,096,100                                                          |          | 1,566,914 |   |
|                                                                                    |       |                                                               |          |   |   |
| **Operating  income from continuing operations**                                        |       | 1,083,765                                                          |          | 564,346 |   |
|                                                                                    |       |                                                               |          |   |   |
| **Other income (expense)**                                                              | ** ** | ** **                                                         | ** **    | ** ** | ** ** |
| Change in fair value of derivative liability                                            |       | 399,009                                                            |          | — |   |
| Interest expense                                                                        |       | (80,565                                                            | )             | (24,821 | ) |
|                                                                                    |       |                                                               |          |   |   |
| **Income  from continuing operations before provision for income taxes**                |       | 1,402,209                                                          |          | 539,525 |   |
| **Provision  for income taxes**                                                         |       | 227,038                                                            |          | 218,610 |   |
|                                                                                    |       |                                                               |          |   |   |
| **Income  from continuing operations**                                                  | ** ** | **1,175,171**                                                      | ** **    | **320,915** | ** ** |
| **Loss  from discontinued operations, net of income tax benefit**                       | ** ** | **(1,844**                                                         | **)**         | **(6,077** | **)** |
| ** **                                                                              | ** ** | ** **                                                         | ** **    | ** ** | ** ** |
| **Net  income**                                                                         | ** ** | **$**                                                              | **1,173,327** | ** ** | **$** | **314,838** | ** ** |
|                                                                                    |       |                                                               |          |   |   |
| **Basic earnings per share:**                                                           | ** ** | ** **                                                         | ** **    | ** ** | ** ** |
| From continuing operations                                                              | ** ** | **$**                                                              | **0.18**      | ** ** | **$** | **0.06** | ** ** |
| From discontinued operations                                                            | ** ** | **$**                                                              | **(0.00**     | **)** | **$** | **(0.00** | **)** |
| Net income                                                                              | ** ** | **$**                                                              | **0.18**      | ** ** | **$** | **0.06** | ** ** |
| **Diluted earnings per share:**                                                         | ** ** | ** **                                                         | ** **    | ** ** | ** ** |
| From continuing operations                                                              | ** ** | **$**                                                              | **0.15**      | ** ** | **$** | **0.05** | ** ** |
| From discontinued operations                                                            | ** ** | **$**                                                              | **(0.00**     | **)** | **$** | **(0.00** | **)** |
| Net income                                                                              | ** ** | **$**                                                              | **0.15**      | ** ** | **$** | **0.05** | ** ** |
|                                                                                    |       |                                                               |          |   |   |
| **Basic  weighted-average number of common shares outstanding**                         | ** ** | **6,397,911**                                                      | ** **    | **5,212,000** | ** ** |
|                                                                                    |       |                                                               |          |   |   |
| **Diluted weighted-average number  of common shares outstanding**                       | ** ** | **7,733,469**                                                      | ** **    | **5,856,686** | ** ** |

 

*Seeaccompanying notes*.

5

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**InfoSonics Corporation andSubsidiariesConsolidated Statements of Cash Flows(unaudited)**

 
| ** **                                                                                                              | ** ** | **For the Three Months Ended March 31,** | ** **     |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|----------------|
| ** **                                                                                                              | ** ** | **2006**                                                               | ** **     | **2005** | ** ** |
| ** **                                                                                                              | ** ** | **(restated)**                                                         | ** **     | ** ** | ** ** |
| **Cash flows from operating  activities:**                                                                              |       |                                                                   |           |   |   |
| Net income from continuing operations                                                                                   |       | $                                                                      | 1,175,171      |   | $ | 320,915 |   |
| Adjustments to  reconcile net income from continuing operations to net cash provided by (used  in) operating activities |       |                                                                   |           |   |   |
| Depreciation and amortization                                                                                           |       | 31,935                                                                 |           | 13,690 |   |
| Provision for bad debt                                                                                                  |       | 312,297                                                                |           | 111,650 |   |
| Provision for obsolete inventory                                                                                        |       | 168,974                                                                |           | (21,330 | ) |
| Tax benefit from stock option exercises                                                                                 |       | 96,409                                                                 |           | — |   |
| Stock option expense                                                                                                    |       | 52,443                                                                 |           | — |   |
| Change in fair value of derivative security                                                                             |       | (399,009                                                               | )              | — |   |
| (Increase)  decrease in                                                                                                 |       |                                                                   |           |   |   |
| Trade accounts receivable                                                                                               |       | (23,652,578                                                            | )              | (5,087,956 | ) |
| Inventory                                                                                                               |       | (2,406,482                                                             | )              | 897,767 |   |
| Prepaid inventory                                                                                                       |       | (2,432,581                                                             | )              | (2,428,150 | ) |
| Prepaid expenses                                                                                                        |       | (363,784                                                               | )              | 168,221 |   |
| Other assets                                                                                                            |       | 511                                                                    |           | (14,415 | ) |
| Increase  (decrease) in                                                                                                 |       |                                                                   |           |   |   |
| Accounts payable                                                                                                        |       | 9,971,802                                                              |           | (526,147 | ) |
| Accrued expenses                                                                                                        |       | 478,726                                                                |           | (62,224 | ) |
| Deferred tax asset current                                                                                              |       | (94,000                                                                | )              | (58,000 | ) |
| Deferred tax asset non current                                                                                          |       | (19,207                                                                | )              | 69,000 |   |
| Income tax liabilities                                                                                                  |       | 244,629                                                                |           | 108,514 |   |
|                                                                                                                    |       |                                                                   |           |   |   |
| Cash provided by  (used in) continuing operations                                                                       |       | (16,834,744                                                            | )              | (6,508,465 | ) |
| Cash provided by  (used in) discontinued operations                                                                     |       | 629                                                                    |           | (25,001 | ) |
|                                                                                                                    |       |                                                                   |           |   |   |
| Net cash  provided by (used in) operating activities                                                                    |       | (16,834,115                                                            | )              | (6,533,466 | ) |
|                                                                                                                    |       |                                                                   |           |   |   |
| **Cash flows from investing  activities:**                                                                              | ** ** | ** **                                                             | ** **     | ** ** | ** ** |
|                                                                                                                    |       |                                                                   |           |   |   |
| Purchase of property and equipment                                                                                      |       | (27,092                                                                | )              | (43,071 | ) |
|                                                                                                                    |       |                                                                   |           |   |   |
| Net cash  provided by (used in) investing activities                                                                    |       | (27,092                                                                | )              | (43,071 | ) |
|                                                                                                                    |       |                                                                   |           |   |   |
| **Cash flows from financing  activities:**                                                                              | ** ** | ** **                                                             | ** **     | ** ** | ** ** |
| Borrowings from line of credit                                                                                          |       | 23,998,241                                                             |           | 18,422,466 |   |
| Payments on line of credit                                                                                              |       | (16,086,310                                                            | )              | (13,486,592 | ) |
| Cash paid for offering costs                                                                                            |       | (991,680                                                               | )              | — |   |
| Cash received for stock and warrants                                                                                    |       | 14,574,354                                                             |           | — |   |
|                                                                                                                    |       |                                                                   |           |   |   |
| Net cash provided by (used in) financing activities                                                                     |       | 21,494,605                                                             |           | 4,935,874 |   |
|                                                                                                                    |       |                                                                   |           |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                                   |       | 4,633,398                                                              |           | (1,640,663 | ) |
|                                                                                                                    |       |                                                                   |           |   |   |
| **Cash and cash equivalents, beginning of period**                                                                      |       | 7,712,915                                                              |           | 5,183,876 |   |
|                                                                                                                    |       |                                                                   |           |   |   |
| **Cash  and cash equivalents, end of period**                                                                           | ** ** | **$**                                                                  | **12,346,313** | ** ** | **$** | **3,543,213** | ** ** |

 

*Seeaccompanying notes*.

 

6

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**InfoSonicsCorporation**

**Notes to Unaudited ConsolidatedFinancial StatementsMarch 31, 2006**

**NOTE 1.Basis of Presentation**

The accompanyingunaudited Consolidated Financial Statements have been prepared in accordancewith accounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q and Article 10of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they donot include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements. The preparation of financial statements requires management to makeestimates and assumptions that affect amounts reported in the financialstatements and accompanying notes. Actual results are likely to differ fromthose estimates, but management does not believe such differences willmaterially affect the financial position or results of operations of InfoSonicsCorporation (the “Company”). These Consolidated Financial Statements and notesshould be read in conjunction with the financial statements and notes as of andfor the year ended December 31, 2005 included in the Company’s AnnualReport on Form 10-K, which was filed with the Securities andExchange Commission on March 31, 2006. The Consolidated FinancialStatements reflect all adjustments considered, in the opinion of the Company,necessary to fairly present the results for the periods. Such adjustments areof a normal recurring nature.

The Consolidated FinancialStatements include the accounts of the Company and its subsidiaries, AxcessMobile LLC, InfoSonics De Mexico, InfoSonics de Guatemala, InfoSonics ElSalvador and InfoSonics S.A., all of which are wholly owned. Significantintercompany accounts and transactions have been eliminated in consolidation.

