**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10 - Q**

 

**x       ****QUARTERLY REPORT UNDERSECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934.**

 

**For the quarterly period ended June 30, 2006**

 

**OR**

 

**o        TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition periodfrom                to**

 

**CommissionFile Number - 001-32217**

 

**InfoSonics Corporation**

(Exact name of registrant as specified in itscharter)

 

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

 

**5880Pacific Center Blvd San Diego, CA 92121**

(Address of principal executive offices includingzip code)

 

**(858)373-1600**

(Registrant’s telephone number, including areacode)

 

**Not Applicable**

(Former Name or Former Address, if Changed SinceLast Report)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

Yes   x   No o

 

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).

Large Accelerated Filer o     Accelerated Filer o     Non-Accelerated Filer x

 

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

Yes  o   No x

 

As of August 10, 2006, theRegistrant had 13,982,608 sharesoutstanding of its $.001 par value common stock.

 

----

 

**InfoSonicsCorporation and Subsidiaries**

 

**Quarterly Reporton Form 10-Q For The Period Ended****June 30, 2006**

 

**Table of Contents**

 
| **PART I.  FINANCIAL INFORMATION** |
|------------------------------------|
|                               |   |   |
| Item 1.                            | Financial  Statements |   |
|                               |   |   |
| •                             | Consolidated  Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005 |   |
|                               |   |   |
| •                             | Consolidated Statements of Income  for the Three and Six Months Ended June 30, 2006 and 2005 (unaudited) |   |
|                               |   |   |
| •                             | Consolidated Statements of  Cash Flows for the Six Months Ended June 30, 2006 and 2005 (unaudited) |   |
|                               |   |   |
| •                             | Condensed  Notes to Consolidated Financial Statements (unaudited) |   |
|                               |   |   |
| 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 2.                            | Unregistered  Sales of Equity Securities and Use of Proceeds |   |
|                               |   |   |
| Item 3.                            | Defaults  Under Senior Securities |   |
|                               |   |   |
| Item 4.                            | Submission  of Matters to a Vote of Security Holders |   |
|                               |   |   |
| Item  5.                           | Other  Information |   |
|                               |   |   |
| Item 6.                            | Exhibits |   |

 

 

 

2

----

 

 

**Part I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                          | ** ** | **June 30,  2006** | ** **     | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|----------------|------------------------|------------|
| ** **                                                                                                                                          | ** ** | **(unaudited)**    | ** **     | ** **             | ** ** |
| **ASSETS**                                                                                                                                          | ** ** | ** **         | ** **     | ** **             | ** ** |
| **Current assets:**                                                                                                                                 |       |               |           |                   |       |
| Cash and cash equivalents                                                                                                                           |       | $                  | 24,682,320     |                   | $          | 7,712,915 |   |
| Trade accounts receivable, net of allowance for doubtful accounts of  $829,625 (unaudited) and $552,993                                             |       | 37,335,171         |           | 19,962,630             |       |
| Inventory, net of reserves  of $419,198 (unaudited) and $249,476                                                                                    |       | 7,786,151          |           | 5,612,343              |       |
| Prepaid inventory                                                                                                                                   |       | 3,172,297          |           | 1,680,086              |       |
| Prepaid expenses                                                                                                                                    |       | 394,585            |           | 231,400                |       |
| Prepaid taxes                                                                                                                                       |       | 624,893            |           | 246,796                |       |
| Net assets of discontinued  operations                                                                                                              |       | 17,625             |           | 18,931                 |       |
| Deferred tax assets —  current                                                                                                                 |       | 657,000            |           | 550,000                |       |
|                                                                                                                                                |       |               |           |                   |       |
| Total current assets                                                                                                                                |       | 74,670,042         |           | 36,015,101             |       |
|                                                                                                                                                |       |               |           |                   |       |
| Property and equipment,  net                                                                                                                        |       | 653,944            |           | 426,917                |       |
| Intangible assets                                                                                                                                   |       | 504,000            |           | 504,000                |       |
| Deferred tax assets —  non-current                                                                                                             |       | 19,000             |           | —                 |       |
| Other assets                                                                                                                                        |       | 114,330            |           | 90,791                 |       |
|                                                                                                                                                |       |               |           |                   |       |
| **Total assets**                                                                                                                                    | ** ** | **$**              | **75,961,316** | ** **             | **$**      | **37,036,809** | ** ** |
|                                                                                                                                                |       |               |           |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                       | ** ** | ** **         | ** **     | ** **             | ** ** |
|                                                                                                                                                |       |               |           |                   |       |
| **Current liabilities:**                                                                                                                            |       |               |           |                   |       |
| Line of credit                                                                                                                                      |       | $                  | 20,000,000     |                   | $          | 10,000,000 |   |
| Accounts payable                                                                                                                                    |       | 16,624,255         |           | 5,986,890              |       |
| Accrued expenses                                                                                                                                    |       | 4,302,790          |           | 2,983,880              |       |
| Income taxes payable                                                                                                                                |       | 73,386             |           | —                 |       |
|                                                                                                                                                |       |               |           |                   |       |
| Total current liabilities                                                                                                                           |       | 41,000,431         |           | 18,970,770             |       |
|                                                                                                                                                |       |               |           |                   |       |
| Deferred tax liability  non-current                                                                                                                 |       | —             |           | 22,207                 |       |
| ** **                                                                                                                                          | ** ** | ** **         | ** **     | ** **             | ** ** |
| **Total liabilities**                                                                                                                               |       | 41,000,431         |           | 18,992,977             |       |
| ** **                                                                                                                                          |       |               |           |                   |       |
| **Commitments and contingencies**                                                                                                                   |       |               |           |                   |       |
| ** **                                                                                                                                          |       |               |           |                   |       |
| **Stockholders’ equity:**                                                                                                                      |       |               |           |                   |       |
| Preferred stock, $0.001 par value 10,000,000 shares authorized (no  shares issued and outstanding as of applicable period end)                      |       | —             |           | —                 |       |
| Common stock, $0.001 par value 40,000,000 shares authorized  (13,896,068 and 11,252,844 shares issued and outstanding as of applicable  period end) |       | 13,896             |           | 11,252                 |       |
| Additional paid-in capital                                                                                                                          |       | 29,044,648         |           | 13,421,311             |       |
| Retained earnings                                                                                                                                   |       | 5,902,341          |           | 4,611,269              |       |
|                                                                                                                                                |       |               |           |                   |       |
| Total stockholders’ equity                                                                                                                     |       | 34,960,885         |           | 18,043,832             |       |
|                                                                                                                                                |       |               |           |                   |       |
| **Total liabilities and  stockholders’ equity**                                                                                                | ** ** | **$**              | **75,961,316** | ** **             | **$**      | **37,036,809** | ** ** |
|                                                                                                                                                     |            |                    |                |                        |            |  |  |  |  |  |

 

*Accompanying notesare integral part of these financial statements.*

 

3

----

 

 

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements of Income**

**(unaudited)**

 
| ** **                                                               | ** ** | **For the Three Months  Ended June 30,** | ** **  | **For the Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------|-------------|----------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                 | ** **  | **2005**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                               | ** ** | ** **                               | ** **  | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales**                                                            |       | $                                        | 58,279,558  |                                   | $          | 32,527,630 |   | $ | 112,406,647 |   | $ | 56,551,847 |   |
| **Cost of sales**                                                        |       | 53,947,902                               |        | 29,871,047                             |       | 103,895,126 |   | 51,764,004 |   |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Gross profit**                                                         |       | 4,331,656                                |        | 2,656,583                              |       | 8,511,521 |   | 4,787,843 |   |
| **Operating  expenses**                                                  |       | 4,019,995                                |        | 1,980,779                              |       | 7,116,095 |   | 3,547,693 |   |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Operating  income from continuing operations**                         |       | 311,661                                  |        | 675,804                                |       | 1,395,426 |   | 1,240,150 |   |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Other  income (expense)**                                              |       |                                     |        |                                   |       |   |   |   |   |
| Change in fair  value of derivative liability                            |       | —                                   |        | —                                 |       | 399,009 |   | — |   |
| Interest income  (expense)                                               |       | (118,991                                 | )           | (61,155                                | )          | (199,557 | ) | (85,975 | ) |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Income  from continuing operations before provision for income taxes** |       | 192,670                                  |        | 614,649                                |       | 1,594,878 |   | 1,154,175 |   |
| **Provision  for income taxes**                                          |       | 66,502                                   |        | 195,705                                |       | 293,540 |   | 414,315 |   |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Income  from continuing operations**                                   |       | 126,168                                  |        | 418,944                                |       | 1,301,338 |   | 739,860 |   |
| **Gain  (loss) net of income tax expense from discontinued operations**  |       | 1,192                                    |        | (11,007                                | )          | (652 | ) | (17,084 | ) |
| ** **                                                               | ** ** | ** **                               | ** **  | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  income**                                                          | ** ** | **$**                                    | **127,360** | ** **                             | **$**      | **407,937** | ** ** | **$** | **1,300,686** | ** ** | **$** | **722,776** | ** ** |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Basic  earnings per share**                                            |       |                                     |        |                                   |       |   |   |   |   |
| From continuing  operations                                              | ** ** | **$**                                    | **0.01**    | ** **                             | **$**      | **0.04** | ** ** | **$** | **0.10** | ** ** | **$** | **0.07** | ** ** |
| From discontinued  operations                                            | ** ** | **$**                                    | **0.00**    | ** **                             | **$**      | **0.00** | ** ** | **$** | **0.00** | ** ** | **$** | **0.00** | ** ** |
| Net income                                                               | ** ** | **$**                                    | **0.01**    | ** **                             | **$**      | **0.04** | ** ** | **$** | **0.10** | ** ** | **$** | **0.07** | ** ** |
| **Diluted  earnings per share**                                          |       |                                     |        |                                   |       |   |   |   |   |
| From continuing  operations                                              | ** ** | **$**                                    | **0.01**    | ** **                             | **$**      | **0.04** | ** ** | **$** | **0.08** | ** ** | **$** | **0.06** | ** ** |
| From discontinued  operations                                            | ** ** | **$**                                    | **0.00**    | ** **                             | **$**      | **0.00** | ** ** | **$** | **0.00** | ** ** | **$** | **0.00** | ** ** |
| Net income                                                               | ** ** | **$**                                    | **0.01**    | ** **                             | **$**      | **0.04** | ** ** | **$** | **0.08** | ** ** | **$** | **0.06** | ** ** |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Basic  weighted-average number of common shares outstanding**          | ** ** | **13,686,300**                           | ** **  | **10,424,000**                         | ** ** | **13,242,672** | ** ** | **10,424,000** | ** ** |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Diluted  weighted-average number of common shares outstanding**        | ** ** | **16,267,032**                           | ** **  | **11,655,586**                         | ** ** | **15,766,957** | ** ** | **11,686,306** | ** ** |
|                                                                          |            |                                          |             |                                        |            |  |  |  |  |  |  |  |  |  |  |  |

 

*Accompanyingnotes are integral part of these financial statements*.

