**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

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**FORM 10 - Q**

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**QUARTERLY REPORT UNDER SECTION 13OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF1934.**

 

**For the quarterly period ended September 30, 2004.**

 

| **005-79915**                                           |
|---------------------------------------------------------|
| (Commission File Number)                                |
|                                                    |
| **InfoSonics  Corporation**                             |
| (Exact name of registrant as specified in its  charter) |

 

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

** **

**5880 Pacific Center BlvdSan Diego, CA 92121**

(Addressof principal executive offices including zip code)

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

**Not Applicable**(Former Name or Former Address, if ChangedSince Last Report)

 

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

Yes ý     Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yeso     Noý

 

As of November 15, 2004, theRegistrant had 5,212,000 shares outstanding of its $.001 par value commonstock.

 

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**InfoSonicsCorporation**

 

**QuarterlyReport on FORM 10-Q For The Period Ended**

 

### **September 30, 2004**

 
| **Table of Contents**          |
|--------------------------------|
|                           |   |   |
|                           |   |   |
|                           |   |   |
| PART I. FINANCIAL  INFORMATION |
|                           |   |   |
| Item 1.                        | Financial Statements |   |
|                           |   |   |
|                           | Consolidated Balance Sheets  as of September 30, 2004 (unaudited) and December 31, 2003 |   |
|                           |   |   |
|                           | Consolidated  Statements of Operations for the Three Months and Nine Months Ended September  30, 2004 (unaudited) and 2003 (unaudited) |   |
|                           |   |   |
|                           | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2004  (unaudited) and 2003 (unaudited) |   |
|                           |   |   |
|                           | Notes to  Consolidated Financial Statements |   |
|                           |   |   |
| Item 2.                        | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|                           |   |   |
| Item 3.                        | Quantitative and Qualitative  Disclosures About Market Risk |   |
|                           |   |   |
| Item 4.                        | Controls and Procedures |   |
|                           |   |   |
| PART II. OTHER INFORMATION     |
|                           |   |   |
| Item 1.                        | Legal Proceedings. |   |
|                           |   |   |
| Item 2.                        | Changes in Securities and Use of  Proceeds. |   |
|                           |   |   |
| Item 3.                        | Defaults Upon Senior Securites. |   |
|                           |   |   |
| Item 6.                        | Exhibits and Reports on Form 8-K. |   |
|                           |   |   |
| Signatures.                    |   |
|                           |   |   |
| Exhibit  31.1                  |   |
|                           |   |   |
| Exhibit  32.1                  |   |

 

2

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**Part I.  FINANCIAL INFORMATION**

## ** **

Item 1.  FinancialStatements

 

**InfoSonicsCorporation and subsidiaries**

**Consolidated Balance Sheets**

** **
| **ASSETS**                                                                                              | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                              | ** ** | **(unaudited)** | ** ** | ** ** | ** ** |
| **Current assets**                                                                                      |       |   |   |   |   |
| Cash and cash equivalents                                                                               |       | $ | 6,477,766 |   | $ | 2,570 |   |
| Trade accounts receivable, net of allowance for doubtful accounts of  $258,011 (unaudited) and $359,990 |       | 6,333,053 |   | 8,633,284 |   |
| Inventory, net of reserves of $168,539 (unaudited), and $76,820                                         |       | 5,002,281 |   | 1,575,999 |   |
| Prepaid expenses                                                                                        |       | 1,547,363 |   | 188,513 |   |
| Net assets of discontinued operations                                                                   |       | 545,778 |   | 1,559,207 |   |
| Deferred tax assets                                                                                     |       | 365,650 |   | 515,650 |   |
|                                                                                                    |       |   |   |   |   |
| Total current assets                                                                                    |       | 20,271,891 |   | 12,475,223 |   |
|                                                                                                    |       |   |   |   |   |
| **Property and equipment,**net                                                                          |       | 176,282 |   | 37,312 |   |
| **Deferred offering costs**                                                                             |       | — |   | 162,913 |   |
| **Other assets**                                                                                        |       | 71,609 |   | 22,767 |   |
|                                                                                                    |       |   |   |   |   |
| **Total assets**                                                                                        | ** ** | **$** | **20,519,782** | ** ** | **$** | **12,698,215** | ** ** |
|                                                                                                    |       |   |   |   |   |
|                                                                                                         |            |  |  |  |  |  |  |  |  |

 

* See accompanyingnotes.*

 