The unauditedConsolidated Balance Sheet at March 31, 2006 does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements. Due to seasonal andother factors, the Company’s interim results may not be indicative of annualresults. The unaudited Consolidated Statements of Income for the three monthsended March 31, 2006 and the unaudited Consolidated Statement of CashFlows for the three months ended March 31, 2006 are not necessarilyindicative of the operating results or cash flows that may be expected for thefull fiscal year or for any future period.

**NOTE 2.Acquisition**

On January 19, 2005,the Company purchased Primasel S.A., from Fanrock Investments Limited for up to120,000 shares of the Company’s common stock, based on sales of certain levelsbeing achieved in the next three years. During the year ended December 31,2005, 120,000 shares of stock were issued in full satisfaction of the Company’spotential share issuance in connection with this transaction. In addition theCompany is obligated to pay a profit sharing based on sales and profitabilityachieved in Argentina. During the three months ended March 31, 2006, theCompany recorded an expense and related accrual of $544,000 related to salesand profitability. The Company has accounted for the transaction as a stockpurchase. The purchase price has been recorded as an intangible asset on theaccompanying balance sheet. Primasel had a distribution agreement and amanagement agreement which was the purpose for the transaction, and the impliedvalue of those agreements is the value of the 120,000 shares issued in October 2005.The Company allocated 75% of the non-cash cost of this issuance towards themanagement agreement and 25% towards the distribution agreement. In February 2005,Primasel S.A. changed its name to InfoSonics S.A. A proforma statement ofoperations for the three months ended March, 31 2005 has not been presented asPrimasel had no operations prior to the purchase.

**NOTE 3.Discontinued Operations**

During the quarter ended September 30,2004, the Company’s Board of Directors reviewed Axcess Mobile, LLC and itsmall-based kiosk locations and implemented actions necessary to close theCompany’s mall-based kiosk locations. On October 28, 2004, the Companyassigned the leases for six of the mall-based kiosk locations to an unrelatedassignee; however, the assignment did not release the Company from the futurelease obligations, of up to $965,000. The assignee operates approximately 400mall-based kiosks in 28 states. A third party is holding in escrow two monthsrent for the locations from the assignee, and in the event of default by theassignee, those funds will be released to the Company. The Company’s other fourlease locations were closed in October 2004. SFAS No. 142, “Goodwilland Other Intangible Assets,” prohibits the amortization of goodwill, butrequires that it be reviewed for impairment at least annually or on an interimbasis if an event occurs or circumstances change that could indicate that itsvalue has diminished or been impaired. As a result of the discontinuedoperation, the Company has reassessed the goodwill and written down the valueto zero. This write-down was recorded as an operating expense in the year endedDecember 31, 2004. The results of the discontinued operations are asfollows:

 
| ** **                     | ** ** | **Three months ended March 31** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Net Sales                      |       | $                                                   | -0-        |   | $ | -0- |   |
| Gross Profit                   |       | -0-                                                 |       | -0- |   |
| Operating loss                 |       | (1,844                                              | )          | (6,077 | ) |
| Capital  Expenditures          |       | -0-                                                 |       | -0- |   |
| Depreciation and  Amortization |       | -0-                                                 |       | -0- |   |
|                           |       |                                                |       |   |   |
|                                |            |                                                     |            |  |  |  |  |

 

7

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As of March 31,2006, net assets of discontinued operations consist of cash of $12,224 andother assets of $4,234. As of March 31, 2006, the plans for thediscontinued operations were complete; however the Company expects to continueto record adjustments and expenses through discontinued operations asnecessary.

**NOTE 4.Stock-Based Compensation**

Prior to December 31,2005, the Company accounted for employee stock option plans based on theintrinsic value method in accordance with Accounting Principles Board (APB)Opinion No. 25, “*Accounting for StockIssued to Employees,”* and related Interpretations and had adoptedthe disclosure requirements of SFAS No. 123, “*Accounting for Stock-Based Compensation”* (SFAS No.123), asamended by SFAS No. 148, “*Accountingfor Stock-Based Compensation—Transition and Disclosure* ” (SFAS No. 148).Accordingly, compensation cost for stock options was measured as the excess, ifany, of the quoted market price of the Company’s stock at the grant date overthe amount an employee must pay to acquire the stock. The Company granted stockoptions with exercise prices equal to the market price of the underlying stockon the date of grant; therefore, the Company did not record stock-basedcompensation expense under APB Opinion No. 25.

In December 2004,the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, “*Share-Based Payments”* to require that compensationcost relating to share-based payment arrangements be recognized in thefinancial statements. As of January 1, 2006, the Company adopted SFAS No. 123Rusing the modified prospective method, which requires measurement ofcompensation cost for all stock-based awards at fair value on the date of grantand recognition of compensation over the service period for awards expected tovest. The fair value of stock options were determined using the Black-Scholesvaluation model, which is consistent with our valuation techniques previouslyutilized for stock options in footnote disclosures required under SFAS No. 123,as amended by SFAS No. 148. Such fair value is recognized as expense overthe service period, net of estimated forfeitures.

If the Company had adoptedSFAS No. 123R during the quarter ended March 31, 2005 for its’stock-based compensation plans, then the Company’s net income for the threemonths ended March 31, 2005 would have been adjusted to the pro formaamounts indicated below:

 
| ** **                                                                                                                                                                        | ** ** | **Quarter ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2005**                               | ** ** |
| Net income as  reported                                                                                                                                                           |       | $                                      | 314,838    |   |
|                                                                                                                                                                              |       |                                   |       |
| Stock-based  employee compensation cost, net of related tax effects, that would have been  included in the determination of net income if the fair value method had been  applied |       | (460,011                               | )          |
| Pro forma                                                                                                                                                                         |       | $                                      | (145,173   | ) |
|                                                                                                                                                                              |       |                                   |       |
| Basic earnings  per common share as reported                                                                                                                                      |       | $                                      | 0.06       |   |
| Stock-based  employee compensation cost, net of related tax effects, that would have been  included in the determination of net income if the fair value method had been  applied |       | $                                      | (0.09      | ) |
| Pro forma                                                                                                                                                                         |       | $                                      | (0.03      | ) |
|                                                                                                                                                                              |       |                                   |       |
| Diluted earning per  share                                                                                                                                                        |       |                                   |       |
| As reported                                                                                                                                                                       |       | $                                      | 0.05       |   |
| Stock-based  employee compensation cost, net of related tax effects, that would have been  included in the determination of net income if the fair value method had been  applied |       | $                                      | (0.08      | ) |
| Pro forma                                                                                                                                                                         |       | $                                      | (0.03      | ) |

 

8

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On September 27,2001, the FASB Emerging Issues Task Force (EITF) issued EITF Issue 96-18 “Accountingfor Equity Instruments That are Issued to Other than Employees for Acquiring,or in Conjunction with Selling, Goods or Services” which requires that equityinstruments issued in exchange for services be valued at the more accurate ofthe fair value of the services provided or the fair value of the equityinstruments issued. For equity instruments issued that are subject to arequired service period the expense associated with the equity instruments isrecorded as the instruments vest or the services are provided. The Company hasgranted options and warrants to non-employees and recorded the fair value ofthe equity instruments on the date of issuance using the Black-Scholesvaluation model. For grants subject to vesting or service requirements, theexpenses is deferred and is recognized over the more appropriate of the vestingperiod, or as services are provided.

On March 29, 2005,the Securities and Exchange Commission published Staff Accounting Bulletin No. 107(SAB 107), which provides the Staff’s views on a variety of matters relating tostock-based payments. SAB 107 requires stock-based compensation to beclassified in the same expense line items as cash compensation. Informationabout stock-based compensation included in the results of operations for thequarter ended March 31, 2006 is as follows:

 
| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **March 31, 2006**     | ** ** |
| Officer compensation               |       | $                                | 18,297     |   |
| Sales, general  and administrative |       | 34,146                           |       |
| Totals                             |       | $                                | 52,443     |   |

 

Our stock options vest onan annual or a monthly basis. As of December 31, 2005, there was $291,462of total unrecognized compensation costs related to the non-vested stockoptions. That cost is expected to be recognized over the next weighted-averageperiod of 1.75 years. Such amounts may change as a result of additional grants,forfeitures, modifications in assumptions and other factors. SFAS No. 123Rprovides that income tax effects of share-based payments are recognized in thefinancial statements for those awards which will normally result in taxdeductions under existing tax law. Under current U.S. federal tax law, we wouldreceive a compensation expense deduction related to non-qualified stock optionsonly when those options are exercised and vested shares are received.Accordingly, the financial statement recognition of compensation cost fornon-qualified stock options creates a deductible temporary difference whichresults in a deferred tax asset and a corresponding deferred tax benefit in theincome statement.

**NOTE 5.Earnings Per Share**

The Company utilizes SFASNo. 128, “Earnings per Share.” Basic earnings per share is computed bydividing income available to common stockholders by the weighted-average numberof common shares outstanding. Diluted earnings per share is computed similarlyto basic earnings per share, except that the denominator is increased toinclude the number of additional common shares that would have been outstandingif the potential additional common shares that were dilutive had been issued.Common equivalent shares are excluded from the computation if their effect isanti-dilutive. The Company’s common share equivalents consist of stock options.