 

4

----

 

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements of Cash Flows**

**(unaudited)**

** **
| ** **                                                                                                             | ** ** | **For the Six Months Ended June 30,** | ** **     |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|----------------|
| ** **                                                                                                             | ** ** | **2006**                              | ** **     | **2005** | ** ** |
| **Cash flows from operating  activities:**                                                                             |       |                                  |           |   |   |
| Net income from continuing operations                                                                                  |       | $                                     | 1,301,338      |   | $ | 739,860 |   |
| Adjustments to reconcile net income from continuing operations to net  cash provided by (used in) operating activities |       |                                  |           |   |   |
| Depreciation and amortization                                                                                          |       | 68,339                                |           | 30,537 |   |
| Provision for bad debt                                                                                                 |       | 276,632                               |           | 292,566 |   |
| Provision for obsolete inventory                                                                                       |       | 169,722                               |           | (8,817 | ) |
| Stock option expense                                                                                                   |       | 1,243,064                             |           | — |   |
| Tax benefit from stock option exercises                                                                                |       | 440,940                               |           | — |   |
| Change in fair value of derivative liability                                                                           |       | (399,009                              | )              | — |   |
| (Increase) decrease in                                                                                                 |       |                                  |           |   |   |
| Trade accounts receivable                                                                                              |       | (17,649,173                           | )              | (12,279,898 | ) |
| Inventory                                                                                                              |       | (2,343,530                            | )              | 137,168 |   |
| Prepaid Inventory                                                                                                      |       | (1,492,211                            | )              | 71,850 |   |
| Prepaid expenses                                                                                                       |       | (541,282                              | )              | 134,380 |   |
| Deferred tax asset current                                                                                             |       | (107,000                              | )              | (98,000 | ) |
| Deferred tax asset non current                                                                                         |       | (41,207                               | )              | 69,000 |   |
| Other assets                                                                                                           |       | (23,540                               | )              | (14,415 | ) |
| Increase (decrease) in                                                                                                 |       |                                  |           |   |   |
| Accounts payable                                                                                                       |       | 10,637,367                            |           | 2,073,885 |   |
| Accrued expenses                                                                                                       |       | 1,318,910                             |           | 721,327 |   |
| Income tax liabilities                                                                                                 |       | 73,386                                |           | 90,485 |   |
|                                                                                                                   |       |                                  |           |   |   |
| Cash provided by (used in)  continuing operations                                                                      |       | (7,067,254                            | )              | (8,040,072 | ) |
| Cash provided by (used in)  discontinued operations                                                                    |       | 654                                   |           | (29,979 | ) |
|                                                                                                                   |       |                                  |           |   |   |
| Net cash provided by (used  in) operating activities                                                                   |       | (7,066,600                            | )              | (8,070,051 | ) |
|                                                                                                                   |       |                                  |           |   |   |
| **Cash flows from investing  activities:**                                                                             |       |                                  |           |   |   |
|                                                                                                                   |       |                                  |           |   |   |
| Purchase of property and equipment                                                                                     |       | (295,367                              | )              | (114,445 | ) |
|                                                                                                                   |       |                                  |           |   |   |
| Net cash provided by (used  in) investing activities                                                                   |       | (295,367                              | )              | (114,445 | ) |
|                                                                                                                   |       |                                  |           |   |   |
| **Cash flows from financing  activities:**                                                                             |       |                                  |           |   |   |
| Borrowings from line of credit                                                                                         |       | 70,745,841                            |           | 36,417,712 |   |
| Payments on line of credit                                                                                             |       | (60,745,841                           | )              | (32,704,193 | ) |
| Cash paid for offering costs                                                                                           |       | (1,005,582                            | )              | — |   |
| Cash received for stock                                                                                                |       | 15,346,569                            |           | — |   |
|                                                                                                                   |       |                                  |           |   |   |
| Net cash provided by (used in) financing activities                                                                    |       | 24,340,987                            |           | 3,713,519 |   |
|                                                                                                                   |       |                                  |           |   |   |
| Effect of Exchange rate changes on cash                                                                                |       | (9,615                                | )              | — |   |
|                                                                                                                   |       |                                  |           |   |   |
| Net increase (decrease) in  cash and cash equivalents                                                                  |       | 16,969,405                            |           | (4,470,977 | ) |
|                                                                                                                   |       |                                  |           |   |   |
| **Cash and cash equivalents, beginning of period**                                                                     |       | 7,712,915                             |           | 5,183,876 |   |
|                                                                                                                   |       |                                  |           |   |   |
| **Cash and cash equivalents, end of period**                                                                           | ** ** | **$**                                 | **24,682,320** | ** ** | **$** | **712,899** | ** ** |
|                                                                                                                        |            |                                       |                |  |  |  |  |  |  |

 

*Accompanyingnotes are integral part of these financial statements*.

 

5

----

 

 

**InfoSonicsCorporation**

**Condensed Notes to Unaudited Consolidated Financial Statements**

**as of andat June 30, 2006**

**(unaudited)**

 

 

**NOTE 1. Basis of Presentation**

 

The accompanying unaudited consolidated financialstatements and these condensed notes have been prepared in accordance withaccounting principles generally accepted in the United States (“GAAP”) forinterim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended(the “Exchange Act”). Accordingly, they do not include all of the informationand footnotes required by GAAP for complete financial statements. Thepreparation of financial statements requires management to make estimates andassumptions that affect amounts reported in the financial statements andaccompanying notes. Actual results are likely to differ from those estimates,but management does not believe such differences will materially affect thefinancial position or results of operations of InfoSonics Corporation (the “Company”),although they may. These unaudited consolidated financial statements and condensednotes should be read in conjunction with the financial statements and notes asof and for the year ended December 31, 2005 included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005. These unaudited consolidatedfinancial statements reflect all adjustments considered, in the opinion of theCompany’s management, necessary to fairly present the results for the periodscovered herein and such adjustments are considered of a normal recurringnature.

 

The unaudited consolidated financial statementsinclude the accounts of the Company and its subsidiaries, Axcess Mobile LLC, InfoSonicsDe Mexico, InfoSonics de Guatemala, InfoSonics El Salvador and InfoSonics S.A.,all of which are wholly owned. Significant intercompany accounts andtransactions have been eliminated in consolidation of these consolidatedfinancial statements.

 

The unaudited Consolidated Balance Sheet at June 30, 2006does not include all of the information and footnotes required by GAAP forcomplete financial statements. Due to seasonality of the Company’s business andother factors, the Company’s interim results may not be indicative of thecondition at or the results for the full fiscal year of 2006 or at or for any otherfuture period. The unaudited Consolidated Statements of Income for the threeand six months ended June 30, 2006 and the unaudited Consolidated Statement ofCash Flows for the six months ended June 30, 2006 are not necessarilyindicative of the operating results or cash flows that may be expected for the fullfiscal year of 2006 or for any future period.

 

Shareand per share amounts for all periods presented in this report (unlessotherwise stated) have been adjusted to reflect the two-for-one common stocksplit in the form of a stock dividend effected on June 19, 2006. See Note 10below for additional information.

 

**NOTE 2.****Acquisition**

 

OnJanuary 19, 2005, the Company purchased Primasel S.A., from Fanrock InvestmentsLimited for up to 240,000 shares of the Company’s common stock, based on salesof certain levels being achieved in the next three years. During the year endedDecember 31, 2005, 240,000 shares of stock were issued in full satisfaction ofthe Company’s potential share issuance in connection with this transaction. Inaddition, under the terms of the acquisition, the Company is obligated to sharecertain profits based on sales and profitability achieved in Argentina. Duringthe three and six months ended June 30, 2006, the Company recorded expense andrelated accrual of $537,000 and $870,000, respectively, related to theseprofit-sharing terms. The Company accounted for the transaction as a stockpurchase. The purchase price has been recorded as an intangible asset on theConsolidated 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 240,000 shares issued in October2005. The Company allocated 75% of the non-cash cost of this stock issuancetowards the management agreement and 25% towards the distribution agreement. In February 2005, Primasel S.A. changedits name to InfoSonics S.A.

 

**NOTE 3. Discontinued Operations**

 

During the quarter ended September 30, 2004, theCompany’s Board of Directors reviewed Axcess Mobile, LLC and its mall-basedkiosk locations and implemented actions necessary to close the Company’s mall-basedkiosk locations. On October 28, 2004, the Company assigned the leases for sixof its mall-based kiosk locations to an unrelated assignee; however, theassignment did not release the Company from its future lease obligations, includingup to $835,055 as of June

 

6

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30, 2006. The assignee operates approximately 400mall-based kiosks in 28 states. A third party is holding in escrow two monthsrent for the assigned locations from the assignee, and in the event of defaultby the assignee, those funds will be released to the Company. The Company’s otherfour lease locations were closed in October 2004. SFAS No. 142, “Goodwill andOther Intangible Assets” prohibits the amortization of goodwill, but requiresthat it be reviewed for impairment at least annually or on an interim basis ifan event occurs or circumstances change that could indicate that its value hasdiminished or been impaired. As a result of the discontinued operations, the Companyhas reassessed the goodwill and written down the value associated with itsmall-based kiosk locations to zero. This write-down was recorded as anoperating expense in the year ended December 31, 2004.

 

**NOTE 4. Stock-Based Compensation**

 

The Company has three stockoption plans, the 2006 Equity Incentive Plan (“2006 Plan”), the 2003 StockOption Plan (“2003 Plan”) and, the 1998 Stock Option Plan (“1998 Plan”). Eachof the plans has been approved by our shareholders. The 2006 Plan is the onlyplan from which additional options will be granted. The 2006 Plan authorizesthe grant of up to 1,000,000 shares and options. The Company is also a party tonon-plan option agreements with its non-employee directors.

 

Prior to December 31, 2005,the Company accounted for employee stock option plans based on the intrinsicvalue method in accordance with Accounting Principles Board (APB) Opinion No.25, “*Accounting for Stock Issued toEmployees,”*and related Interpretations, and had adopted thedisclosure requirements of SFAS No. 123, “*Accountingfor Stock-Based Compensation”* as amended by SFAS No. 148, “*Accounting for Stock-Based Compensation—Transitionand Disclosure.*” Accordingly, compensation cost for stock optionswas measured as the excess, if any, of the quoted market price of the Company’sstock at the grant date over the amount an employee must pay to acquire thestock. The Company granted stock options with exercise prices equal to themarket price of the underlying stock on the date of grant; therefore, theCompany did not record stock-based compensation expense under APB Opinion No.25.

 

In December 2004, theFinancial Accounting Standards Board (FASB) issued SFAS No. 123R, “ *Share-Based Payments,”*to require thatcompensation cost relating to share-based payment arrangements be recognized inthe financial statements. As of January 1, 2006, the Company adopted SFAS 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 was determined using the Black-Scholesvaluation model, which is consistent with our valuation techniques previouslyutilized for stock options in footnote disclosures required under SFAS 123, asamended by SFAS 148. Such fair value is recognized as expense over the serviceperiod, net of estimated forfeitures.

 

Ifthe Company had adopted SFAS 123R as of January 1, 2005 for its stock-basedcompensation plans, then the Company’s net income for the three and six monthsended June 30, 2005 would have been adjusted to the pro forma amounts indicatedbelow:

 
| ** **                                                                                                                                                                                  | ** ** | **Three Months  Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | **2005**                          | ** ** | **2005**                       | ** ** |
| Net income as reported                                                                                                                                                                      |       | $                                 | 407,937    |                           | $          | 722,776 |   |
|                                                                                                                                                                                        |       |                              |       |                           |       |
| Stock-based employee  compensation cost, net of related tax effects, that would have been included  in the determination of net income if the SFAS 123R fair value method had  been applied |       | (51,311                           | )          | (511,322                       | )          |
| Pro forma                                                                                                                                                                                   |       | $                                 | 356,626    |                           | $          | 211,454 |   |
|                                                                                                                                                                                        |       |                              |       |                           |       |
| Basic earnings per common  share as reported                                                                                                                                                |       | $                                 | 0.04       |                           | $          | 0.07 |   |
| Stock-based employee  compensation cost, net of related tax effects, that would have been included  in the determination of net income if the SFAS 123R fair value method had  been applied |       | $                                 | (0.01      | )                              | $          | (0.05 | ) |
| Pro forma                                                                                                                                                                                   |       | $                                 | 0.03       |                           | $          | 0.02 |   |
| Diluted earnings per  common share as reported                                                                                                                                              |       | $                                 | 0.04       |                           | $          | 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 SFAS 123R fair value method had  been applied |       | $                                 | (0.01      | )                              | $          | (0.04 | ) |
| Pro forma                                                                                                                                                                                   |       | $                                 | 0.03       |                           | $          | 0.02 |   |

 

7

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On September 27, 2001, theFASB Emerging Issues Task Force (“EITF”) issued EITF Issue 96-18 “*Accounting for Equity Instruments That are Issued to Other thanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services*,”which requires that equity instruments issued in exchange for certain servicesbe valued at the more accurate of the fair value of the services provided orthe fair value of the equity instruments issued. For equity instruments issuedthat are subject to a required service period the expense associated with theequity instruments is recorded as the instruments vest or the services areprovided. The Company has granted options and warrants to non-employees andrecorded the fair value of the equity instruments on the date of issuance usingthe Black-Scholes valuation model. For grants subject to vesting or service requirements,the expense is deferred and is recognized over the more appropriate of thevesting period or as the services are provided.

 

On March 29, 2005, theSecurities and Exchange Commission (“SEC”) published Staff Accounting Bulletin (“SAB”)No. 107, which provides the SEC Staff’s views on a variety of matters relatingto stock-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 the threeand six months ended June 30, 2006 is as follows:

 
| ** **                                                       | ** ** | **Three Months  Ended June 30, 2006** | ** ** | **Six Months  Ended June 30, 2006** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| Officer compensation                                             |       | $                                     | 18,297     |                                | $          | 36,594 |   |
| Non-employee directors                                           |       | 1,138,178                             |       | 1,138,178                           |       |
| Sales, general and  administrative                               |       | 34,146                                |       | 68,292                              |       |
| Total stock option expense, included in total operating expenses |       | $                                     | 1,190,621  |                                | $          | 1,243,064 |   |

 

 

Our stock options vest on an annual or amonthly basis. As of June 30, 2006, there was $901,000 of total unrecognizedcompensation costs related to the non-vested stock options. The Company recognizes stock-basedcompensation costs on a straight-line basis over the requisite service periodof the award, which is generally the option vesting term.  That cost is expected to be recognized overthe next weighted-average period of 3.5 years. Such amounts may change as aresult of additional grants, forfeitures, modifications in assumptions andother factors. SFAS 123R provides that income tax effects of share-basedpayments are recognized in the financial statements for those awards which willnormally result in tax deductions under existing tax law. During the secondquarter of 2006, we recorded an expense of $1,138,178, related to optionsgranted to our non-employee directors. These options had been previouslygranted in January and December 2005 and were approved by our stockholders atour annual stockholders meeting held on June 12, 2006. Under current U.S.federal tax law, we would receive a compensation expense deduction related tonon-qualified stock options only when these options are exercised and vestedshares are received. Accordingly, the financial statement recognition ofcompensation cost for non-qualified stock options creates a deductible temporarydifference which results in a deferred tax asset and a corresponding deferredtax benefit in the income statement.