3

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**InfoSonicsCorporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                 | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                     | ** ** | **(unaudited)** | ** ** | ** ** | ** ** |
| **Current liabilities**                                                                                                        |       |   |   |   |   |
| Line of credit                                                                                                                 |       | $ | 4,031,227 |   | $ | 5,236,432 |   |
| Book Overdraft                                                                                                                 |       | — |   | 867,555 |   |
| Accounts payable                                                                                                               |       | 3,404,506 |   | 2,211,563 |   |
| Accrued expenses                                                                                                               |       | 254,400 |   | 144,278 |   |
| Income taxes payable                                                                                                           |       | — |   | 821,982 |   |
| Notes payable - related party                                                                                                  |       | — |   | 30,000 |   |
| Net liabilities of discontinued operations                                                                                     |       | 463,185 |   | 988,905 |   |
|                                                                                                                           |       |   |   |   |   |
| Total current liabilities                                                                                                      |       | 8,153,318 |   | 10,300,715 |   |
|                                                                                                                           |       |   |   |   |   |
| Total liabilities                                                                                                              |       | 8,153,318 |   | 10,300,715 |   |
|                                                                                                                           |       |   |   |   |   |
| **Shareholders’ equity**                                                                                                  |       |   |   |   |   |
| Preferred stock, $0.001 par value 10,000,000 shares authorized 0 and  0 shares issued and outstanding                          |       | — |   | — |   |
| Common stock, $0.001 par value 40,000,000 shares authorized 5,212,000  (unaudited) and 3,200,000 shares issued and outstanding |       | 5,212 |   | 3,200 |   |
| Additional paid-in capital                                                                                                     |       | 10,529,652 |   | 528,263 |   |
| Retained earnings                                                                                                              |       | 1,831,600 |   | 1,866,037 |   |
|                                                                                                                           |       |   |   |   |   |
| Total shareholders’ equity                                                                                                |       | 12,366,464 |   | 2,397,500 |   |
|                                                                                                                           |       |   |   |   |   |
| **Total liabilities and shareholders’ equity**                                                                            | ** ** | **$** | **20,519,782** | ** ** | **$** | **12,698,215** | ** ** |
|                                                                                                                                |            |  |  |  |  |  |  |  |  |

 

* See accompanyingnotes.*

 

4

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**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements****of Income**

 
| ** **                                                               | ** ** | **For the Three Months Ended** | ** **   | **For the Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------|--------------|-------------------------------|------------|
| ** **                                                               | ** ** | **September 30,**              | ** **   | **September 30,**             | ** ** |
| ** **                                                               | ** ** | **2004**                       | ** **   | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                               | ** ** | **(unaudited)**                | ** **   | **(unaudited)**               | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
|                                                                     |       |                           |         |                          |       |   |   |   |   |
| **Net sales**                                                            |       | $                              | 17,393,081   |                          | $          | 17,075,934 |   | $ | 53,816,308 |   | $ | 42,185,216 |   |
| **Cost of sales**                                                        |       | 16,116,974                     |         | 15,691,655                    |       | 49,582,109 |   | 38,988,652 |   |
|                                                                     |       |                           |         |                          |       |   |   |   |   |
| **Gross profit**                                                         |       | 1,276,107                      |         | 1,384,279                     |       | 4,234,199 |   | 3,196,564 |   |
| **Operating expenses**                                                   |       | 1,076,520                      |         | 867,908                       |       | 3,114,304 |   | 2,302,536 |   |
|                                                                     |       |                           |         |                          |       |   |   |   |   |
| **Income from continuing operations**                                    |       | 199,587                        |         | 516,371                       |       | 1,119,895 |   | 894,028 |   |
|                                                                     |       |                           |         |                          |       |   |   |   |   |
| **Other income (expense)**                                               |       |                           |         |                          |       |   |   |   |   |
| Interest income (expense)                                                |       | 11,759                         |         | (18,123                       | )          | (74,356 | ) | (85,464 | ) |
|                                                                     |       |                           |         |                          |       |   |   |   |   |
| **Income from continuing operations before  provision for income taxes** |       | 211,346                        |         | 498,248                       |       | 1,045,539 |   | 808,564 |   |
| **Provision for income taxes**                                           |       | (117,302                       | )            | 229,952                       |       | 118,633 |   | 323,430 |   |
|                                                                     |       |                           |         |                          |       |   |   |   |   |
| **Income from continuing operations**                                    | ** ** | **328,648**                    | ** **   | **268,296**                   | ** ** | **926,906** | ** ** | **485,134** | ** ** |
| **Income (loss) from discontinued operations (note  9)**                 | ** ** | **(788,635**                   | **)**        | **(75,532**                   | **)**      | **(961,344** | **)** | **(106,048** | **)** |
| ** **                                                               | ** ** | ** **                     | ** **   | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income (loss)**                                                    | ** ** | **$**                          | **(459,987** | **)**                         | **$**      | **192,764** | ** ** | **$** | **(34,438** | **)** | **$** | **379,086** | ** ** |
|                                                                     |       |                           |         |                          |       |   |   |   |   |
| **Basic earnings per share**                                             |       |                           |         |                          |       |   |   |   |   |
| From continuing operations                                               | ** ** | **$**                          | **0.06**     | ** **                    | **$**      | **0.08** | ** ** | **$** | **0.23** | ** ** | **$** | **0.15** | ** ** |
| Discontinued                                                             | ** ** | **$**                          | **(0.15**    | **)**                         | **$**      | **(0.02** | **)** | **$** | **(0.24** | **)** | **$** | **(0.03** | **)** |
| Net Income                                                               | ** ** | **$**                          | **(0.09**    | **)**                         | **$**      | **0.06** | ** ** | **$** | **(0.01** | **)** | **$** | **0.12** | ** ** |
| **Diluted earnings per share**                                           | ** ** | ** **                     | ** **   | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| From continuing operations                                               | ** ** | **$**                          | **0.06**     | ** **                    | **$**      | **0.07** | ** ** | **$** | **0.23** | ** ** | **$** | **0.12** | ** ** |
| Discontinued                                                             | ** ** | **$**                          | **(0.15**    | **)**                         | **$**      | **(0.02** | **)** | **$** | **(0.24** | **)** | **$** | **(0.03** | **)** |
| Net Income                                                               | ** ** | **$**                          | **(0.09**    | **)**                         | **$**      | **0.05** | ** ** | **$** | **(0.01** | **)** | **$** | **0.09** | ** ** |
| **Basic weighted-average number of shares  outstanding**                 |       | **5,212,000**                  |         | **3,200,000**                 |       | **3,977,197** |   | **3,200,000** |   |
|                                                                     |       |                           |         |                          |       |   |   |   |   |
| **Diluted weighted-average number of shares  outstanding**               |       | **5,212,000**                  |         | **3,908,098**                 |       | **3,977,197** |   | **3,908,098** |   |