The following tablerepresents a reconciliation of the shares used to calculate basic and dilutedearnings per share for the respective periods indicated:

 
| ** **                                                                                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                                                                                        |       |                                                 |       |   |   |
| Numerator: Net  income                                                                                      |       | $                                                    | 1,173,327  |   | $ | 314,838 |   |
| Denominator:                                                                                                |       |                                                 |       |   |   |
| Denominator for  basic earnings per share — weighted average shares                                    |       | 6,397,911                                            |       | 5,212,000 |   |
| Effect of  dilutive securities                                                                              |       |                                                 |       |   |   |
| Employee stock  options                                                                                     |       | 1,335,558                                            |       | 644,686 |   |
| Denominator for  diluted earnings per share — adjusted weighted average shares and assumed  conversion |       | 7,733,469                                            |       | 5,856,686 |   |
|                                                                                                        |       |                                                 |       |   |   |
| Basic earnings  per share                                                                                   |       | $                                                    | 0.18       |   | $ | 0.06 |   |
|                                                                                                        |       |                                                 |       |   |   |
| Diluted earnings per  share                                                                                 |       | $                                                    | 0.15       |   | $ | 0.05 |   |

 

Potential common shareshave been excluded from the computation of diluted earnings per share due totheir exercise price being greater than the Company’s weighted average stockprice for the period. For the three months ended March 31, 2006 and 2005,the number of shares excluded for stock options and warrants was 963,376 and1,131,750 respectively.

9

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** **

**NOTE 6.Income Taxes**

SFAS No. 109, “ACCOUNTINGFOR INCOME TAXES”, establishes financial accounting and reporting standards forthe effect of income taxes. The objectives of accounting for income taxes areto recognize 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 impactour financial position or our results of operations.

**NOTE 7.Inventory**

Inventory is valued atthe lower of cost or market using standard costs that approximate average cost.Inventories are reviewed periodically and items considered to be slow moving orobsolete are reduced to estimated net realizable value through an appropriatereserve. In addition, included in our Prepaid Inventory at March 31, 2006,we had consigned inventory of $1.9 million which is located at the distributioncenter and retail locations of a certain carrier. This inventory is owned bythe Company until it is sold by the carrier. There was no consigned inventoryat December 31, 2005. Inventory consists of the following:

 
| ** **         | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------|------------|--------------------------|------------|-----------------------------|------------|
| Finished goods     |       | $                        | 8,268,301  |                        | $          | 5,861,819 |   |
| Inventory  reserve |       | (418,450                 | )          | (249,476                    | )          |
| Net inventory      |       | $                        | 7,849,851  |                        | $          | 5,612,343 |   |

 

**NOTE 8.Property and Equipment**

Property and equipmentconsisted of the following:

 
| ** **                     | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Machinery and  equipment       |       | $                        | 498,524    |                        | $          | 487,998 |   |
| Furniture and  fixtures        |       | 133,648                  |       | 117,082                     |       |
|                           |       | 632,172                  |       | 605,080                     |       |
| Less accumulated  depreciation |       | 210,098                  |       | 178,163                     |       |
| Total                          |       | $                        | 422,074    |                        | $          | 426,917 |   |

 

Depreciation expense was$31,935 and $13,690 for the quarter ended March 31, 2006 and March 31,2005, respectively.

**NOTE 9.Line of Credit**

The Company has a line ofcredit from a bank, which provides for advances not to exceed 80% of eligibledomestic accounts receivable and 85% of foreign insured accounts, depending onthe country of the debtor, up to a maximum of $25,000,000. As of March 31,2006, the majority of the debtors are foreign.

Interest is payable on amonthly basis at prime (7.75% at March 31, 2006) or at the LondonInter-Bank Offering Rate (4.875% at March 31, 2006), plus 1.50%. The lineof credit is collateralized by substantially all of the assets of the Company,and expires in October 2006. In addition to reporting and othernon-financial covenants, the line of credit contains certain financialcovenants which require the Company to maintain a tangible net worth of notless than $12,500,000, a quick ratio of not less than 1-to-1, adebt-to-net worth ratio of not greater than 2-to-1, and require theCompany to maintain annual net income after taxes of at least $1 on a rollingfour quarter basis. Management believes the Company was in compliance with thesecovenants at March 31, 2006. At March 31, 2006 and December 31,2005, the amounts drawn against the line of credit were $17,911,931 and10,000,000, respectively.

The Company has no othernotes payable.

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**NOTE 10.Stockholders’ Equity**

Sale of Common Stock

On January 30, 2006**,** the Company sold an aggregate of1,100,000 shares of its common stock at $13.10 per share, for total grossproceeds of $14,410,000. The purchasers were also issued warrants (as describedbelow).

Stock Options

The Company did not grantany stock options during the three months ended March 31, 2006.

Warrants

In June 1998, FASBissued SFAS No. 133, Accounting for Derivative Instruments and HedgingActivities. The Statement establishes accounting and reporting standards forderivative instruments, including certain derivative instruments embedded inother contracts, (collectively referred to as derivatives) and for hedgingactivities. It requires that an entity recognize all derivatives as eitherassets or liabilities in the statement of financial position and measure thoseinstruments at fair value.

In January 2006, inconnection with the sale of common stock, the Company issued the purchaserswarrants to purchase an aggregate of 330,000 shares of the Company’s commonstock at an exercise price of $18.38 per share during the period beginning sixmonths after the date of the purchase agreement and ending four years later.The Company also issued warrants exercisable for three years to purchase atotal of 28,600 shares to the placement agents in the offering. Warrants topurchase 22,000 shares issued to placement agents have an exercise price of$13.76 per share and 6,600 have an exercise price of $19.30 per share. Thesecurities purchase agreement contained provisions whereby the Company agreedto pay liquidated damages if a registration statement covering the sharesunderlying the warrants was not declared effective by the specified date. TheCompany evaluated the warrants in the transaction as derivatives in accordancewith SFAS No. 133 and EITF 00-19. The Company recorded a liabilityfor the fair value of the warrants determined under the Black-Scholes optionpricing formula (included in the liabilities as a “derivative liability”).Subsequent to the initial recording, the registration statement was declaredeffective, and the Company has now reclassified the warrants from a derivativeliability to equity on the date of effectiveness (February 17, 2006). Thechange in the fair value of the warrants, determined under the Black-Scholesoption pricing formula, at the date of effectiveness, was recorded as anadjustment to the liability. The income relating to the change in the fairvalue of the Company’s stock reflected in the change in the fair value of thewarrants is included as other income (expense). The values of the warrants on January 30and February 17, 2006 were calculated using the following weighted-averageassumptions: dividend yields of 0% and 0%, respectively, expected volatility of97% and 97%, respectively risk-free interest rates of 4.46% and 4.55%,respectively, and expected lives of 4 years for each.

**NOTE 11.Recent Accounting Pronouncements**

In December 2004,the FASB issued SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123(R)”).SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting forStock Issued to Employees,” and amends SFAS No. 95, “Statement of CashFlows.” Generally, the fair value approach in SFAS No. 123(R) issimilar to the fair value approach described in SFAS No. 123. In 2005, ourCompany used the Black-Scholes-Merton formula to estimate the fair value ofstock options granted to employees. Our Company adopted SFAS No. 123(R),using the modified-prospective method, beginning January 1, 2006. Based onthe terms of our plans, our Company did not have a cumulative effect related toits plans. Our Company also elected to continue to estimate the fair value ofstock options using the Black-Scholes-Merton formula. In the first quarter of2006, the adoption of SFAS No. 123(R) included an operating expense of$52,443. Further, we believe the adoption of SFAS No. 123(R) couldhave a material impact on our Company’s future stock-based compensationexpense. As of March, 31, 2006, there was approximately $220,000 of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under our plans. That cost is expected to be recognizedover the next two years. This expected cost does not include the impact ofany future stock-based compensation awards.

In May 2005, theFASB issued FASB Statement No. 154 (“SFAS 154”), Accounting Changes andError Corrections. SFAS 154 applies to all voluntary changes in accountingprinciple as well as to changes required by an accounting pronouncement thatdoes not include specific transition provisions. SFAS 154 eliminates therequirement in ABP Opinion No. 20, Accounting Changes, to include thecumulative effect of changes in accounting principle in the income statement inthe period of change and, instead, requires changes in accounting principle tobe retrospectively applied. Retrospective application requires the newaccounting principle to be applied as if the change occurred at the beginningof the first period presented by modifying periods previously reported, if anestimate of the prior period impact is practicable and estimable. SFAS 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. We do not currently anticipate anychanges in accounting principle other than the adoption of SFAS 123R discussedbelow, which has its own adoption transition provision and is therefore not inthe scope of SFAS 154. As a result, we do not believe the adoption of SFAS 154will have a material impact on the Company’s consolidated financial statements.

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In March 2005, theFASB issued FASB Interpretation (“FIN”) No. 47, “Accounting forConditional Asset Retirement Obligations”. FIN No. 47clarifies that the term conditional asset retirement obligation asused in FASB Statement No. 143, “Accounting for Asset RetirementObligations,” refers to a legal obligation to perform an assetretirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity. The obligation to perform the asset retirement activity isunconditional even though uncertainty exists about the timing and (or) methodof settlement. Uncertainty about the timing and/or method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists. This interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation**.** FIN No. 47 becameeffective in December 2005. Retrospective application of interim financialinformation is permitted but is not required. Management does not expectadoption of FIN No. 47 to have a material impact on the Company’sfinancial statements.