 

The fair value of each option grant isestimated on the date of grant using the Black-Scholes option pricing modelwith the following weighted-average assumptions used for grants in 2006 and2005: risk-free interest rate of between 4.88% to 5.04% in 2006 and 3.22% to4.41% in 2005 based on the U.S. Treasury yields in effect at the time of grant;expected dividend yields of 0 percent as the Company has not, and does notintend to, issue dividends; and expected lives of 3 to 5 years in 2006 and 2005based upon the historical life of options. For grants in 2006 and 2005, theexpected volatility used ranged from 62% to 91%, based on the Company’shistorical stock price fluctuations for a period matching the expected life ofthe options.

 

8

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Asummary of option activity under all of the above plans as of June 30, 2006,and changes during the six months then ended is presented in the table below:

 

| ** **                           | ** ** | **Shares** | ** ** | **Wtd. Avg.  Exercise Price** | ** ** | **Wtd. Avg  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------|------------|--------------------------------------------|------------|---------------------------------|------------|
| Outstanding  at January 1, 2006 |       | 3,598,500  |       | $                             | 2.09       |                                       | 3.97       |                            | —     |   |
| Granted                              |       | 262,000    |       | $                             | 6.90       |                                       | 1.52       |                            | —     |   |
| Exercised                            |       | (401,398   | )          | $                             | 2.33       |                                       | —     |                            | —     |   |
| Forfeited                            |       | (50,278    | )          | $                             | 3.82       |                                       | —     |                            | —     |   |
| Outstanding  at June 30, 2006   |       | 3,408,824  |       | $                             | 2.21       |                                       | 3.75       |                            |       | — |   |
| Vested  and expected to vest         |       | 3,408,824  |       | $                             | 2.21       |                                       | 3.75       |                            |       | — |   |
| Exercisable  at June 30, 2006   |       | 3,027,383  |       | $                             | 2.22       |                                       | 3.47       |                            |       | — |   |

 

 

 

A summary of the status of the Company’s nonvested options at June 30, 2006, and changes during the six months ended June30, 2006, is presented below:

 

| ** **                      | ** ** | **Shares** | ** ** | **Weighted-average  grant-date fair value** | ** ** |
|---------------------------------|------------|------------|------------|---------------------------------------------|------------|
| Nonvested at December 31,  2005 |       |       | 462,834    |                                        | $          | 1.90 |   |
| Granted                         |       | 262,000    |       | $                                           | 6.90       |   |
| Vested                          |       | 294,115    |       | $                                           | 0.57       |   |
| Forfeited                       |       | 49,278     |       | $                                           | 2.12       |   |
| Non-vested at June 30,  2006    |       | 381,441    |       | $                                           | 4.38       |   |
|                                 |            |            |            |                                             |            |  |  |

 

The weighted-average grant-date fair value ofoptions granted during the three and six months ended June 30, 2006 was $6.90and $6.90, respectively. The total intrinsic value of options exercised duringthe three and six months ended June 30, 2006 was $0 and $0, respectively. Therewas $772,000 and $937,000 cash received from options exercised for the threeand six months ended June 30, 2006, respectively. There were no optionsexercised in the three and six months ended June 30, 2005. The stock basedcompensation unrecognized expense for future periods as of June 30, 2006 isapproximately $901,000 with a weighted average remaining vesting period of 3.5 years.

 

 

**NOTE 5. Earnings Per Share**

 

The Company utilizes SFAS No. 128, ‘‘*Earnings perShare*.’’ Basic earnings per share is computed by dividing incomeavailable to common stockholders by the weighted-average number of commonshares outstanding. Diluted earnings per share is computed similarly to basicearnings per share, except that the denominator is increased to include thenumber of additional common shares that would have been outstanding if thepotential additional common shares that were dilutive had been issued. Common shareequivalents are excluded from the computation if their effect is anti-dilutive.The Company’s common share equivalents consist of stock options and warrants.

 

Thefollowing table represents a reconciliation of the shares used to calculatebasic and diluted earnings per share for the respective periods indicated:

 
| ** **                                                                                                 | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                 | ** ** | **June 30,  2006**      | ** ** | **June 30,  2005**    | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
|                                                                                                       |       |                    |       |                  |       |   |   |   |   |
| Numerator: Net income                                                                                      |       | $                       | 127,360    |                  | $          | 407,937 |   | $ | 1,300,686 |   | $ | 722,776 |   |
| Denominator:                                                                                               |       |                    |       |                  |       |   |   |   |   |
| Denominator for basic  earnings per share — weighted-average shares                                   |       | 13,686,300              |       | 10,424,000            |       | 13,242,672 |   | 10,424,000 |   |
| Effect of dilutive  securities                                                                             |       |                    |       |                  |       |   |   |   |   |
| Employee stock options and  warrants                                                                       |       | 2,580,732               |       | 1,231,586             |       | 2,524,285 |   | 1,262,306 |   |
|                                                                                                       |       |                    |       |                  |       |   |   |   |   |
| Denominator for diluted  earnings per share — adjusted weighted-average shares and assumed conversion |       | 16,267,032              |       | 11,655,586            |       | 15,766,957 |   | 11,686,306 |   |
|                                                                                                            |            |                         |            |                       |            |  |  |  |  |  |  |  |  |

 

9

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Certain potential common shares fromexercise of options and warrants have been excluded from the computation ofdiluted earnings per share due to their exercise price being greater than theCompany’s weighted-average stock price for the period. For the three monthsended June 30, 2006 and 2005, the number of shares excluded were 1,810,292 and 2,182,814,respectively, and for the six months ended June 30, 2006 and 2005, the numberof shares excluded were 1,866,740 and 2,151,427, respectively.

 

**NOTE 6. Income Taxes**

 

SFAS No. 109, “*Accounting for IncomeTaxes,*” 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**

 

Inventoryis valued at the lower of cost or market using standard costs that approximateaverage cost. Inventories are reviewed periodically and items considered to beslow moving or obsolete are reduced to estimated net realizable value throughan appropriate reserve. In addition, included in our prepaid inventory at June30, 2006, we had consigned inventory of $1.5 million, which is located at thedistribution center and retail locations of a certain carrier. This inventoryis owned by the Company until it is sold by the carrier. There was no consignedinventory at December 31, 2005. Inventory consists of the following:

 
| ** **        | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------|------------|--------------------|------------|------------------------|------------|
| Finished goods    |       | $                  | 8,205,349  |                   | $          | 5,861,819 |   |
| Inventory reserve |       | (419,198           | )          | (249,476               | )          |
| Net inventory     |       | $                  | 7,786,151  |                   | $          | 5,612,343 |   |

 

**NOTE 8. Property and Equipment**

 

Property and equipment are primarily located in theUnited States, with the exception of $258,000 of machinery and equipment locatedat our Mexico facility (installed in June 2006 and included in table below) andconsisted of the following as of the dates presented:

 
| ** **                     | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------|------------|--------------------|------------|------------------------|------------|
| Machinery and equipment        |       | $                  | 745,396    |                   | $          | 487,998 |   |
| Furniture and fixtures         |       | 153,779            |       | 117,082                |       |
| Subtotal                       |       | 899,175            |       | 605,080                |       |
| Less accumulated  depreciation |       | (245,231           | )          | (178,163               | )          |
| Total                          |       | $                  | 653,944    |                   | $          | 426,917 |   |

 

Depreciationexpense was $42,016 and $16,847 for the three months ended June 30, 2006 and2005, respectively. Depreciation expense was $73,951 and $30,537 for the sixmonths ended June 30, 2006 and 2005, respectively.

 

**NOTE 9. Line of Credit**

 

TheCompany has a line of credit from Wells Fargo HSBC Trade Bank N.A., whichprovides for advances not to exceed 80% of eligible domestic accountsreceivable and 85% of foreign-insured accounts receivable (depending on thecountry of the debtor), up to a maximum of $25,000,000. As of June 30, 2006,the majority of our debt was based on foreign accounts receivable.

 

Interestis payable on a monthly basis (i) at Wells Fargo’s prime (8.25% at June 30, 2006)or (ii) at the one-month LIBOR (5.33% at June 30, 2006) plus 1.50%. Theinterest rate is floating at Wells Fargo’s prime rate or is at LIBOR plus 1.5% ifthe debt is a fixed amount draw down. The line of credit is collateralized bysubstantially all of the assets of the Company, and expires in October 2006. Inaddition to reporting and other non-financial covenants, the line of creditcontains certain

 

10

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financialcovenants which require the Company to maintain a tangible net worth of notless than $12,500,000, a pre-tax profit of not less than $1 on a rolling fourquarter basis, a quick ratio of not less than one-to-one, a debt-to-net worthratio of not greater than two-to-one, and annual net income after taxes of atleast $1. Management believes the Company was in compliance with thesecovenants at June 30, 2006. At June 30, 2006 and December 31, 2005, the amountsdrawn against the line of credit were $20,000,000 and 10,000,000, respectively.

 

TheCompany has no other notes payable.

 

**NOTE 10. Stockholders’ Equity**

 

StockSplit as Dividend

OnMay 30, 2006, the Company’s Board of Directors approved a two-for-onestock split of the Company’s outstanding common stock. The stock split wasaccomplished through a 100% stock dividend, providing the Company’sstockholders with one additional share of common stock for every one share heldas of the record date. The split was paid on June 19, 2006 to stockholdersof record as of June 9, 2006. Immediately following the stock split, theCompany’s outstanding shares of common stock increased from 6,948,034 shares to13,896,068 shares of common stock.

Saleof Common Stock

On January 30, 2006**,**the Company sold an aggregate of 2,200,000shares of its common stock at $6.55 per share, for total gross proceeds of$14,410,000.  The purchasers were also issued warrants as described below.

 

StockOptions

 

Effective April 13, 2006and June 1, 2006, the Company granted options to purchase an aggregate of 32,000and 50,000 of its common stock to certain employees, including one inducementgrant to a newly-hired Company officer (the “EmployeeOptions”). One-third of the total options subject to these option grants becomeexercisable one year from the employee grantee’s first date of employment, and1/36th of the total options become exercisable each month thereafter untilfully vested. The Employee Options have exercise prices of $5.33 and $15.17 pershare, which were the closing prices per share of the Company’s common stock onApril 13, 2006 and June 1, 2006. The Employee Options expire five years from the dateof grant.

 

Effective June 12, 2006,the stockholders of the Company approved previously granted options to purchasean aggregate of 180,000 of the Company’s common stock to certain non-employeeDirectors (the “Director Options”). These grants had vested 90,000 onJanuary 21, 2005 and 90,000 on December 30, 2005. The Director Options haveexercise prices of $1.65 and $8.12, per share, which were the closing pricesper share of the Company’s common stock on the original grant dates of January21, 2005 and December 30, 2005. The Director Options expire three and five years,repectively, from the date of grant.

 

Warrants

 

InJune 1998, FASBissued SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*. SFAS 133 establishes accountingand reporting standards for derivative instruments, including certainderivative instruments embedded in other contracts (collectively referred to asderivatives) and for hedging activities. It requires that an entity recognizeall derivatives as either assets or liabilities in the statement of financialposition and measure those instruments at fair value.

 

In January 2006, theCompany sold shares of common stock and warrants to purchase common stock. TheCompany evaluated the warrants in the transaction as derivative liabilities inaccordance with SFAS No. 133 until the date that the Company’sregistration statement registering the shares of common stock underlying suchwarrants was declared effective on February 17, 2006, after which such warrantswere classified as 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 of the registration statement isrecorded as an adjustment to the liability. The income relating to the changein the fair value of the Company’s stock reflected in the change in the fairvalue of the warrants is included as other income (expense). As the warrantshave been classified as equity, the Company will no longer need to “mark tomarket” the change in fair value of such warrants.