In September 2005,the Emerging Issues Task Force (EITF) ratified EITF Issue No. 04-13,Accounting for Purchases and Sales of Inventory with the Same Counterparty.Beginning April 1, 2006, EITF 04-13 requires arrangements wherebypurchase and sales transactions with the same counterparty that are enteredinto in contemplation of one another to be combined (net basis). The Companyhas had such arrangements whereby it purchases wireless devices or prepaidairtime from certain counterparties and sells similar items to the samecounterparties. These arrangements are accounted for on a net basis withinlogistic services. Therefore, the effect of adopting EITF 04-13 will haveno impact on the Company’s results of operations.

**NOTE 12.Geographic Information**

The Company currently operatesin one business segment. All fixed assets are located in the Company facilitiesin the Untied States. Revenues by geographical area for the three months ended March 31,2006 and March 31, 2005:

 
| ** **    | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
|---------------|------------|------------------------------|------------|------------------------------|------------|
| United States |       | $                            | 1,720,699  |                         | $          | 15,340,878 |   |
| Latin America |       | 19,375,215                   |       | 6,151,923                    |       |
| Argentina     |       | 33,031,175                   |       | 2,531,416                    |       |
| Total         |       | $                            | 54,127,089 |                         | $          | 24,024,217 |   |

 

**NOTE 13.Restatement**

The Company has reassessedits application of certain provisions of EITF 00-19,*Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock.* Specifically, it recorded $564,000 of otherincome during the quarter ended March 31, 2006 related to a mark to marketadjustment of certain warrants. Since these warrants became part of permanentequity on February 17, 2006, InfoSonics should have ceased applying themark to market provisions of EITF 00-19, on that date. Accordingly,the net income for the quarter ended March 31, 2006 has been reduced by anon-cash amount of $564,000.

The following tables setforth for the quarter ended March 31, 2006 the amounts of the restatementadjustments and reconciliation from previously reported amounts to restatedamounts for the quarter.

**BalanceSheet:**

 
| ** **                          | ** ** | **Three Months Ended March 31, 2006  (Unaudited)** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **As Previously  Reported**                                            | ** ** | **Effect of  Restatement** | ** ** | **Restated** | ** ** |
| Fair value of  derivative liability |       | $                                                                           | 2,041,265  |   | $ | (2,041,265 | ) | $ | — |   |
| Total  liabilities                  |       | 39,622,123                                                                  |       | (2,041,265 | ) | 37,580,858 |   |
| Additional  paid-in capital         |       | 24,152,706                                                                  |       | 2,605,607 |   | 26,758,313 |   |
| Retained  earnings                  |       | 6,348,938                                                                   |       | (564,342 | ) | 5,784,596 |   |
| Total stockholders  equity          |       | 30,508,410                                                                  |       | 2,041,265 |   | 32,549,675 |   |
|                                     |            |                                                                             |            |  |  |  |  |  |  |  |

 

**Statement of Operations**

 
| ** **                                                           | ** ** | **Three Months Ended March 31, 2006  (Unaudited)** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **As Previously  Reported**                                            | ** ** | **Effect of  Restatement** | ** ** | **Restated** | ** ** |
| Other Income:  change in fair value of derivative liability          |       | $                                                                           | 963,351    |   | $ | (564,342 | ) | $ | 399,009 |   |
| Income from  continuing operations before provision for income taxes |       | 1,966,551                                                                   |       | (564,342 | ) | 1,402,209 |   |
| Income from  Continuing operations                                   |       | 1,739,513                                                                   |       | (564,342 | ) | 1,175,171 |   |
| Net income                                                           |       | 1,737,669                                                                   |       | (564,342 | ) | 1,173,327 |   |
| Basic earnings  per share                                            |       | $                                                                           | 0.27       |   | $ | (0.09 | ) | $ | 0.18 |   |
| Diluted earnings per  share                                          |       | $                                                                           | 0.22       |   | $ | (0.07 | ) | $ | 0.15 |   |

 

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**Statement of Cash Flows**

 
| ** **                                        | ** ** | **Three Months Ended March 31, 2006  (Unaudited)** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **As Previously  Reported**                                            | ** ** | **Effect of  Restatement** | ** ** | **Restated** | ** ** |
| Net income from  continuing operations            |       | $                                                                           | 1,739,513  |   | $ | (564,342 | ) | $ | 1,175,171 |   |
| Change in fair  value of derivative liability     |       | (963,351                                                                    | )          | 564,342 |   | (399,009 | ) |
| Cash provided by (used  in) continuing operations |       | (16,834,744                                                                 | )          | — |   | (16,834,744 | ) |
|                                                   |            |                                                                             |            |  |  |  |  |  |  |  |

 

**NOTE 14.Subsequent Events**

Subsequent to the quarterended March 31, 2006, we entered into a lease agreement for a facility inMexico. We plan to use the facility for assembly, warehouse, distribution andlogistical services and as our sales and headquarters for Mexico. The term ofthe lease agreement is three years and has a total rental expense, includingannual escalations, of $470,000 based on the exchange rate at March 31,2006.

**Item2. Management’s Discussion and Analysis of Results of Operations and FinancialCondition**

This discussionand analysis should be read in conjunction with the accompanying unauditedConsolidated Financial Statements and related notes included in this report andwith our 2005 audited financial statements and related notes thereto includedin our Annual Report on Form 10-K, which was filed with theSecurities and Exchange Commission on March 31, 2006. Our discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of any contingent liabilities at the financialstatement date, and reported amounts of revenue and expenses during thereporting period. On an ongoing basis we review our estimates and assumptions.Our estimates are based on our historical experience and other assumptions thatwe believe to be reasonable under the circumstances. Actual results are likelyto differ from those estimates under different assumptions or conditions, butwe do not believe such differences will materially affect our financialposition or results of operations. Our critical accounting policies, thepolicies we believe are most important to the presentation of our financialstatements and require the most difficult, subjective and complex judgments,are outlined below in “—Critical Accounting Policies.”

The matters inthis report that are forward-looking statements, including without limitationto statements about future revenues, sales levels, operating income andmargins, wireless handset sales, stock-based compensation expense, gain (loss)in value of derivatives, cost synergies, operating efficiencies, profitability,market share and rates of return, are based on current management expectationsthat involve certain risks which, if realized, in whole or in part, could causesuch expectations to fail to be achieved and have a material adverse effect onInfoSonics’ business, financial condition and results of operations, including,without limitation: (1) intense competition, regionally andinternationally, including competition from alternative business models, suchas manufacturer-to-carrier sales, which may lead to reduced prices, lower salesor reduced sales growth, lower gross margins, extended payment terms withcustomers, increased capital investment and interest costs, bad debt risks andproduct supply shortages; (2) inability to secure adequate supply ofcompetitive products on a timely basis and on commercially reasonable terms; (3) foreignexchange rate fluctuations, devaluation of a foreign currency, adversegovernmental controls or actions, political or economic instability, ordisruption of a foreign market, and other related risks of our internationaloperations; (4) the ability to attract new sources of profitable businessfrom expansion of products or services or risks associated with entry into newmarkets, including geographies, products and services; (5) an interruptionor failure of our information systems or subversion of access or other systemcontrols may result in a significant loss of business, assets, or competitiveinformation; (6) significant changes in supplier terms and relationships; (7) terminationof a supply or services agreement with a major supplier or product supplyshortages; (8) continued consolidation in the wireless handset carriermarket; (9) extended general economic downturn; (10) loss of businessfrom one or more significant customers; (11) customer and geographical accountsreceivable concentration risk; (12) rapid product improvement and technologicalchange resulting in inventory obsolescence; (13) future terrorist or militaryactions; (14) the loss of a key executive officer or other key employees; (15)changes in consumer demand for multimedia wireless handset products andfeatures; (16) our failureto adequately adapt to industry changes and to managepotential growth and/or contractions; (17) future periodic assessments requiredby current or new accounting standards such as those relating to long-livedassets, goodwill and other intangible assets and expensing of stock options andvaluing gain or loss on fair value of derivatives may result in additionalnon-cash income or expenses; (18) seasonal buying patterns; (19) dependency onLatin American sales; (20) uncertain political and economic conditionsinternationally; and (21) the impact, if any, of changes in EITF 00-19 orSFAS 133 guidance as it relates to warrants and registration rights. Our actualresults could differ materially from those anticipated in our forward lookingstatements.

Subsequent to ourfiling of the Form 10-Q for the quarter ended March 31, 2006,we determined that a restatement of our previously reported financialinformation was required, in part, due to our further consideration of EITF 00-19,“Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock” in evaluating whether there were 

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ongoing derivative instruments contained inoutstanding warrants issued in conjunction with the Securities PurchaseAgreements entered into in January 2006 by and among the Company andcertain institutional and accredited investors, pursuant to which we issued inconnection with the sale of common stock. Accordingly, we restated previouslyreported unaudited Consolidated Financial Statements for the period ended March 31,2006 as further described in this Form 10-Q/A.

InfoSonics hasinstituted in the past and continues to institute changes to its strategies,operations and processes to address these risk factors and to mitigate theirimpact on InfoSonics’ results of operations and financial condition. However,no assurances can be given that InfoSonics will be successful in these efforts.For a further discussion of significant factors to consider in connection withforward-looking statements concerning InfoSonics, reference is made to Item 1ARisk Factors of InfoSonics’ Annual Report on Form 10-K for the yearended December 31, 2005; other risks or uncertainties may be detailed fromtime to time in InfoSonics’ future SEC filings. InfoSonics does not intend toupdate any forward-looking statements.

**Overview**

Theresults of operations presented below reflect certain restatements to ourpreviously reported results of operations for the three months ended March 31,2006. See Note 13 of the Notes to our unaudited Consolidated FinancialStatements.

We distributewireless handsets and accessories in the United States and are one of thefastest growing distributors of wireless handsets and accessories in LatinAmerica. We provide end-to-end handset and wireless terminal solutions forcarriers in both the United States and Latin America. We distribute products ofseveral key manufacturers, including i-mate, Motorola, Nokia, Novatel, Samsung,VK Mobile, and others. As an integral part of our customers’ supply chain, weperform value added services and solutions, including product approval andcertification, light assembly, warehousing, logistics services (packing,shipping and delivery), marketing campaigns, warranty services and end-usersupport. We provide these services to wireless telecommunications manufacturersin order to facilitate sales to carriers (network operators), agents, resellers,distributors, independent dealers and retailers in the United States and LatinAmerica. During 2005, we significantly changed our business model from sellingproducts to dealers and agents in the United States and Latin America toproviding products, services and solutions primarily to carriers in suchregions. As a result, we believe that this shift in customer focus enables usto better service our customers and vendors as we play a more important role inthe supply chain for wireless handsets.

Our corporateheadquarters is in San Diego, California and from our facility in MiamiFlorida, where we have our Latin America sales and executive offices, weoperate a warehouse and distribution center. This distribution center servicesour customers in the United States and Latin America. Our distribution andsolution services include product testing, certification, carriers’ approval,light assembly, warehousing, logistics services (packing, shipping anddelivery), marketing campaigns, warranty services and end-user support. Theseservices are provided for manufacturers of wireless telecommunicationsproducts, in order to facilitate sales to network carriers, agents, resellers,distributors, independent dealers and retailers in the United States and LatinAmerica. Additionally, we have wholly-owned subsidiaries in Latin America whichconduct some of our business activities in their respective regions of LatinAmerica, including Primasel S.A., which we purchased in January 2005 andlater changed its name to InfoSonics S.A. See Note 2 to our unauditedConsolidated Financial Statements for financial information regarding thispurchase.

Due to seasonaland other factors, our interim results may not be indicative of annual results.Our operating results are influenced by several seasonal and other factors,which may cause our revenues and operating results to fluctuate on a quarterlybasis, including but not limited to the timing and introduction of new productsby our suppliers and competitors, promotions and subsidies by wireless networkoperators, technical and certification delays by industry bodies as well as theoperators, purchasing patterns of customers, and the timing of holidays andother events affecting consumer demand.

**Areas ofManagement Focus and Performance Indicators**

We focus on theneeds of our customers, developing and maintaining close relationships withmanufacturers, expanding in and entering into new markets, and sourcing new andinnovative products, while maintaining close attention to operationalefficiencies and costs. We intend to increase shipping volumes and improveefficiencies to enable higher levels of profitability and earnings growth.

Performanceindicators that are key for the monitoring and management of our businessinclude operating and net income, cost of sales and gross profit percentage,operating expenses as a percent of revenues, and overall net sales growth. Wemake extensive use of our customized information system to closely monitor allaspects of our business, including customer relationship management,intelligent purchasing, inventory control, and inventory flow, line item margincontrol for every order, and weighted average cost and statistical data forevery product, customer and supplier. We believe a strong focus on providingbetter service to customers leads to increased customer satisfaction andretention and potential increases in sales.

Management spendsa significant amount of time traveling with the purpose of spending time withkey customers, suppliers and employees. We believe that these relationships arevital to our success and we will continue to dedicate a significant amount oftime to this area.

**IndustryTrends, Challenges, Risks and Growth Opportunities**

According to a February 2006report by JP Morgan Chase & Co, in 2005, overall worldwide wirelesshandset sales 

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increased by approximately 24%, and are forecasted toincrease 15% in 2006. A rapid decline in wireless handset sales growth couldnegatively impact our net sales. Excess supply conditions can reduce the marketprices of the products we sell and therefore affect our ability to generate netsales and gross profit at historical levels and could affect the value of ourinventory. Conversely, should manufacturers be unable to respond to an unanticipatedincrease in demand on a timely basis, we, along with others in our industry,could experience supply constraints that would affect our ability to deliverproducts. We are unable to quantify these effects, as it is difficult topredict future supply conditions and demand patterns which affect our abilityto meet customer demand or sell wireless handsets at an acceptable grossprofit.

**CompanySpecific Trends, Challenges, Risks and Growth Opportunities**

In the quarterended March 31, 2006, our net sales increased by 125%, and wirelesshandset units sold increased by 253%, compared with the quarter ended March 31,2005. Although we have incorporated growth into our strategy, there can be noassurances that these trends will continue. Similarly, although we haveexperienced high levels of growth in operating income from continuingoperations (92% increase over the same quarter last year), we cannot anticipatefuture growth to be at the same levels. We experienced significant growth inour Latin America and Argentina regions during the quarter ended March 31,2006, combined they accounted for 97% of sales for the quarter compared to 36%for the quarter ended March 31, 2005. This increase is primarily theresult of our increased sales and marketing efforts in both of those regions,in addition to the overall wireless handset growth those regions haveexperienced in the recent past. By contrast, the U.S. regional revenuesdecreased to 3% of total sales from 64% of sales during the quarter ended March 31,2005. During the quarter ended March 31, 2006, due to delayedintroductions and longer than expected approval certifications processes forcertain products in the U.S., we were unable to procure and deliver product tomeet the needs of our U.S. customers. Our strategy incorporates overall growthelements for each aspect of our business, which we hope will result incontinued earnings growth; however there can be no assurance that this trendwill continue. In addition, our supply of product is highly dependent upon themanufacturers continuing our business relationships within our assignedterritories. Such manufacturer relationships could be terminated in the futureand might not be replaced by other manufacturers.

 
| ** **                | ** ** | **Quarter Ended March 31,**       | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Net sales                 |       | $                                                | 54,127     |   | $ | 24,024 |   |
| Increase over  prior year |       | 125                                              | %          | 28 | % |
|                           |            |                                                  |            |  |  |  |  |

 

**Results of Operations:**

***Quarter Ended March 31, 2006 Compared With QuarterEnded March 31, 2005***

For the quarterended March 31, 2006, we had income from continuing operations of $1.2million, or $.15 per diluted share, on net sales of $54.1 million. This was anincrease of 266% when compared to the quarter ended March 31, 2005 of$321,000, or $.05 per diluted share, on net sales of $24.0 million. Thisincrease was due to overall sales growth and to non-cash items, including thechange in fair value of derivative liability of $399,000 and stock optionexpense of $52,000. Our revenue increase of 125% was primarily attributable toa 253% increase in handset volume offsetting a 33% decrease in average sellingprice per unit. The geographic mix of revenues shifted significantly in 2006 assales in Argentina and Latin America increased to 61% and 36% respectively oftotal net sales. Combined, these two regions represented 97% of net sales inthe quarter ended March 31, 2006 as compared to 36% in the quarter ended March 31,2005. This increase was primarily the result of our increased sales andmarketing efforts in both of those regions, in addition to the overall cellulargrowth those regions have experienced in the recent past. Sales in the UnitedStates made up the remainder of our sales in the quarter ended March 31,2006, declining 89% to $1.7 million, or 3% of total net sales. The decrease inour U.S. sales resulted from increased competition and product introductiondelays for the region from our primary vendors. In addition, our interestexpense increased for the quarter ended March 31, 2006 to $81,000 from$25,000 in the same quarter last year which negatively impacted our dilutedearnings per share. The increase in interest expense primarily resulted fromour net sales growth and the capital necessary to fund such growth.

 
| ** **                                             | ** ** | **Quarter ended March 31,**                                                 | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                             | ** ** | **2006**                                                                                   | ** ** | **2005**   | ** ** | **Increase** | ** ** |
| ** **                                             | ** ** | **(Dollar amounts in thousands,  except per share amounts)** | ** ** | ** ** | ** ** |
| Net Sales                                              |       | $                                                                                          | 54,127     |       | $          | 24,024 |   | 125 | % |
| Gross Profit                                           |       | 4,180                                                                                      |       | 2,131      |       | 96 | % |
| Income from  continuing operations                     |       | 1,175                                                                                      |       | 321        |       | 266 | % |
|                                                   |       |                                                                                       |       |       |       |   |   |
| Diluted Earnings per  share from continuing operations |       | $                                                                                          | 0.15       |       | $          | 0.05 |   | 300 | % |

 

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Revenues by geographicregion
| ** **    | ** ** | **Quarter ended March 31,**       | ** ** |
|---------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)** | ** ** |
| United States |       | $                                                | 1,721      |   | $ | 15,341 |   |
| Latin America |       | 19,375                                           |       | 6,152 |   |
| Argentina     |       | 33,031                                           |       | 2,531 |   |
| Total         |       | $                                                | 54,127     |   | $ | 24,024 |   |

 

**Cost ofSales, Gross Profit and Gross Margin**

For the quarterended March 31, 2006, cost of sales was $49.9 million, or 92.3% of sales,compared with $21.9 million, or 91.1% of sales, for the quarter ended March 31,2005. The increase in our cost of sales was a direct result of the increasedwireless handset volume we purchased and sold during the quarter ended March 31,2006. In addition, the decrease in gross margin was the result of product andregion mix, as different product and different regions have varying margins.