 

11

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**NOTE 11. Recent Accounting Pronouncements**

 

In December 2004,the FASB issued SFAS 123R. SFAS 123R supersedes APB Opinion No. 25and amends SFAS No. 95, “*Statement of Cash Flows*.”Generally, the fair value approach in SFAS 123R is similar to the fair valueapproach described in SFAS 123. In 2005, the Company used theBlack-Scholes formula to estimate the fair value of stock options granted toemployees. The Company adopted SFAS 123R, using the modified-prospectivemethod, beginning January 1, 2006. Based on the terms of our stock option plans, there was no cumulativeeffect upon adoption. The Company elected to continue to estimate the fairvalue of stock options using the Black-Scholes formula. In the first six monthsof 2006, the adoption of SFAS 123R included an operating expense of$1,234,064. Further, we believe the adoption of SFAS 123R could have amaterial impact on our Company’s future stock-based compensation expense.  As of June 30, 2006, there was $901,000 oftotal unrecognized compensation cost related to nonvested share-basedcompensation arrangements granted under our plans. That cost is expected to berecognized over the next three and one-half years. This expected cost does notinclude the impact of any future stock-based compensation awards.

 

In May 2005, the FASBissued FASB Statement No. 154, “*Accounting Changes andError Corrections*.” SFAS 154 applies to all voluntary changes inaccounting principle as well as to changes required by an accountingpronouncement that does not include specific transition provisions. SFAS 154eliminates the requirement in APB Opinion No. 20, “*AccountingChanges*,” to include the cumulative effect of changes in accountingprinciple in the income statement in the period of change and, instead,requires changes in accounting principle to be retrospectively applied.Retrospective application requires the new accounting principle to be appliedas if the change occurred at the beginning of the first period presented bymodifying periods previously reported if an estimate of the prior period impactis practicable and estimable. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005. We do not currently anticipate any changes in accounting principle otherthan the adoption of SFAS 123R discussed above, which has its own adoptiontransition provision and is therefore not within the scope of SFAS 154. As aresult, we do not believe the adoption of SFAS 154 has had a material impact onthe Company’s consolidated financial statements.

 

In March 2005, the FASBissued FASB Interpretation (“FIN”) No. 47, “*Accounting for ConditionalAsset Retirement Obligations*.” FIN 47 clarifies that theterm conditional asset retirement obligation as used in SFAS Statement No. 143,“*Accounting for Asset Retirement Obligations*,” refersto a legal obligation to perform an asset retirement activity in which thetiming and/or method of settlement are conditional on a future event that mayor may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditionaleven though uncertainty exists about the timing and/or method ofsettlement.  Uncertainty about the timingand/or method of settlement of a conditional asset retirement obligation shouldbe factored into the measurement of the liability when sufficient informationexists. This interpretation also clarifies when an entity would havesufficient information to reasonably estimate the fair value of an assetretirement obligation**.**FIN 47 became effective in December 2005.Retrospective application of interim financial information is permitted but isnot required.  Management does not expectadoption of FIN 47 to have a material impact on the Company’s financialstatements.

 

In September 2005, EITF ratified EITF Issue No. 04-13, “*Accounting for Purchases and Sales of Inventory with the SameCounterparty*.” Beginning April 1, 2006, EITF 04-13 requiresarrangements whereby purchase and sales transactions with the same counterpartythat are entered into in contemplation of one another to be combined (i.e., netbasis). The Company has had such arrangements whereby it purchases wirelessdevices from certain counterparties and sells similar items to the samecounterparties. These arrangements have been and are accounted for on a netbasis within logistic services. Therefore, the effect of adopting EITF 04-13will have no impact on the Company’s results of operations.

 

**NOTE 12. Geographic Information**

 

TheCompany currently operates in one business segment.  All fixed assets are located in Companyfacilities in the United States and Mexico. Net sales  by geographical area for the three and sixmonths ended June 30, 2006 and June 30, 2005 were:

 
| ** **      | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **June 30, 2006**       | ** ** | **June 30,  2005**    | ** ** | **June 30,  2005** | ** ** | **June 30,  2005** | ** ** |
| United States   |       | $                       | 3,241,614  |                  | $          | 11,283,892 |   | $ | 4,962,316 |   | $ | 26,624,770 |   |
| South America   |       | 31,052,895              |       | 16,593,032            |       | 64,084,070 |   | 19,124,448 |   |
| Central America |       | 23,985,049              |       | 4,650,706             |       | 43,360,261 |   | 10,802,629 |   |
| Total           |       | $                       | 58,279,558 |                  | $          | 32,527,630 |   | $ | 112,406,647 |   | $ | 56,551,847 |   |

 

**NOTE 13. Subsequent Events**

 

On August 3, 2006, our common stock commenced trading onThe NASDAQ Stock Market’s Global Market under the ticker symbol “IFON,” and wesuspended trading of our common stock on the American Stock Exchange.

 

12

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**NOTE 14.  Commitments andContingencies**

 

*Securities Class Actions*

Between June 13, 2006 andJuly 14, 2006, seven securities class actions were filed in the United StatesDistrict Court for the Southern District of California against us and certainof our officers and directors.  Thelongest class period alleged in these seven cases is from May 8, 2006 to June 12,2006.  Each of these substantially similarlawsuits allege that the defendants violated Sections 10(b), 20(a) and/or 20Aof the Exchange Act, as well as the associated Rule 10b-5, in connection withour restatement announced on June 12, 2006. In these seven lawsuits, plaintiffs seek declarations that each actionis a proper class action, unspecified damages, interest, attorneys’ fees andother costs, equitable/injunctive relief, and/or such other relief as is justand proper.  When required to respond toa consolidated complaint, the defendants anticipate filing a motion to dismisson the grounds that the plaintiffs have failed to adequately plead violationsof the securities laws.

*Derivative Lawsuits*

On June 27, 2006, aderivative lawsuit was filed in the United States District Court for theSouthern District of California, purportedly on behalf of the Company againstcertain of our officers and directors, and the Company as a nominal defendant,by Caridad Miller.  This lawsuit assertsclaims for breaches of fiduciary duty, abuse of control, gross mismanagement,waste of corporate assets, unjust enrichment, violation of CaliforniaCorporations Code Section 25402, violation of Section 304 of the Sarbanes-OxleyAct, and violation of Section 14(a) of the Exchange Act.  Plaintiff seeks unspecified damages, adeclaration of liability under the Sarbanes-Oxley Act of 2002 andreimbursement, a declaration regarding Section 14(a) of the Exchange Act,restitution, disgorgement, modification of certain corporate governance andinternal procedures, extraordinary equitable and/or injunctive relief, costs,and such other relief as is just and proper.

On July 12, 2006, aderivative lawsuit was filed in the California Superior Court, in the County ofSan Diego, by Peter J. Cunningham, purportedly on behalf of the Company againstcertain officers and directors of the Company, and the Company as a nominaldefendant.  This lawsuit asserts claimsfor breaches of fiduciary duty, abuse of control, gross mismanagement, waste ofcorporate assets, unjust enrichment, and violation of California CorporationsCode Section 25402 in connection with the Company’s restatement.  Plaintiff seeks unspecified damages,extraordinary equitable and/or injunctive relief,  restitution, disgorgement, costs, and suchother relief as is just and proper.

On July 28, 2006, aderivative lawsuit was filed in the United States District Court for theSouthern District of California by Peter J. Cunningham, purportedly on behalfof the Company against certain of our officers and directors, and the Companyas a nominal defendant.  This lawsuitasserts claims for breaches of fiduciary duty, abuse of control, grossmismanagement, waste of corporate assets, unjust enrichment, and violation ofCalifornia Corporations Code Section 25402. Plaintiff seeks unspecified damages, extraordinary equitable and/orinjunctive relief, disgorgement, costs, and such other relief as is just andproper.

When required to respond tothese derivative lawsuits, the defendants anticipate filing a motion to dismisson the ground, among others, that the plaintiff has failed to make a demand onthe Company’s board of directors.

While the above lawsuits arein their early stages, at this time we do not believe they will have a materialadverse effect on our financial condition. However, the ultimate legal and financial liability with respect to suchmatters cannot be estimated with certainty and requires the use of estimates inrecording liabilities for potential litigation settlements.  Estimates for losses from litigation are disclosedif considered reasonably possible and accrued if considered probable afterconsultation with outside counsel.  Ifestimates of potential losses increase or the related facts and circumstanceschange in the future, the Company may be required to record additionallitigation expense.  The Company intendsto expense legal expense as incurred related to this matter.

 

 

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

 

**Forward-Looking Statements and Other General Information**

 

This discussion and analysis should be read in conjunctionwith the accompanying unaudited consolidated financial statements and condensednotes thereto included in this report and with our Annual Report on Form 10-Kfor the year ended

 

13

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December 31, 2005 (including our 2005 auditedfinancial statements and related notes thereto). InfoSonics Corporation’s (“InfoSonics”or the “Company”) discussion and analysis of financial condition and results ofoperations are based upon consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States (“GAAP”). The preparation of financial statements in conformitywith GAAP requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, disclosure of any contingentliabilities as of and at the financial statement date, and reported amounts ofrevenue and expenses during the reporting period. On an ongoing basis we reviewour estimates and assumptions. Our estimates are based on our historicalexperience and other assumptions that we believe to be reasonable under thecircumstances. Although management believes these judgments, estimates and assumptionsto be reasonably accurate, actual results may differ significantly. Ourcritical accounting policies, the policies we believe are most important to thepresentation of our financial statements and require the most difficult,subjective and complex judgments, are outlined below in’ “—Critical AccountingPolicies.’’

 

Statementscontained in this report may be “forward-looking” statements.  These statements may use forward-lookingterms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,”“will,” their negatives or other variations on these terms, or similar terms.The matters in this report that are forward-looking statements, includingwithout limitation, statements about future revenues, sales levels, operatingincome and margins, 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 currentmanagement expectations that involve certain risks and uncertainties, which, ifrealized, in whole or in part, could cause such expectations to fail to beachieved and have a material adverse effect on our business, financialcondition or results of operations. Some of these risks and uncertainties, include,without limitation: (1) intense competition, regionally and internationally,including competition from alternative business models, such asmanufacturer-to-carrier sales, which may lead to reduced prices, lower sales orreduced 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 or maintain adequate supplyof competitive products on a timely basis or on commercially reasonable termsfrom suppliers; (3) foreign exchange rate fluctuations, devaluation of aforeign currency, adverse governmental controls or actions, political oreconomic instability, or disruption of a foreign market, and other relatedrisks of our international operations; (4) the ability to attract new sourcesof profitable business from expansion of products or services or risksassociated with entry into new markets, including geographies, products andservices; (5) an interruption or failure of our information systems orsubversion of access or other system controls may result in a significant lossof business, assets, or competitive information; (6) an extended generaleconomic downturn; (7) loss of business from one or more significant customers;(8) customer and geographical sales and accounts receivable concentration risk,including in Latin America; (9) rapid product improvement and technologicalchange resulting in inventory obsolescence; (10) future terrorist or militaryactions; (11) the loss of a key executive officer or other key employees; (12)changes in consumer demand for multimedia wireless handset products andfeatures; (13) failure to adequately adapt to industry changes, includingconsolidation of the wireless handset carrier market, and to manage potentialgrowth and/or contractions; (14) future periodic assessments required bycurrent or new accounting standards and guidance such as those relating tolong-lived assets, goodwill and other intangible assets and expensing of stockoptions and valuing gain or loss on fair value of derivatives; and (15)seasonal buying patterns; (16) the impact, if any, of changes in EITF 00-19 orSFAS 133 guidance as it relates to warrants and registration rights; and (17)any uninsured damages, legal fees and costs relating to current and futurepending and threatened litigation.  Ouractual results could differ materially from those anticipated in ourforward-looking statements. InfoSonics does not intend to update anyforward-looking statements.

InfoSonics has instituted inthe past and continues to institute changes to its strategies, operations andprocesses to address risks and uncertainties and to mitigate their impact onInfoSonics’ results of operations and financial condition. However, no assurancescan be given that InfoSonics will be successful in these efforts. For a furtherdiscussion of significant factors to consider concerning InfoSonics, see “Item1A. Risk Factors” of InfoSonics’ Annual Report on Form 10-K for the year endedDecember 31, 2005 and “Part II. Item 1A. Risk Factors” of this report. Inaddition, other risks or uncertainties may be detailed from time to time inInfoSonics’ future SEC filings.

 

**Overview**

 

We distribute wireless handsets and accessoriesin the United States, and are one of the fastest growing distributors ofwireless handsets and accessories in Latin America. We provide end-to-endwireless handset and wireless terminal solutions for carriers in both theUnited States and Latin America. We distribute products of several keymanufacturers, including  Samsung,Alcatel, Motorola, VK Mobile, i-mate and Novatel, and others. As an integralpart of our customers’ supply chain, we perform value added services andsolutions, including product approval and certification, light assembly,warehousing, logistics services (packing, shipping and delivery), marketingcampaigns, warranty services and end-user support. We provide these servicesand solutions to wireless telecommunications manufacturers in order tofacilitate sales to

 

14

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carriers (network operators), agents, resellers,distributors, independent dealers and retailers in the United States and LatinAmerica.  During 2005, we significantlychanged our business model from selling products to dealers and agents in theUnited States and Latin America to providing products, services and solutionsprimarily to carriers in such regions. As a result, we believe that this shift in customer focus enables us tobetter service our customers and vendors as we play a more important role inthe supply chain for wireless handsets and accessories.