For the quarter endedMarch 31, 2006, our gross profit increased to $4.2 million from $2.1million, an increase of 96%, as compared with the same quarter last year. Theincrease in gross profit was primarily the result of increased sales levelsoffset by a decrease in gross margin to 7.7% during the quarter ended March 31,2006 from 8.9% in the quarter ended March 31, 2005.
| ** **    | ** ** | **Quarter Ended March 31,**       | ** ** |
|---------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Cost of sales |       | $                                                | 49,947     |   | $ | 21,893 |   |
| Gross profit  |       | $                                                | 4,180      |   | $ | 2,131 |   |
| Gross margin  |       | 7.7                                              | %          | 8.9 | % |

 

**OperatingExpenses and Operating Income from Continuing Operations**

For the quarterended March 31, 2006, operating expenses were $3.1 million, an increase of98%, as compared with the same quarter last year. As a percentage of net sales,operating expenses were 5.7% for the quarter ended March 31, 2006 comparedwith 6.5% in the same quarter last year. In compliance with SFAS 123R, duringthe quarter ended March 31, 2006, we incurred $52,000 of non-cash expense,included in our operating expenses, as compared to zero in the prior years’quarter. In addition the increase in operating expense dollars is also a resultof increased facility physical space and operational expenses related togrowth, as well as the profit sharing related to our Argentina business. Thedecrease in operating expenses as a percentage of revenues is a primary resultof increased revenues together with management’s efforts to utilizeefficiencies, as we have structured our operating expenses to fluctuate withthe varying levels of sales volume on a quarterly basis.

For the quarterended March 31, 2006, our operating income from continuing operations was$1.1 million, as compared with $0.6 million for the quarter ended March 31,2005. As a percentage of net sales, operating income from continuing operationswas 2.0% for the quarter ended March 31, 2006 as compared to 2.3% for thequarter ended March 31, 2005. The decrease in operating income fromcontinuing operations as a percentage of net sales for the quarter ended March 31,2006 was a result of the factors discussed above, specifically the decrease ingross margin. The dollar increase in income from continuing operations is dueto increased sales, increased gross profit dollars, and no change in operatingcost per dollar of revenue.

**OperatingExpenses**
| ** **             | ** ** | **Quarter Ended March 31,**       | ** ** |
|------------------------|------------|--------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Operating  expenses    |       | $                                                | 3,096      |   | $ | 1,567 |   |
| Percentage of  revenue |       | 5.7                                              | %          | 6.5 | % |
|                        |            |                                                  |            |  |  |  |  |

 

**OperatingIncome from Continuing Operations**
| ** **                                   | ** ** | **Quarter Ended March 31,**       | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Operating income  from Continuing Operations |       | $                                                | 1,084      |   | $ | 564 |   |
| Percentage of  revenue                       |       | 2.0                                              | %          | 2.3 | % |
|                                              |            |                                                  |            |  |  |  |  |

 

**OtherIncome**

During the firstquarter 2006, we had income from a non-cash change in fair value of derivativeliability (for financing related warrants) of $399,000 and non-cash expenserelated to stock-option compensation of $52,000. To comply with accounting rules fortreatment of derivative liabilities (SFAS 133 and EITF 00-19), werecorded a non-cash gain during this quarter, based on the calculated change infair value of the warrants, which were issued in conjunction with our financingduring the first quarter. As these 

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warrants have been reclassified as equity we do notanticipate future quarterly adjustments related to these warrants, unlesscontrary guidance is provided publicly by applicable accounting standardsbodies or the SEC. However, we will continue to recognize non-cash compensationexpense (SFAS 123R) each quarter for outstanding stock options. This non-cashexpense has the potential to materially adversely affect on our earnings pershare on a quarterly basis.

 
| ** **                                    | ** ** | **Quarter Ended March 31,**       | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Change in fair  value of derivative liability |       | $                                                | 399        |   | $ | — |   |
| Interest expense                              |       | (81                                              | )          | (25 | ) |
| Other Income (expense)  total                 |       | $                                                | 318        |   | $ | (25 | ) |

 

**FirstQuarter 2006 Results with Reconciliation of Non-GAAP Financial Measures to theCorresponding GAAP Financial Measures (unaudited)**

The following are selectedresults excluding and including the impact of SFAS 123R and SFAS 133:

 
| Three months ended  March 31, 2006 | ** ** | **Actual** | ** ** | **Adjustment** | ** ** | **Non-GAAP  Pro-forma (c)** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------|------------|----------------------------------|------------|
|                                                        | ** ** | ** ** | ** ** | $              | 52,443     | (a)                              | ** ** | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | ** **     | ** ** | ** **                       | ** ** |
|                                                        |       |       |       | (399,009       | )(b)       |                             |       |
| Net income                                             |       | $          | 1,173,327  |           | $          | (346,566                         | )          | $ | 826,761 |   |
|                                                        |       |       |       |           |       |                             |       |
| Diluted earnings per  share                            |       | $          | 0.15       |           | $          | (0.04                            | )          | $ | 0.11 |   |

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(a)  To eliminate stock-option compensation charges (SFAS 123 R) recorded in thefirst quarter of 2006.

(b)  To eliminate change in fair value of derivative liability (warrants) (SFAS 133)recorded in the first quarter of 2006.

(c)   Non-GAAP pro-forma basis ofpresentation.

Effective January 1,2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R,“Share-Based Payment”, which requires the cost relating to share-based paymenttransactions in which an entity exchanges its equity instruments for goods orservices from either employees or non-employees recognized in the ConsolidatedFinancial Statements as the goods or services are rendered. The cost ismeasured at the fair value of the equity instrument issued. The Company is nolonger permitted to follow the intrinsic value accounting method under previousaccounting guidance, which resulted in no expense for stock options for whichthe exercise price was equal to the fair value of the underlying stock on thedate of grant.

The Companybelieves that excluding the incremental impact of SFAS 123R from net incomeprovides meaningful supplemental information regarding its financial resultsfor the three months ended March 31, 2006 as compared to the same periodin 2005 since the Company’s Consolidated Financial Statements issued prior to January 1,2006 did not change as a result of adopting SFAS 123R. The Company alsobelieves that this financial information is useful in assessing the Company’shistorical performance and year-over-year growth and when planning, forecastingand analyzing future periods. The incremental impact of SFAS 123R during thethree months ended March 31, 2006 represents the stock option expenserelated to stock options issued prior to the adoption of SFAS 123R and vestedduring the current period and the impact of estimating forfeitures related tononvested shares.

In June 1998,FASB issued SFAS No. 133, Accounting for Derivative Instruments andHedging Activities. The Statement establishes accounting and reportingstandards for derivative instruments, including certain derivative instrumentsembedded in other contracts, (collectively referred to as derivatives) and forhedging activities. It requires that an entity recognize all derivatives aseither assets or liabilities in the statement of financial position and measurethose instruments at fair value.

In January 2006,the Company sold shares of common stock including warrants to purchase commonstock from the Company. The Company evaluated the warrants in the transactionas derivatives in accordance with SFAS No. 133, at the time of theissuance of the warrants. The warrants, to the extent that they are to besatisfied with common stock of the Company, would normally be included asequity obligations. However, in the event that the Company does not achieveeffectiveness of the registration statement within a predetermined timeframe,the Company would have to pay penalties to the holders of the warrants.;therefore, the Company was required to record a liability for the fair value ofthe warrants determined under the Black-Scholes option pricing formula(included in the liabilities as a “derivative liability”). Subsequent to theinitial recording, the Company achieved effectiveness of the registrationstatement prior to the predetermined timeframe, therefore enabling thosewarrants to be moved to equity. The change in the fair value of the warrants,determined under the Black- Scholes option pricing formula from the initialtransaction date to the effectiveness date is recorded as an adjustment to the liability. The income relating tothe change in the fair value of the Company’s stock reflected in the change inthe fair value of the warrants is included as other income (expense). As thewarrants have been reclassified to equity, the Company will not need to “markto market” and therefore does not anticipate having future quarters effected bythese warrantsand their respective values under the Black-Scholes optionpricing formula.   See Note 11 of theNotes to our unaudited Consolidated Financial Statements.

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**FinancialCondition, Liquidity and Capital Resources**

At March 31,2006, we had $12.3 million in cash. In January 2006, we raised $14.4million gross proceeds from the sale of our common stock (and relatedwarrants). We believe that our existing cash resources, together with ourprojected cash flow from operations and the net proceeds from our bank line ofcredit, will be sufficient to allow us to implement our strategy and growthplan.

During the quarterended March 31, 2006, in addition to capital raised from the sale of ourcommon stock (and related warrants), we continued to leverage our bank andvendor lines of credit to help fund our growth. The net cash used by operatingactivities was $16.8 million for the quarter ended March 31, 2006 whichresulted primarily from increased accounts receivable and increased inventorylevels. The approximately $23.7 million increase in accounts receivable was dueto increased sales and increased net terms to some regions during the quarterended March 31, 2006. The approximately $2.4 million increase in inventoryand $2.4 increase in prepaid inventory was due to higher sales levels andbuying opportunities which were available to us at the end of the quarter endedMarch 31, 2006. Allowance for doubtful accounts at March 31, 2006increased to $865,000 compared to $553,000 at December 31, 2005. Thisincrease was related to our increased sales levels and increased accountsreceivable balance at March 31, 2006. We believe that at March 31,2006, our reserve for doubtful accounts is adequate. Our increase in accountspayable of $10.0 million was an offset to the cash used by increased accountsreceivable and inventory.

Days of salesoutstanding at March 31, 2006 were 53 days compared with 34 days at December 31,2005. Normal payment terms require our customer payment on a net 30-dayor net 60-day basis depending on the region. We are constantly workingwith our customers to reduce our days of sales outstanding. The increased useof net 60-day terms was required to remain competitive in several of theregions we currently operate.

The net cash usedin investing activities was $27,000 for the three months ended March 31,2006 compared with $43,000 for the three months ended March 31, 2005. Thisuse of cash was primarily the result of expenditures for new furniture andfixtures related to increased office, technical assembly and warehouse space,as well as the technical tools and equipment necessary for the customizationprocess.

The net cashprovided by financing activities for the three months ended March 31, 2006of $21.5 million was primarily the result of the sale of 1.1 million shares ofour common stock (and 358,600 related warrants) for net proceeds of $13.4million in addition to borrowings from our bank line of credit.

Our net workingcapital at March 31, 2006 was $31.5 million, compared with $17.0 millionat December 31, 2005. This change was due primarily to our sale of commonstock (and related warrants) and our net income for the quarter ended March 31,2006.

**Borrowings**

We have a fullycollateralized line of credit with Wells Fargo HSBC Trade Bank N.A. that allowsus to borrow up to a maximum of $25 million with a maturity date of October 1,2006. Although we cannot assure that this line of credit will be extended orrenewed, we believe that we can obtain an extension or renewal on reasonableterms. Our advances cannot exceed 80% of eligible domestic accounts receivableand 85% of eligible foreign insured accounts.

Outstandingbalance under the line of credit bears interest on a monthly basis at eitherWells Fargo’s prime rate**(**8.0% at May 10, 2006) or at theLondon Inter-Bank Offering Rate (“LIBOR”) plus 1.5% (5.0% at May 10, 2006)for a fixed amount drawn down. Our outstanding balance at April 30, 2006was approximately $6.4 million. In addition to reporting and othernon-financial covenants, the line of credit contains certain financialcovenants which, among other items, require us to maintain a tangible net worthof not less than $12 million a quick ratio of not less than 1-to-1,a debt-to-tangible net worth ratio of not greater than 2-to-1, apre-tax profit of not less than $1 on a rolling four-quarter basis, and netincome after taxes of not less than $1 on an annual basis. We believe that wecomplied with these covenants at May 10, 2006.

For the quarterended March 31, 2006 and the year ended December 31, 2005 amountsadvanced against our then existing line of credit were approximately $17.9 and$10.0, million, respectively. Our credit lines have been important parts ofgrowing our business, and market changes affecting accounts receivable coulddiminish the borrowing base of available funds. For the quarters ended March 31,2006 and December 31, 2005, advances were 72% and 71%, respectively, ofthe available borrowing base.

Subsequent Events

Subsequent to thequarter ended March 31, 2006, we entered into a lease agreement for a newfacility in Mexico. We plan to use the facility for assembly, warehouse,distribution and logistical services and as our sales and headquarters forMexico. The term of the lease agreement is three years and has a total rentalexpense of $470,000 based on the applicable exchange rate at March 31,2006.

Critical Accounting Policies

We believe thefollowing critical accounting policies are important to the presentation of ourfinancial condition and results, and require management’s judgments to makeestimates about the effects of matters that are inherently uncertain.

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*Revenue Recognition and AccruedChargebacks*

Revenues arerecognized (1) upon shipment of the products to customers, (2) whencollection of the outstanding receivables are probable; and (3) when thefinal price of the product has been determined. The carrier has nine monthsfrom date of activation to charge back amounts previously credited to us if thecustomer terminates its service. We provide an allowance for estimated returnsbased on our experience, which estimate is recorded as a contra asset againstaccounts receivable. A provision for returns is provided in the same period inwhich the related commission revenue is recorded. Customer credit-worthinessand economic conditions may change and increase the risk of collectibility andcontract terminations and may require additional provisions, which wouldnegatively impact our operating results.

*Allowance for Doubtful Accounts andSales Return Reserve*

Credit evaluationsare undertaken for all major sale transactions before shipment is authorized.Normal payment terms require payment on a net 30 or 60 day basis depending oncustomer. On an ongoing basis, we analyze the payment history of customeraccounts, including recent customer purchases. We evaluate aged items in theaccounts receivable aging and provide reserves for doubtful accounts andestimated sales returns. Customer credit worthiness and economic conditions maychange and increase the risk of collectibility and sales returns, and mayrequire additional provisions, which would negatively impact our operatingresults.

*Inventory Write-Off and Effect onGross Margin*

We regularlymonitor inventory quantities on hand and record a provision for excess andobsolete inventories based primarily on historical usage rates and ourestimated forecast of product demand for a period of time, generally ninemonths. Because of obsolescence, we will generally provide a full reserve forthe costs of our inventories in excess of our relevant forecast for theapplicable period. We attempt to control our inventory levels so that we do nothold inventories in excess of demand for the succeeding nine months. However,because we need to place non-cancelable orders with significant lead time andbecause it is difficult to estimate product demand, it is possible that we willbuild inventories in excess of demand for the future periods. If we haveinventories in excess of estimated product demand, we will provide a reserve,which could have a material adverse effect on our reported results ofoperations and financial position.

*DerivativeInstruments*

In connection withthe sale of debt or equity instruments, we may sell options or warrants topurchase our common stock. In certain circumstances, these options or warrantsmay be classified as derivative liabilities, rather than as equity.Additionally, the debt or equity instruments may contain embedded derivativeinstruments, such as variable conversion options, which in certaincircumstances may be required to be bifurcated from the host instrument andaccounted for separately as a derivative instrument liability.

The identificationof, and accounting for, derivative instruments is complex. Derivativeinstrument liabilities are re-valued at the end of each reporting period, withchanges in fair value of the derivative liability recorded as charges orcredits to income in the period in which the changes occur. For options,warrants and bifurcated conversion options that are accounted for as derivativeinstrument liabilities, we determine the fair value of these instruments usingthe Black-Sholes option pricing model, binomial stock price probability trees,or other valuation techniques, sometimes with the assistance of a certifiedvaluation expert. These models require assumptions related to the remainingterm of the instruments and risk-free rates of return, our current common stockprice and expected dividend yield, and the expected volatility of our commonstock price based on not only the history of our stock price but also theexperience of other entities considered comparable to us. The identificationof, and accounting for, derivative instruments and the assumptions used tovalue them can significantly affect our financial statements.

**Item3. Quantitative and Qualitative Disclosures About Market Risk**

The primaryobjective of the following information is to provide forward-lookingquantitative and qualitative information about our potential exposure to marketrisks. The term “market risk” for us refers to the risk of loss arising fromadverse changes in interest rates and various foreign currencies. Thedisclosures are not meant to be precise indicators of expected future losses,but rather indicators of reasonably possible losses. This forward-lookinginformation provides indicators of how we view and manage our ongoing marketrisk exposures.

**InterestRate**

We are exposed tomarket risk from changes in interest rates on our outstanding revolving line ofcredit. At March 31, 2006, we had approximately $17.9 million outstanding,which could be affected by changes in short term interest rates. The interestrate for the revolving line of credit is the prime rate (7.75% at March 31,2006) or LIBOR plus 1.50% (4.875% at March 31, 2006). For every 1%increase in our bank’s prime rate or LIBOR, our interest expense would increaseby $100,000 assuming $10.0 million remained outstanding for the entire year.

The abovesensitivity analysis for interest rate risk excludes accounts receivable,accounts payable and accrued liabilities because of the short-term maturity ofsuch instruments. The analysis does not consider the effect this movement mayhave on other variables including changes in sales volumes that could beindirectly attributed to changes in interest rates. The actions that we would

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take in response to such a change are also notconsidered. If it were possible to quantify this impact, the results could wellbe different than the sensitivity effects shown above.