Our corporate headquarters isin San Diego, California, and from our facility in Miami, Florida, where wehave our Latin America sales and executive offices, we operate our mainwarehouse and distribution center. This warehouse and distribution centerservices our customers in the United States and Latin America. In addition, wehave warehouse and office facilities in Mexico, and a sales office in Chile. Wehave wholly-owned subsidiaries in Latin America, which conduct some of ourbusiness activities in their respective regions of Latin America, includingInfoSonics El Salvador, InfoSonics de Guatemala, InfoSonics de Mexico andInfoSonics S.A.

Dueto seasonal and other factors, our interim condition or results may not beindicative of fiscal year 2006 or other future condition or results. Ourfinancial condition and operating results are influenced by several seasonaland other factors, which may cause our financial condition and operatingresults to fluctuate on a quarterly basis, including, but not limited to, thetiming and introduction of new products by our suppliers and competitors,promotions and subsidies by network operators, technical and certificationdelays by industry bodies as well as the operators, purchasing patterns ofcustomers, and the timing of holidays and other events affectingconsumer demand.

On May 30, 2006, our Boardof Directors approved a two-for-onestock split of our outstanding common stock. The stock split was accomplished through a 100% stock dividend,providing our stockholders with one additional share of common stock for everyone share held as of the record date. The split was paid on June 19, 2006 to stockholders of record as ofJune 9, 2006.  Immediately followingthe stock split, our outstanding shares of common stock increased from6,948,034 shares to 13,896,068 shares of common stock.

 

**Areas of Management Focus and PerformanceIndicators**

 

Wefocus on the needs of our customers, developing and maintaining closerelationships with manufacturers, expanding in and entering into new markets,and sourcing new and innovative products, while maintaining close attention tooperational efficiencies and costs. We are striving to increase shippingvolumes and improve efficiencies to enable higher levels of profitability andearnings 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 net sales, and overall net sales growth. Wemake extensive use of our customized information system to closely monitor allaspects of our business, including customer relationship management, intelligentpurchasing, inventory control and flow, line item margin control for orders,and weighted-average cost and statistical data for products, customers andsuppliers.

Managementspends a significant amount of time traveling with the purpose of spending timewith key customers, suppliers and employees. We believe that theserelationships are vital to our success, and we will continue to dedicate asignificant amount of time to this area.

 

**Industry Trends and Risks**

 

Accordingto an August 2006 report by JP Morgan Chase & Co, overall worldwidewireless handset sales are forecasted to increase by 20% in 2006 and 14% in2007. However, a rapid decline in wireless handset sales growth couldnegatively impact our net sales.

Excesssupply conditions could reduce the market prices of wireless handsets and therelated products we sell and thereby affect our ability to generate net salesand gross profit at historical levels, as well as affect the value of ourinventory. Conversely, should manufacturers be unable to respond to anunanticipated increase in demand of wireless handsets and related products on atimely basis, we, along with others in our industry, could experience supplyconstraints that would affect our ability to deliver products.

Weare unable to quantify the potential effects of these trends and risks on ourbusiness, as it is difficult to predict future supply conditions and demandpatterns which may affect our ability to meet customer demand for wirelesshandsets and related products at acceptable gross profits.

 

15

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**Company Specific Trends and Risks**

 

Our strategy incorporates overall market growthelements for each aspect of our business, which we hope will result incontinued growth. In the quarter ended June 30, 2006, our net sales increasedby 79%, and wireless handset units sold increased by 169%, compared with thequarter ended June 30, 2005. Although we have incorporated growth into ourstrategy, there can be no assurances that these trends will continue.

During the quarter ended June 30, 2006, weexperienced significant growth in our South American and Central Americanregions.  These regions accounted for 94%of net sales for the second quarter of 2006, compared to 65% for the secondquarter of 2005. This increase was primarily the result of our increased salesand marketing efforts in both of those regions, as well as the general increasein wireless handsets sold in those regions in the recent past. By contrast,U.S. regional net sales decreased to 6% of our net sales for the quarter endedJune 30, 2006, from 35% of net sales for the quarter ended June 30, 2005,due to the factors discussed below. 

| ** **               | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------|------------|------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Net sales                |       | $                                              | 58,280     |   | $ | 32,528 |   |
| Increase over prior year |       | 79                                             | %          | 84 | % |
|                          |            |                                                |            |  |  |  |  |

 

**Results of Operations:**

***Three Months Ended June 30, 2006 and 2005***

 

For the quarter ended June 30, 2006, we had incomefrom continuing operations of $126,000, or $0.01 per diluted share, on netsales of $58.3 million, which is a decrease of 70% from the quarter endedJune 30, 2005. This decrease resulted from a non-cash expense of $1.2 million relating tostock option grants approved by our stockholders in the second quarter of 2006.Our net sales increase of 79% for the second quarter of 2006 compared to thesame period of 2005, was primarily attributable to a 169% increase in wirelesshandset volume, partially offset by a 36% decrease in average selling price perunit sold. The geographic mix of net sales shifted significantly in the firsttwo quarters of 2006 as sales in South America and Central America increasedsubstantially.  These two regionsrepresented 94% (53% for South America and 41% for Central America) of netsales in the quarter ended June 30, 2006, compared to 65% (51% for SouthAmerica and 14% for Central America) in the quarter ended June 30, 2005.This increase was primarily the result of our increased sales and marketingefforts in both of those regions, as well as the general increase in wirelesshandsets sold in those regions in the recent past. Sales in the United Statesmade up the remainder of our sales in the quarter ended June 30, 2006,declining 71% to $3.2 million, or 6% of net sales, compared to the same periodin 2005. The decrease in our U.S. sales resulted from increased competition andproduct introduction delays from our primary vendors, as well as longer thanexpected certification processes which are required by our carrier customersprior to their purchase of our products. In addition, our interest expenseincreased 95% for the quarter ended June 30, 2006 to $119,000 from $61,000 inthe same quarter last year, which negatively impacted our income fromcontinuing operations.  The increase ininterest expense primarily resulted from our net sales growth and the debt usedto fund such growth, and increased cost of capital.

| ** **                                             | ** ** | **Three Months ended June 30,**                                           | ** ** | **Increase** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|--------------|------------|
| ** **                                             | ** ** | **2006**                                                                  | ** ** | **2005**     | ** ** | **(Decrease)** | ** ** |
| ** **                                             | ** ** | **(Dollar amounts in thousands,  except per share amounts)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales                                              |       | $                                                                         | 58,280     |         | $          | 32,528 |   | 79% |   |
| Gross profit                                           |       | 4,332                                                                     |       | 2,657        |       | 63% |   |
| Income from continuing  operations                     |       | 126                                                                       |       | 419          |       | (70)% |   |
|                                                   |       |                                                                      |       |         |       |   |   |
| Diluted earnings per share  from continuing operations |       | $                                                                         | 0.01       |         | $          | 0.04 |   | (80)% |   |

 

Net sales by geographic region.

| ** **      | ** ** | **Three Months ended June 30,**      | ** ** |
|-----------------|------------|------------------------------------------------|------------|
| ** **      | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| United States   |       | $                                              | 3,242      |   | $ | 11,284 |   |
| Central America |       | 23,985                                         |       | 4,651 |   |
| South America   |       | 31,053                                         |       | 16,593 |   |
| Total           |       | $                                              | 58,280     |   | $ | 32,528 |   |

 

16

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

 

For the quarter endedJune 30, 2006, cost of sales was $53.9 million, or 92.6% of net sales, comparedwith $29.9 million, or 91.8% of net sales, for the quarter ended June 30, 2005.The increase in our cost of sales was a direct result of the increased wirelesshandset sales during the quarter ended June 30, 2006, compared to the samequarter in 2005. The decrease in gross margin was primarily the result of thechange of product and regional mix of our sales, including higher sales inLatin America, as different products and different regions can have varyingmargins.

 

Forthe quarter ended June 30, 2006, our gross profit increased to $4.3 millionfrom $2.7 million, compared with the same quarter last year, an increase of63%. This increase in gross profit was primarily the result of increasedwireless handset sales levels, partially offset by the decrease in grossmargin.

** **

| ** **    | ** ** | **Three Months Ended June 30,**      | ** ** |
|---------------|------------|------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Cost of sales |       | $                                              | 53,948     |   | $ | 29,871 |   |
| Gross margin  |       | 7.4                                            | %          | 8.2 | % |
| Gross profit  |       | $                                              | 4,332      |   | $ | 2,657 |   |

 

**OperatingExpenses and Operating Income from Continuing Operations**

 

For the quarter endedJune 30, 2006, operating expenses were $4.0 million, an increase of 103%,compared with the same quarter last year. As a percentage of net sales,operating expenses were 6.9% in the quarter ended June 30, 2006, compared with6.1% in the same quarter last year. Pursuant to SFAS 123R, during the quarter ended June 30, 2006, weincurred $1.2 million, or 2.0% of net sales, of non-cash expense relating to stock option grants approved by ourstockholders in the second quarter of 2006, comparedto no such expense in the same quarter of last year. Excluding the non-cashexpense related to SFAS 123R,proforma operating expenses as a percentage of netsales decreased significantly.  Thisdecrease was primarily as a result of operational efficiencies achieved relatedto our sales in Latin America.

 

For the quarter ended June 30, 2006, ouroperating income from continuing operations was $312,000 (including thenon-cash expense of $1.2 million relatingto stock option grants approved by our stockholders in the second quarter of2006)compared with $676,000 for the quarter ended June 30, 2005, a decrease of 54%.As a percentage of net sales, operating income from continuing operations was0.5% for the quarter ended June 30, 2006, compared to 2.1% for the quarterended June 30, 2005. The decrease in operating income from continuingoperations as a percentage of net sales for the quarter ended June 30, 2006 wasa result of the non-cash expense related to SFAS 123R and the decrease in grossmargin. The actual dollar increase in operating income from continuing operations(excluding the non-cash stock option expense related to SFAS 123R) was due toincreased net sales and the operating efficiencies achieved related to sales inLatin America.

**Operating Expenses**

| ** **              | ** ** | **Three Months Ended June 30,**      | ** ** |
|-------------------------|------------|------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Operating expenses      |       | $                                              | 4,020      |   | $ | 1,981 |   |
| Percentage of net sales |       | 6.9                                            | %          | 6.1 | % |
|                         |            |                                                |            |  |  |  |  |

 

17

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**Operating Income from Continuing Operations**

** **

| ** **                                  | ** ** | **Three Months Ended June 30,**      | ** ** |
|---------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Operating income from continuing Operations |       | $                                              | 312        |   | $ | 676 |   |
| Percentage of net sales                     |       | 0.5                                            | %          | 2.1 | % |
|                                             |            |                                                |            |  |  |  |  |

 

**OtherIncome (Expense)**

 

Duringthe quarter ended June 30, 2006, we incurred $119,000 of interest expense, anincrease of 95% compared to the same period last year.  This increase was primarily related toincreased borrowing to fund our increased purchases of wireless handsets aswell as the increased levels of inventory we were required to maintain tosupport the 79% increase in our net sales, during the second quarter of 2006,compared to the same period of 2005.

 

**Other Income**

 

| ** **                    | ** ** | **Three Months Ended June 30,**      | ** ** |
|-------------------------------|------------|------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Other Income (expense)  total |       | $                                              | (119       | ) | $ | (61 | ) |
|                               |            |                                                |            |  |  |  |  |

 

 

**NetIncome**

 

Duringthe quarter ended June 30, 2006, our net income was $127,000, a decrease of 69%compared to the same period last year. This decrease was primarily related to our non-cash expense related tostock options under SFAS 123R.  See belowfor a discussion of our net income as adjusted for the effects of SFAS 123R onour results for the three months ended June 30, 2006.