**MarketRisk**

A substantialportion of our revenue and expenses are transacted in markets outside theUnited States, however all sales transactions and accounts receivable aredenominated in U.S. dollars. As a result of our international sales, our futureoperating results could be adversely affected by a variety of factors,including changes in specific countries’ political, economic or regulatoryconditions and trade protection measures. Our market risk management includesan accounts receivable insurance policy for both our domestic and foreignsales. However, there can be no assurance that our insurance policy willsubstantially offset the impact of fluctuations in currency exchange rates,political, economic or regulatory conditions on its results of operations andfinancial position. Foreign currency fluctuations did not have a materialimpact on our financial results during the quarter ended March 31, 2006.

**Item4. Controls and Procedures**

**DisclosureControls**

The Company, underthe supervision and with the participation of its management, including itsprincipal executive officer and principal financial officer, evaluated theeffectiveness of the design and operation of its disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of the end of the period covered by this report. Based onthis evaluation, the principal executive officer and principal financialofficer concluded that the Company’s disclosure controls and procedures areeffective as of the end of the period covered by this report. There have beenno changes in our internal control over financial reporting during the quartercovered by this report that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

**Changesin Internal Control Over Financial Reporting**

The principalexecutive officer and principal financial officer also conducted an evaluationof the Company’s internal control over financial reporting (as defined inExchange Act Rule 13a-15(f)) (“Internal Control”) to determinewhether any changes in Internal Control occurred during the quarter ended March 31,2006, that have materially affected or which are reasonably likely tomaterially affect Internal Control. Based on that evaluation, there has been nosuch change during such period.

**PART II.OTHER INFORMATION**

**Item1. Legal Proceedings**

We may becomeinvolved in certain legal proceedings and claims which arise in the normalcourse of business. As of March 31, 2006, we did not have any significantlitigation outstanding, and management does not expect any pending litigationmatters to have a material impact on our liquidity or the financial statementstaken as a whole.

**Item1A. Risk Factors**

In addition to theother information set forth in this report, you should carefully consider thefactors discussed in Part I, “Item 1A. Risk Factors” in our Annual Reporton Form 10-K for the year ended December 31, 2005, which couldmaterially affect our business, financial condition or future results. The risksdescribed in our Annual Report on Form 10-K are not the only risksfacing us. Additional risks and uncertainties not currently known to us or thatwe currently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results. Except as set forthbelow, there were no material changes to the risk factors included in ourAnnual Report on Form 10-K for the year ended December 31, 2005during the period covered by this report.

***We buy a significant amount of our products from a limitednumber of suppliers, who may not provide us with competitive products atreasonable prices when we need them in the future.***

We purchasewireless handsets and accessories principally from wireless communicationsequipment manufacturers and distributors. We depend on these suppliers toprovide us with adequate inventories of currently popular brand name productson a timely basis and on favorable pricing and other terms, as well as we aredependent upon our vendors for their own abilities and financial stability. Forthe quarter ended March 31, 2006, two vendors accounted for 47% and 19%respectively of our total cost of sales. We currently have one exclusive andseveral non-exclusive agreements with our principal suppliers, which can beterminated on short notice and provide for certain territorial restrictions.Our suppliers may not offer us competitive products on favorable terms or withtimely delivery. In addition new products from other manufacturers could impactthe demand for products from manufacturers we represent. From time to time, wehave been unable to obtain sufficient product supplies. Any failure or delay byour suppliers, particularly our three primary vendors, in supplying us withproducts on favorable terms may severely diminish our ability to obtain anddeliver products to our customers on a timely and competitive basis. If we loseany of our principal suppliers, or if these suppliers are unable to fulfill ourproduct needs, or if any principal supplier imposes substantial price increasesand alternative sources of supply are not readily available, it would have amaterial adverse effect on our results of operations.

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***The loss or reduction in orders from principal customers ora reduction in prices we are able to charge these customers will have anegative impact upon our revenues and could cause our stock price to decline.***

Our two largestcustomers in the quarter ended March 31, 2006 represented 31% and 23% ofour net sales. These customers are carriers in Latin America. The markets weserve are subject to severe price competition. Additionally, our customers arenot contractually obligated to purchase product from us. For these and otherreasons such as competitive pricing and competitive pressures, customers mayseek to obtain products or services from us at lower prices than we have beenable to obtain from these customers in the past. This could occur, for example,in the case of a customer purchasing large quantities of a product from us, whothen terminates this relationship because the customer can obtain a lower priceby buying directly from the manufacturer. The loss of any of our principalcustomers, a reduction in the amount of product or services our principalcustomers order from us or the inability to maintain current terms, includingprice, with these or other customers could have an adverse effect on ourfinancial condition, results of operations and liquidity. We have experiencedlosses of certain customers through industry consolidation and ordinary courseof business and there can be no assurance that any of our customers willcontinue to purchase products or services from us or that their purchases willbe at the same or greater levels than in prior periods.

***Approximately 97% of our revenues during the quarter ended March 31,2006******were generated outside of the UnitedStates in countries that may have volatile currencies or other risks.***

We engage insignificant sales activities in territories and countries outside of the UnitedStates, particularly Latin American countries, including Argentina. All oursales transactions are completed in U.S. dollars. The fact that we distributeproducts into a number of countries exposes us to increased credit risks,customs duties, import quotas and other trade restrictions, potentially greaterand more unpredictable inflationary pressures, and shipping delays. Changes mayoccur in social, political, regulatory and economic conditions or in laws andpolicies governing foreign trade and investment in the territories andcountries where we currently distribute products. United States laws andregulations relating to investment and trade in foreign countries could alsochange to our detriment. Any of these factors could have a material adverseeffect on our business and operations. Although we purchase and sell productsand services in U.S. dollars and do not engage in exchange swaps, futures oroptions contracts or other hedging techniques, fluctuations in currencyexchange rates could reduce demand for products sold in U.S. dollars. We cannot predict the effectthat future exchange rate fluctuations will have on our operating results. Wemay in the future engage in currency hedging transactions, which could resultin our incurring significant additional losses.

***We have outstanding indebtedness, which is secured bysubstantially all our assets and which could prevent us from borrowingadditional funds, if needed.***

We had outstandingdebt in the amount of approximately $17.9 million and $10.0 million at March 31,2006 and December 31, 2005, respectively, in the form of a bank line ofcredit of up to $25 million based on a borrowing base of which is based on apercentage of eligible accounts receivable. If we violate our loan covenants,default on our obligations or become subject to a change of control, ourindebtedness would become immediately due and payable. Any significant decreasein our level of eligible accounts receivable will reduce our ability to borrowadditional funds to adequately finance our operations and expansion strategies.The terms of our credit facility could substantially prohibit us from incurringadditional indebtedness, which could limit our ability to expand ouroperations. We are also subject to negative covenants that, among other things,limit our ability to sell certain assets and make certain payments, includingbut not limited to, dividends, repurchases of common stock and other paymentsoutside the normal course of business, as well as prohibiting us from mergingor consolidating with another corporation or selling all or substantially allof our assets.

***Stockholders may be diluted as a result of past, futureofferings or other financings.***

We may need toraise additional capital through one or more future public offerings, privateplacements or other financings involving our securities. As a result of thesefinancings, ownership interests in our company may be greatly diluted. In January 2006**,** we sold an aggregate 1,100,000 shares ofour common stock at $13.10 per share, for total gross proceeds of $14,410,000.The purchasers were also issued warrants to purchase an aggregate of 330,000shares of our common stock at an exercise price of $18.38 per share during theperiod beginning six months after the date of the purchase agreement and endingfour years later. We also issued three year term warrants to purchase a totalof 28,600 shares to the placement agents in the offering with varying exerciseprices (22,000 shares at $13.76 per share and 6,600 at $19.30 per share).

**Item6.**** Exhibits**

 
| 10.1 |   | Securities Purchase Agreement by and among  InfoSonics Corporation and the investors listed thereon dated  January 30, 2005 (1)                                                    |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 |   | Form of Common Stock Purchase Warrant (1)                                                                                                                                          |
| 31.1 |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934,  implementing Section 302 of Sarbanes-Oxley Act of 2002 (*) |
| 31.2 |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934,  implementing Section 302 of Sarbanes-Oxley Act of 2002 (*) |
| 32.1 |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 (*)                           |
| 32.2 |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 (*)                           |

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(1)  Incorporatedby reference from the Company’s Current Report on Form 8-K, filed onFebruary 2, 2006.

(*)  Filed herewith

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|        |   |                |   |   |   | InfoSonics  Corporation         |   |
|--------|--------|---------------------|--------|--------|--------|---------------------------------|--------|
|   |   |                |   |   |   |                            |   |
| Date:  |   | June 12,  2006 |   | By:    |   | /s/  Joseph Ram       |   |
|   |   |                |   |   |   | Joseph Ram                      |   |
|   |   |                |   |   |   | Chief Executive Officer         |   |
|   |   |                |   |   |   |                            |   |
|   |   |                |   |   |   |                            |   |
| Date:  |   | June 12,  2006 |   | By:    |   | /s/  Jeffrey Klausner |   |
|   |   |                |   |   |   | Jeffrey Klausner                |   |
|   |   |                |   |   |   | Chief Financial Officer         |   |
|   |   |                |   |   |   |                            |   |

 

 

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