 

**Reconciliationof Non-GAAP Financial Measures to the Corresponding GAAP Financial Measures forthe Three Months ended June 30, 2006 (unaudited)**

The following are selected results including andexcluding the impact of SFAS 123R: 

| **Three Months Ended  June 30, 2006**       | ** ** | **Actual** | ** ** | **Adjustment** | ** ** | ** ** | ** ** | **Non-GAAP  Pro-forma** | ** ** |
|---------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|-------------------------|------------|
| Operating expenses                          |       | $          | 4,019,995  |           | $          | (1,190,621 | )          |                    |       | $ | 2,829,374 |   |
|                                        |       |       |       |           |       |       |       |                    |       |   |   |   |
| Operating income from continuing operations |       | $          | 311,661    |           | $          | 1,190,621  |       | (a)                     |       | $ | 1,502,282 |   |
|                                        |       |       |       |           |       |       |       |                    |       |
| Net income                                  |       | $          | 127,360    |           | $          | 1,190,621  |       | (a)                     |       | $ | 1,317,981 |   |
| Diluted earnings per share                  |       | $          | 0.01       |           | $          | 0.07       |       |                    |       | $ | 0.08 |   |

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(a)          Non-cash stock-option compensation charges under SFAS 123R recorded inthe second quarter of 2006.

Effective January 1, 2006, the Company adoptedStatement of Financial Accounting Standards (SFAS) No. 123R, “Share-BasedPayment,” which requires the cost relating to share-based payment transactionsin which an entity exchanges its equity instruments for goods or services fromeither employees or non-employees to be recognized in the consolidatedfinancial statements as the goods or services are rendered.  The cost is measured at the fair value of theequity instrument issued as it vests. The Company is no longer permitted to follow the intrinsic valueaccounting method under previous accounting guidance, which previously resultedin no expense for stock options for which the exercise price was equal to thefair value of the underlying stock on the date of grant.

The Company believes thatexcluding the incremental impact of SFAS 123R from net income providesmeaningful supplemental information regarding its financial results for thethree and six months ended June 30, 2006 as compared

 

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to the same period in 2005since the Company’s consolidated financial statements issued prior to January1, 2006 did not change as a result of adopting SFAS 123R.  The Company also believes that this financialinformation is useful in assessing the Company’s historical performance andyear-over-year growth and when planning, forecasting and analyzing futureperiods.  The incremental impact of SFAS123R during the three and six months ended June 30, 2006 represents the stockoption expense related to stock options issued prior to the adoption of SFAS123R and vested during the three and six months ended June 30, 2006 and theimpact of estimating forfeitures related to nonvested shares.

 

***Six Months Ended June 30, 2006 and 2005***

 

For the six months ended June 30, 2006, we had incomefrom continuing operations of $1.3 million, or $0.08 per diluted share(including a non-cash expense pursuant to SFAS 123R of $1.2 million relating tostock option grants approved by our stockholders in the second quarter of 2006,in addition to non-cash income of $399,000 related to change in fairvalue of derivative liability under SFAS 133), on net sales of $112.4 million. This is anincrease of 76%, compared to the six months ended June 30, 2005. Our net salesincrease of 99% for the six months ended June 30, 2006 compared to the sameperiod of 2005 was primarily attributable to a 202% increase in wirelesshandset volume, partially offset by a 34% decrease in average selling price perunit sold.  During the six months endedJune 30, 2006, the geographic mix of net sales shifted significantly as salesin South America and Central America increased substantially. These two regionsrepresented 96% (57% for South America and 39% for Central America) of netsales for the six months ended June 30, 2006, compared to 53%  (34% for South America and 19% for CentralAmerica) for the six months ended June 30, 2005. This increase was primarilythe result of our increased sales and marketing efforts in both of thoseregions, as well as the general increase in wireless handsets sold in thoseregions in the recent past. Sales in the United States made up the remainder ofour sales for the six months ended June 30, 2006, declining 81% to $5.0million, or 4% of net sales, compared to the same period in 2005. The decreasein our U.S. sales resulted from increased competition and product introductiondelays from our primary vendors as well as longer than expected certificationprocesses. In addition, our interest expense increased 133% for the six monthsended June 30, 2006 to $200,000 from $86,000 in the same period last year,which negatively impacted our income from continuing operations. The increasein interest expense resulted from our net sales growth and the debt used tofund such growth, and the increased cost of capital.

| ** **                                            | ** ** | **Six Months Ended June 30,**                                             | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|
| ** **                                            | ** ** | **2006**                                                                  | ** ** | **2005**   | ** ** | **Increase** | ** ** |
| ** **                                            | ** ** | **(Dollar amounts in thousands,  except per share amounts)  (unaudited)** | ** ** | ** ** | ** ** |
| Net sales                                             |       | $                                                                         | 112,407    |       | $          | 56,552 |   | 99% |   |
| Gross profit                                          |       | 8,512                                                                     |       | 4,788      |       | 78% |   |
| Income from continuing  operations                    |       | 1,301                                                                     |       | 740        |       | 76% |   |
|                                                  |       |                                                                      |       |       |       |   |   |
| Diluted earnings per share from continuing operations |       | $                                                                         | 0.08       |       | $          | 0.05 |   | 60% |   |
|                                                  |       |                                                                      |       |       |       |   |   |

Net sales by geographic region.

| ** **      | ** ** | **Six Months Ended June 30,**                  | ** ** |
|-----------------|------------|------------------------------------------------|------------|
| ** **      | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| United States   |       | $                                              | 4,963      |   | $ | 26,625 |   |
| Central America |       | 43,360                                         |       | 10,803 |   |
| South America   |       | 64,084                                         |       | 19,124 |   |
| Total           |       | $                                              | 112,407    |   | $ | 56,552 |   |
|            |       |                                           |       |   |   |

 

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

 

For the six months endedJune 30, 2006, cost of sales was $103.9 million, or 92.4% of net sales,compared with $51.8 million, or 91.5% of net sales, for the six months endedJune 30, 2005. The increase in our cost of sales was a direct result of theincreased wireless handset sales volume during the six months ended June 30,2006, compared to the same

 

19

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period in 2005.  The decrease in gross margin was primarilythe result of the change of product and regional mix of our sales, includinghigher sales in Latin America, as different products and different regions canhave varying margins.

 

Forthe six months ended June 30, 2006, our gross profit increased to $8.5 millionfrom $4.8 million,  compared with thesame period last year, an increase of 78%. The increase in gross profit wasprimarily the result of increased wireless handset sales levels, partiallyoffset by the decrease in gross margin.

** **

| ** **    | ** ** | **Six Months Ended June 30,**                  | ** ** |
|---------------|------------|------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Cost of sales |       | $                                              | 103,895    |   | $ | 51,764 |   |
| Gross margin  |       | 7.6                                            | %          | 8.5 | % |
| Gross profit  |       | $                                              | 8,512      |   | $ | 4,788 |   |
|          |       |                                           |       |   |   |

 

**OperatingExpenses and Operating Income from Continuing Operations**

 

For the six months endedJune 30, 2006, operating expenses were $7.1 million, an increase of 101%,compared with the six months ended June 30, 2005. As a percentage of net sales,operating expenses were 6.3% in each of the six months ended June 30, 2006 and2005. However, pursuant to SFAS 123R, during the six months ended June 30,2006, we incurred $1.2 million, or 1.1% of net sales, of non-cash expense relating to stock option grants approved by ourstockholders in the second quarter of 2006, compared tono such expense in the same period of last year. Excluding the non-cash expenserelated to SFAS 123R, non-GAAP operating expenses as a percentage of net salesdecreased significantly as a result of operational efficiencies achieved.  See non-GAAP reconciliation below.

 

For the six months ended June 30, 2006, ouroperating income from continuing operations was $1.4 million (including anon-cash expense of $1.2 million relatingto stock option grants approved by our stockholders in the second quarter of2006),compared with $1.2 million for the six months ended June 30, 2005. As apercentage of net sales, operating income from continuing operations was 1.2%for the six months ended June 30, 2006, as compared to 2.2% for the six monthsended June 30, 2005.   The decrease inoperating income from continuing operations as a percentage of net sales forthe six months ended June 30, 2006 was a result of the non-cash expense relatedto SFAS 123R and the decrease in gross margin. The actual dollar increase inoperating income from continuing operations was due to increased net sales andthe other items discussed above.

**Operating Expenses**

| ** **              | ** ** | **Six Months Ended June 30,**                  | ** ** |
|-------------------------|------------|------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Operating expenses      |       | $                                              | 7,116      |   | $ | 3,548 |   |
| Percentage of net sales |       | 6.3                                            | %          | 6.3 | % |
|                         |            |                                                |            |  |  |  |  |

 

**Operating Income from Continuing Operations**

** **

| ** **                                  | ** ** | **Six Months Ended June 30,**                  | ** ** |
|---------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Operating income from continuing operations |       | $                                              | 1,395      |   | $ | 1,240 |   |
| Percentage of net sales                     |       | 1.2                                            | %          | 2.2 | % |
|                                             |            |                                                |            |  |  |  |  |

 

20

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**OtherIncome (expense)**

 

Duringthe six months ended June 30, 2006, we had income from a non-cash change infair value of derivative liability relating to the January 2006financing-related warrants of $399,000. This derivative liability related tothe warrants was classified as equity as of February 17, 2006 in accordancewith SFAS 133, the date on which the registration statement registering thecommon stock underlying the warrants was declared effective by the SEC. As thewarrants have been classified as equity, we will no longer need to “mark tomarket” the change in fair value of such warrants.

 

 

| ** **                                   | ** ** | **Six Months Ended June 30,**                  | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Change in fair value of derivative liability |       | $                                              | 399        |   | $ |     |   |
| Interest expense                             |       | (200                                           | )          | (86 | ) |
| Other Income (expense) total                 |       | $                                              | 199        |   | $ | (86 | ) |

 

**NetIncome**

 

Duringthe six months ended June 30, 2006, our net income was $1.3 million, anincrease of 80.0% compared to the same period last year. This increaseprimarily resulted from our increased net sales.  See below for a discussion of our net incomeadjusted for the effects of SFAS 123R and SFAS 133 on our results for the sixmonths ended June 30, 2006.

 

**Reconciliationof Non-GAAP Financial Measures to the Corresponding GAAP Financial Measures forthe Six Months ended June 30, 2006 (unaudited)**

The following are selected results including andexcluding the impact of SFAS 123R and SFAS 133: 

| **Six Months Ended  June 30, 2006**         | ** ** | **Actual** | ** ** | **Adjustment** | ** ** | ** ** | ** ** | **Non-GAAP****Pro-forma** | ** ** |
|---------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|---------------------------|------------|
| Operating expenses                          |       | $          | 7,116,095  |           | $          | (1,243,064 | )          | (a)                       |       | $ | 5,873,031 |   |
|                                        |       |       |       |           |       |       |       |                      |       |   |   |   |
| Operating income from continuing operations |       | $          | 1,395,426  |           | $          | 1,243,064  |       | (a)                       |       | $ | 2,638,490 |   |
|                                        |       |       |       |           |       |       |       |                      |       |   |   |   |
|                                        |       |       |       | $              | 1,243,064  |       | (a)        |                      |       |   |
|                                        |       |       |       | $              | (399,009   | )          | (b)        |                      |       |   |
| Net income                                  |       | $          | 1,300,686  |           | $          | 844,055    |       |                      |       | $ | 2,144,741 |   |
| Diluted earnings per share                  |       | $          | 0.08       |           | $          | 0.06       |       |                      |       | $ | 0.14 |   |

----

(a)          Non-cash stock-option compensation charges under SFAS 123R recorded inthe six months ended June 30, 2006.

(b)         Non-cash change in fair value of derivative liability under SFAS 133recorded in the six months ended June 30, 2006. This derivative liability wasreclassified to equity on February 17, 2006.

See above discussion ofthe impact of SFAS 123R on the Company’s net income.

In June 1998, FASB issuedSFAS No. 133, which established 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 certain derivatives as eitherassets or liabilities in the statement of financial position and measure thoseinstruments at fair value.

The Company believes thatexcluding the incremental impact of SFAS 133 from net income providesmeaningful supplemental information regarding its financial results for the sixmonths ended June 30, 2006 as compared to the same period in 2005 since theCompany’s consolidated financial statements issued prior to January 1, 2006were not impacted by adopting SFAS 133. The Company also believes that thisfinancial information is useful in assessing the Company’s historicalperformance and year-over-year growth and when planning, forecasting andanalyzing future periods. The incremental impact of SFAS 133 during the six monthsended June 30, 2006 represents the change in fair value of the

 

21

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derivative liability (forthe January 2006 financing related warrants). The warrants were marked tomarket as of February 17, 2006 and thereafter classified as equity.

In June 1998, FASB issued SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*.SFAS 133 establishes accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in othercontracts (collectively referred to as derivatives) and for hedging activities.It requires that an entity recognize all derivatives as either assets orliabilities in the statement of financial position and measure those instrumentsat fair value.

 

In January 2006, theCompany sold shares of common stock warrants to purchase common stock. TheCompany evaluated the warrants in the transaction as derivative liabilities inaccordance with SFAS No. 133 until the date that the Company’sregistration statement registering the shares of common stock underlying suchwarrants was declared effective on February 17, 2006, after which such warrantswere classified as 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  of the registration statementis recorded as an adjustment to the liability. The income relating to thechange in the fair value of the Company’s stock reflected in the change in thefair value of the warrants is included as other income (expense). As thewarrants have been classified as equity, the Company will no longer need to “markto market” the change in fair value of such warrants. See Note 10 of the notesto our unaudited consolidated financial statements for the quarter ended June30, 2006.

 

**Financial Condition, Liquidityand Capital Resources**

 

AtJune 30, 2006, we had $24.7 million in cash. In January 2006, we raised $14.4million gross proceeds from the sale of our common stock and related warrantsfor our common stock. Webelieve that our existing cash resources, together with our projected cash flowfrom operations and the net proceeds from our bank line of credit, will besufficient to allow us to implement our strategy and growth plan.

During the six months ended June 30, 2006, in addition tocapital raised from the sale of our common stock and related warrants for ourcommon stock, we continued to leverage our bank and vendor lines of credit tohelp fund our growth. The net cash used by operating activities was $7.1million for the six months ended June 30, 2006, which resulted primarily fromincreased accounts receivable and increased inventory levels. The $17.7 millionincrease in accounts receivable during the six months ended June 30, 2006 wasdue to increased sales and increased net payment terms (see below) to certainregions during that period. The $2.3 million increase in inventory and $1.5million increase in prepaid inventory during the six months ended June 30, 2006was due to higher sales levels and buying opportunities which were available tous at June 30, 2006. Allowance for doubtful accounts at June 30, 2006 increasedto $830,000, compared to $553,000 at December 31, 2005. This increase****was related to our increased sales levelsand increased accounts receivable balance during the six months ended June 30,2006. We believe that at June 30, 2006, our reserve for doubtful accounts wasadequate. Our increase in accounts payable of $10.6 million and accruedexpenses of $1.3 million at June 30, 2006 compared to December 31, 2005was an offset to the cash used for increased accounts receivable and inventory.

 

Days of sales outstanding (the average number of days ittakes to collect revenue after a sale is made) at June 30, 2006 were 63 days,compared with 74 days at December 31, 2005. Normal payment terms require ourcustomers to pay on a net 30-day or net 60-day basis depending on the region.We are constantly working with our customers to reduce our days of salesoutstanding. The extension of net 60-day terms was required to remaincompetitive in several of the regions we currently operate, most notably LatinAmerica.

 

The net cash used in investing activities was $259,000 forthe six months ended June 30, 2006, compared with $114,000 for the six monthsended June 30, 2005. This use of cash is primarily the result of expendituresfor new furniture and fixtures related to our facility in Mexico and itsoffice, technical assembly and warehouse space, as well as the technical toolsand equipment necessary for the customization process of wireless handsets.

 

The net cash provided by financing activities for the sixmonths ended June 30, 2006 of $24.3 million was primarily the result of theJanuary 2006 sale of 2.2 million shares of our common stock and 717,200warrants for our common stock for net proceeds of $13.4 million, we alsoreceived approximately $1.0 million for exercise of employee stock options inaddition to borrowings on our bank line of credit.

 

Our net working capital at June 30, 2006 was $33.7 million,compared with $17.0 million at December 31, 2005. This increase was primarilydue to our January 2006 sale of common stock and related warrants for ourcommon stock and net income for the six months ended June 30, 2006.

 

22

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**Borrowings**

 

We have afully collateralized line of credit with Wells Fargo HSBC Trade Bank N.A. thatallows us to borrow up to a maximum of $25 million. This line of credit has amaturity 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 of this line ofcredit or similar facility on reasonable terms. Under this line of credit, ouradvances cannot exceed 80% of eligibledomestic accounts receivable or 85% of eligible foreign-insured accountsreceivable.

Interest is payable on a monthly basis (i) at Wells Fargo’sprime (8.25% at June 30, 2006) or (ii) at the one-month LIBOR (5.33% at June30, 2006) plus 1.50%. The interest rate is floating at Wells Fargo’s prime rateor is at LIBOR plus 1.5% if the debt is a fixed amount draw down. The line ofcredit is collateralized by substantially all of our assets, and expires in October2006. In addition to reporting and other non-financial covenants, the line ofcredit contains certain financial covenants which require us to maintain atangible net worth of not less than $12,500,000, a quick ratio of not less thanone-to-one, a debt-to-net worth ratio of not greater than two-to-one, and anannual net income after taxes of at least $1 on a rolling four quarter basis.Management believes we were in compliance with these covenants at June 30,2006. respectively.

 

We have no other notes payable.

 

For the quarter ended June 30, 2006 and the yearended December 31, 2005, amounts advanced against our line of credit were $20.0and $10.0 million. Our credit lines have been important parts of growing ourbusiness, and market changes affecting accounts receivable could diminish theborrowing base of available funds. At June 30, 2006 and December 31, 2005,advances were 80% and 71% of the available borrowing base.

**Subsequent Events**

 

On August 3, 2006, our common stock commenced trading onThe NASDAQ Stock Market’s Global Market under the ticker symbol “IFON,” and wesuspended trading of our common stock on the American Stock Exchange.

 

***Critical Accounting Policies***

We believe the following critical accountingpolicies are important to the presentation of our financial condition andoperating results, and require management’s judgments to make assumptions andestimates about the effects of matters that are inherently uncertain.

*RevenueRecognition and Accrued Chargebacks*

Revenues are recognized: (1) upon shipmentof the products to customers, (2) when collection of the outstandingreceivables is probable; and (3) when the final price of the product hasbeen determined. A carrier has nine months from the date of activation of awireless handset to charge back amounts previously credited to us if a customerterminates its service. We provide an allowance for estimated returns based onour experience, which estimate is recorded as a contra asset against accountsreceivable. A provision for returns is provided in the same period in which therelated commission revenue is recorded. Customer creditworthiness and economicconditions may change, including increasing the risk of collectibility andcontract terminations, and may require additional provisions, which couldnegatively impact our operating results.

*Allowancefor Doubtful Accounts and Sales Return Reserve*

Credit evaluations are undertaken for all majorsale transactions before shipment is authorized. Normal payment terms requirepayment on a net 30 or 60 day basis depending on the customer. On an ongoingbasis, we analyze the payment history of customer accounts, including recentcustomer purchases. We evaluate aged items in accounts receivable and providereserves for doubtful accounts and estimated sales returns. Customercreditworthiness and economic conditions may change, including increasing therisk of collectibility and sales returns, and may require additionalprovisions, which could negatively impact our operating results.

*InventoryWrite-Off and Effect on Gross Margin*

We regularly monitorinventory quantities on hand and record a provision for excess and obsoleteinventories based primarily on historical usage rates and our estimatedforecast of product demand for a period of time, generally nine months. Becauseof obsolescence, we will generally provide a full reserve for the costs of ourinventories in excess of our relevant demand forecast for the applicableperiod. We attempt to control our inventory levels so that we limit inventoriesin excess of demand for the succeeding nine months. However, because we need toplace non-cancelable orders with significant lead time

 

23

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and because it is difficult to estimate productdemand, we sometimes build inventories in excess of demand for the applicablefuture periods. If this occurs, we provide a reserve, which may have a negativeimpact on our reported results of operations and financial condition.

**Item 3. Quantitative andQualitative Disclosures About Market Risk**

 

The primary objective of thefollowing information is to provide forward-looking quantitative andqualitative information about our potential exposure to market risks. The term “marketrisk” for us refers to the risk of loss arising from adverse changes ininterest rates and various foreign currencies. The disclosures are not meant tobe precise indicators of expected future losses, but rather indicators ofreasonably possible losses. This forward-looking information providesindicators of how we view and manage our ongoing market risk exposures.

 

**Interest Rate**

 

We are exposed to marketrisk from changes in interest rates on our outstanding revolving line ofcredit. At June 30, 2006, we had $20.0 million outstanding, which could beaffected by changes in short-term interest rates. The interest rate for ourrevolving line of credit is (i) Wells Fargo’s prime rate (8.25% at June 30,2006) or LIBOR plus 1.50% (5.33% at June 30, 2006). For every 1% increase inWells Fargo’s prime rate or one-month LIBOR, our interest expense increases by$200,000 assuming $20.0 million remained outstanding for the entire year.

 

The above sensitivityanalysis for interest rate risk excludes accounts receivable, accounts payableand accrued liabilities because of the short-term maturity of such instruments.The analysis does not consider the effect interest rate movement may have onother variables relating to our business, including changes in sales volumesthat could be indirectly attributed to changes in interest rates. The actionsthat we would take in response to such a change are also not considered. If itwere possible to quantify this impact, the results could differ from thesensitivity effects shown above.

 

**Market Risk**

 

Substantial portions of ourrevenue and expenses are transacted in markets outside the United States;however, all sales transactions and accounts receivable are denominated in U.S.dollars. As a result of our international sales, our future operating resultscould be adversely affected by a variety of factors, including changes inspecific countries’ political, economic or regulatory conditions, and tradeprotection measures. Our market risk management includes an accounts receivableinsurance policy for both our domestic and foreign sales. However, there can beno assurance that our insurance policy will substantially offset the impact offluctuations in currency exchange rates, political, economic or regulatoryconditions on its results of operations and financial position. Foreigncurrency fluctuations did not have a material impact on our financial resultsduring the six months ended June 30, 2006.

 

 

**Item 4. Controls and Procedures**

 

**Disclosure Controls**

 

Pursuantto Rule 13a-15(e) and 15d-15(e) under the Exchange Act, an evaluation wasperformed under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and President and the ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures as of the end of the periodcovered by this report. Based on the evaluation, the Chief Executive Officerand President and the Chief Financial Officer, concluded that the Company’sdisclosure controls and procedures were effective as of the end of the periodcovered by the report.

 

**Changes in Internal Control OverFinancial Reporting**

The Chief ExecutiveOfficer and President and the Chief Financial Officer conducted an evaluationof our internal control over financial reporting (as defined in Exchange ActRule 13a-15(f)) (“Internal Control”) to determine whether any changes inInternal Control occurred during the quarter ended June 30, 2006, that havematerially affected or which are reasonably likely to materially affectInternal Control. Based on that evaluation, no such change occurred during suchperiod.

 

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The Company is not an “acceleratedfiler”(i.e. the Company’s public float is below $75 million) for the fiscalyear 2006; hence, the internal controls certification and attestationrequirements of Section 404 of the Sarbanes-Oxley act will not be applicable tothe Company until the fiscal year ended December 31, 2007. Not withstanding thefact that these internal control requirements are not applicable to the Companyat this time, starting in the second quarter of 2006, the Company has beenreviewing its internal control procedures and it has retained an outside firmto assist in this process.

 

**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

*Securities Class Actions*

Between June 13, 2006 andJuly 14, 2006, seven securities class actions were filed in the United StatesDistrict Court for the Southern District of California against us and certainof our officers and directors. The longest class period alleged in these sevencases is from May 8, 2006 to June 12, 2006. Each of these substantially similarlawsuits allege that the defendants violated Sections 10(b), 20(a) and/or 20Aof the Exchange Act, as well as the associated Rule 10b-5, in connection withour restatement announced on June 12, 2006. In these seven lawsuits, plaintiffsseek declarations that each action is a proper class action, unspecifieddamages, interest, attorneys’ fees and other costs, equitable/injunctiverelief, and/or such other relief as is just and proper. When required torespond to a consolidated complaint, the defendants anticipate filing a motionto dismiss on the grounds that the plaintiffs have failed to adequately pleadviolations of the securities laws.

*DerivativeLawsuits*

On June 27, 2006, aderivative lawsuit was filed in the United States District Court for theSouthern District of California, purportedly on behalf of the Company againstcertain of our officers and directors, and the Company as a nominal defendant,by Caridad Miller. This lawsuit asserts claims for breaches of fiduciary duty,abuse of control, gross mismanagement, waste of corporate assets, unjustenrichment, violation of California Corporations Code Section 25402, violationof Section 304 of the Sarbanes-Oxley Act, and violation of Section 14(a) of theExchange Act. Plaintiff seeks unspecified damages, a declaration of liabilityunder the Sarbanes-Oxley Act of 2002 and reimbursement, a declaration regardingSection 14(a) of the Exchange Act, restitution, disgorgement, modification ofcertain corporate governance and internal procedures, extraordinary equitableand/or injunctive relief, costs, and such other relief as is just and proper.

On July 12, 2006, aderivative lawsuit was filed in the California Superior Court, in the County ofSan Diego, by Peter J. Cunningham, purportedly on behalf of the Company againstcertain officers and directors of the Company, and the Company as a nominaldefendant. This lawsuit asserts claims for breaches of fiduciary duty, abuse ofcontrol, gross mismanagement, waste of corporate assets, unjust enrichment, andviolation of California Corporations Code Section 25402 in connection with theCompany’s restatement. Plaintiff seeks unspecified damages, extraordinary equitableand/or injunctive relief, restitution, disgorgement, costs, and such otherrelief as is just and proper.

On July 28, 2006, aderivative lawsuit was filed in the United States District Court for theSouthern District of California by Peter J. Cunningham, purportedly on behalfof the Company against certain of our officers and directors, and the Companyas a nominal defendant. This lawsuit asserts claims for breaches of fiduciaryduty, abuse of control, gross mismanagement, waste of corporate assets, unjustenrichment, and violation of California Corporations Code Section 25402. Plaintiffseeks unspecified damages, extraordinary equitable and/or injunctive relief,disgorgement, costs, and such other relief as is just and proper.

When required to respond tothese derivative lawsuits, the defendants anticipate filing a motion to dismisson the ground, among others, that the plaintiff has failed to make a demand onthe Company’s board of directors.

While the above lawsuits arein their early stages, at this time we do not believe they will have a materialadverse effect on our financial condition.

Wemay become involved in certain other legal proceedings and claims which arisein the normal course of business. Other than as described above, as of June 30,2006, we did not have any significant litigation outstanding.

 

25

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**Item 1A. Risk Factors**

 

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2005, which could materially affect ourbusiness, financial condition or operating results. The risk factors anduncertainties described in our Annual Report on Form 10-K are not the onlyrisks and uncertainties facing us. Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially affect our business, financial condition or operating results. Exceptas set forth below, there have been no material changes to the risk factorsincluded in our Annual Report on Form 10-K during the period covered by thisreport.

 

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

Wepurchase wireless handsets and accessories principally from wirelesscommunications equipment manufacturers and distributors. We depend on thesesuppliers to provide us with adequate inventories of currently popular brandname products on a timely basis and on favorable pricing and other terms, aswell as depending on our suppliers’ abilities and financial stability. Forthe quarter ended June 30, 2006, two suppliers accounted for 54% and 22%respectively of our total cost of sales. We currently have one exclusive and severalnon-exclusive agreements with our principal suppliers, which can be terminatedon short notice and provide for certain territorial restrictions. Our suppliersmay not offer us competitive products on favorable terms or with timelydelivery. In addition new products from other manufacturers could impact thedemand for products from manufacturers we represent. From time to time, we havebeen unable to obtain sufficient product supplies. Any failure or delay by oursuppliers, 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.

 

***The loss or reduction in orders fromprincipal customers or a reduction in prices we are able to charge thesecustomers will have a negative impact upon our revenues and could cause ourstock price to decline.***

Ourfive largest customers in the quarter ended June 30, 2006 represented 20%, 18%,14%, 12% and 12% of our net sales. These customers are carriers in Central andSouth America. The markets we serve are subject to significant pricecompetition. Additionally, our customers are not contractually obligated topurchase products from us. For these and other reasons, such as competitivepricing and competitive pressures, customers may seek to obtain products orservices from us at lower prices than we have been able to obtain from thesecustomers in the past. This could occur, for example, in the case of a customerpurchasing large quantities of a product from us, who then terminates thisrelationship because the customer can obtain a lower price by buying directlyfrom the manufacturer or other supplier. 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. In addition, we haveexperienced losses of certain customers through industry consolidation and inthe ordinary course of business. There can be no assurance that any of ourcustomers will continue to purchase products or services from us or that theirpurchases will be at the same or greater levels than in prior periods.

 

***Approximately 94% of ourrevenues during the quarter ended June 30, 2006******were generated outside of the United States incountries that may have volatile currencies or other risks.***

Weengage in significant sales activities in territories and countries outside ofthe United States, particularly Latin American countries, including Argentina. Allour sales transactions are completed in U.S. dollars. The fact that wedistribute products into a number of territories and countries exposes us to,among other things, increased credit risks, customs duties, import quotas andother trade restrictions, potentially greater and more unpredictableinflationary pressures, and shipping delays. Changes may occur in social,political, regulatory and economic conditions or in laws and policies governingforeign trade and investment in the territories and countries where wecurrently distribute products. United States laws and regulations relating toinvestment and trade in foreign countries could also change to our detriment.Any of these factors could have material adverse effects on our business andoperations. Although we purchase and sell products and services in U.S. dollarsand do not engage in exchange swaps, futures or options contracts or otherhedging techniques, fluctuations in currency exchange rates could reduce demandfor products sold in U.S. dollars. We cannot predict the effect that futureexchange rate fluctuations will have on our operating results. We may in thefuture engage in currency hedging transactions, which could result in ourincurring significant additional financial risks, including losses.

 

26

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***We have outstanding indebtedness,which is secured by substantially all our assets and could prevent us fromborrowing additional funds, if needed.***

We had outstanding debt in theamount of $20.0 million and $10.0 million at June 30, 2006 andDecember 31, 2005 in the form of a bank line of credit of up to $25million based on a borrowing base, which is based on a percentage of eligibleaccounts receivable.Any significant decrease in our level of eligible accounts receivable willreduce our ability to borrow additional funds to adequately finance ouroperations and expansion strategies. If we violate our loan covenants, defaulton our obligations or become subject to a change of control, our indebtednesswould become immediately due and payable. The terms of our credit facilityrestrict us from incurring additional indebtedness, which could limit ourability to expand our operations. We are also subject to negative covenantsthat, among other things, limit our ability to sell certain assets and makecertain payments, including but not limited to, dividends, repurchases ofcommon stock and other payments outside the normal course of business, as wellas prohibiting us from merging or consolidating with another corporation orselling all or substantially all of our assets.

 

***Stockholders have been and may bediluted as a result of past or future offerings or other financings or equitygrants.***

We may in thefuture raise additional capital through one or more public offerings, privateplacements or other financings involving our securities or make stock option orother equity grants. As a result of these financings or grants, ownershipinterests in us may be diluted, potentially substantially.

In January 2006**,**we sold an aggregate 2,200,000 shares ofour common stock at $6.55 per share, for total gross proceeds of $14,410,000.The purchasers were also issued warrants to purchase an aggregate of 660,000shares of our common stock at an exercise price of $9.19 per share during theperiod beginning six months after the date of the purchase agreement and endingfour years later. As part of the sale, we also issued three-year term warrantsto purchase a total of 57,200 shares to placement agents with varying exerciseprices (44,000 shares at $6.88 per share and 13,200 at $9.65 per share). 

Additionally,in April and June 2006, we granted stock options to purchase an aggregate of32,000 and 50,000 of its common stock to certain employees. These options haveexercise prices of $5.33 and $15.17 per share and expire five years from thedate of grant. Also in June 2006, our stockholders approved previously grantedoptions to purchase an aggregate of 180,000 of our common stock to certain non-employeedirectors. These options have exercise prices of $1.65 and $8.12 per share andexpire five and three years, respectively, from the date of grant. As a resultof these issuances and grants, ownership interests in us have been, and may bein the future further, diluted.

***Class action and derivative lawsuits havebeen filed against us, our board of directors and certain of our officers, andother lawsuits may be instituted against us from time to time.***

We are currently, and from time to time in the futuremay become, subject to claims and litigation, which could be expensive,lengthy, and disruptive to our normal business operations. In addition, theoutcome of any claims or litigation may be difficult to predict and could havea material adverse effect on our business, operating results or financialcondition. For further information regarding certain claims and litigation inwhich we are currently involved, see “Part II — Item 1. Legal Proceedings”above.

 

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

 

None.

 

**Item 3.    Defaults on Senior Securities**

 

None.

 

**Item 4.    Submission of Matters to a Vote of SecurityHolders**

 

On June 12, 2006, we held our 2006Annual Meeting of Stockholders. At that meeting, our stockholders took thefollowing actions on the following proposals by the vote of shares indicated asadjusted for the subsequent June 19, 2006 split:

 

(a)           Theelection of the following directors to serve on our Board of Directors, eachdirector to serve until the next annual meeting of stockholders or until theirrespective successor is elected and qualified:

 
| **Name**          | ** ** | **Votes Cast For** | ** ** | **Votes Against** | ** ** | **Votes Withheld** | ** ** |
|-------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|
| Joseph Ram        |       | 11,556,114         |       | —            |       | 271,782            |       |
| Abraham G. Rosler |       | 11,556,114         |       | —            |       | 283,382            |       |
| Randall P. Marx   |       | 11,556,114         |       | —            |       | 283,382            |       |
| Robert S. Picow   |       | 11,556,114         |       | —            |       | 283,382            |       |
| Kirk A. Waldron   |       | 11,544,484         |       | —            |       | 283,412            |       |

 

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(b)           Theratification of the employment of Singer Lewak Greenbaum & GoldsteinLLP as our independent registered public accounting firm for the fiscal yearending December 31, 2006:

 

| ** ** | **Votes Cast For** | ** ** | **Votes Cast Against** | ** ** | **Abstained** | ** ** | ** ** |
|------------|--------------------|------------|------------------------|------------|---------------|------------|------------|
|       | 11,779,938         |       | 34,158                 |       | 13,800        |       |       |

 

(c)           Theapproval of the InfoSonics Corporation 2006 Equity Incentive Plan, whichprovides for, among other things, the authority to issue up to 1,000,000 sharesof our common stock through various forms of equity grants:

 

| ** ** | **Votes Cast For** | ** ** | **Votes Cast Against** | ** ** | **Abstained** | ** ** | **Broker non-  votes** |
|------------|--------------------|------------|------------------------|------------|---------------|------------|------------------------|
|       | 7,515,718          |       | 566,894                |       | 13,150        |       | 3,732,134              |

 

(d)           The approval of stock options granted by the Board ofDirectors to non-employee members of our Board of Directors during 2005 asdescribed below:

** **

| ** **           | ** ** | **Subject to  Options** | ** ** | **Date  Granted** | ** ** | **Exercise  Price** | ** ** | **Expiration  Date** | ** ** |
|----------------------|------------|-------------------------|------------|-------------------|------------|---------------------|------------|----------------------|------------|
|                 |       |                    |       |              |       |                |       |                 |       |
| Randall P. Marx |       | 30,000                  |       | 01/21/05          |       | $                   | 1.65       |                 | 01/21/10   |   |
|                 |       | 30,000                  |       | 12/30/05          |       | $                   | 8.12       |                 | 12/30/08   |   |
|                 |       |                    |       |              |       |                |       |                 |       |
| Robert S. Picow |       | 30,000                  |       | 01/21/05          |       | $                   | 1.65       |                 | 01/21/10   |   |
|                 |       | 30,000                  |       | 12/30/05          |       | $                   | 8.12       |                 | 12/30/08   |   |
|                 |       |                    |       |              |       |                |       |                 |       |
| Kirk A. Waldron |       | 30,000                  |       | 01/21/05          |       | $                   | 1.65       |                 | 01/21/10   |   |
|                 |       | 30,000                  |       | 12/30/05          |       | $                   | 8.12       |                 | 12/30/08   |   |

 

| ** ** | **Votes Cast For** | ** ** | **Votes Cast Against** | ** ** | **Abstained** | ** ** | **Broker non-  votes** |
|------------|--------------------|------------|------------------------|------------|---------------|------------|------------------------|
|       | 7,508,202          |       | 578,510                |       | 9,050         |       | 3,732,134              |

## ** **

**Item 5.    Other Information**

None.

 

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

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                               |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | InfoSonics Corporation  2006 Equity Incentive Plan (incorporated by reference to Appendix B to  the definitive proxy statement filed by the Company on April 28, 2006)                                                         |
| 10.2                |       | Form of Stock  Option Grant Notice/Stock Option Agreement under the InfoSonics Corporation  2006 Equity Incentive Plan (incorporated by reference to a current report on  Form 8-K filed by the Company on June 12, 2006) |
| 10.3                |       | Form of Amended  and Restated Stock Option Agreement (Non-Employee Directors’ Option (incorporated  by reference to a current report on Form 8-K filed by the Company  on June 12, 2006)                             |
| 10.4                |       | Form of Amendment  No. 1 to Common Stock Purchase Warrant (incorporated by reference to a  current report on Form 8-K filed by the Company on June 12,  2006)                                                             |
| 10.5                |       | Employment Letter  Agreement between the Company and Timmy Monico, dated May 2, 2006 (*)                                                                                                                                            |
| 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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(*) Filed herewith.

 

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**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, as amended, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
| ** ** | ** **      | **InfoSonics Corporation** |
|------------|-----------------|----------------------------|
|       |            |                       |   |
|       |            |                       |   |
| Date:      | August 14, 2006 | By:                        | /s/  Joseph Ram |   |
|       |            |                       | Joseph Ram |
|       |            |                       | Chief Executive Officer |
|       |            |                       |   |
|       |            |                       |   |
| Date:      | August 14, 2006 | By:                        | /s/  Jeffrey Klausner |   |
|       |            |                       | Jeffrey Klausner |
|       |            |                       | Chief Financial Officer |
|            |                 |                            |  |  |  |

 

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