 

*See accompanying notes*.

 

5

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**InfoSonicsCorporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**
| ** **                                                                                                  | ** ** | **For the Nine Months Ended** | ** **    |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------|---------------|
| ** **                                                                                                  | ** ** | **September 30,**             | ** **    |
| ** **                                                                                                  | ** ** | **2004**                      | ** **    | **2003** | ** ** |
| ** **                                                                                                  | ** ** | **(unaudited)**               | ** **    | **(unaudited)** | ** ** |
| **Cash flows from operating activities**                                                                    |       |                          |          |   |   |
| Net income from continuing operations                                                                       |       | $                             | 926,906       |   | $ | 485,134 |   |
| Adjustments to reconcile net income from operations to net cash  provided by (used in) operating activities |       |                          |          |   |   |
| Depreciation and amortization                                                                               |       | 17,973                        |          | 6,577 |   |
| Loss on disposal of fixed assets                                                                            |       | 43,554                        |          | — |   |
| Provision for bad debt                                                                                      |       | (101,979                      | )             | 266,089 |   |
| Provision for obsolete inventory                                                                            |       | 90,059                        |          | 75,110 |   |
| (Increase) decrease in                                                                                      |       |                          |          |   |   |
| Trade accounts receivable                                                                                   |       | 2,402,210                     |          | (5,108,973 | ) |
| Inventory                                                                                                   |       | (3,516,341                    | )             | (1,250,367 | ) |
| Prepaid expenses                                                                                            |       | (1,358,850                    | )             | (578,558 | ) |
| Other assets                                                                                                |       | (48,842                       | )             | — |   |
| Increase (decrease) in                                                                                      |       |                          |          |   |   |
| Accounts payable                                                                                            |       | 1,192,943                     |          | 2,008,134 |   |
| Accrued expenses                                                                                            |       | 110,122                       |          | 351,858 |   |
| Income tax liabilities                                                                                      |       | (821,982                      | )             | (16,700 | ) |
| Deferred tax liability                                                                                      |       | 150,000                       |          | — |   |
|                                                                                                        |       |                          |          |   |   |
| Cash used in continuing operations                                                                          |       | (914,227                      | )             | (3,761,695 | ) |
|                                                                                                        |       |                          |          |   |   |
| Cash used in discontinued operations                                                                        |       | (473,632                      | )             | (399,786 | ) |
|                                                                                                        |       |                          |          |   |   |
| Net cash used in operating activities                                                                       |       | (1,387,859                    | )             | (4,161,486 | ) |
|                                                                                                        |       |                          |          |   |   |
| **Cash flows from investing activities**                                                                    |       |                          |          |   |   |
| Purchase of property and equipment                                                                          |       | $                             | (200,497      | ) | $ | (7,349 | ) |
|                                                                                                        |       |                          |          |   |   |
| Net cash provided by (used in) investing activities                                                         |       | $                             | (200,497      | ) | $ | (7,349 | ) |
|                                                                                                        |       |                          |          |   |   |
| **Cash flows from financing activities**                                                                    |       |                          |          |   |   |
| Bank overdraft                                                                                              |       | (867,555                      | )             | — |   |
| Borrowings from line of credit                                                                              |       | 19,562,625                    |          | 15,759,782 |   |
| Payments on line of credit                                                                                  |       | (20,767,832                   | )             | (12,559,833 | ) |
| Payments on subordinated notes payable — related parties                                               |       | (30,000                       | )             | (67,746 | ) |
| Cash paid for deferred offering costs                                                                       |       | —                        |          | (195,522 | ) |
| Offering costs                                                                                              |       | (1,887,686                    | )             | — |   |
| Cash received for stock                                                                                     |       | 12,054,000                    |          | — |   |
| Net cash provided by (used in) financing activities                                                         |       | 8,063,552                     |          | 2,936,681 |   |
| Net increase (decrease) in cash and cash equivalents                                                        |       | 6,475,196                     |          | (1,232,154 | ) |
|                                                                                                        |       |                          |          |   |   |
| **Cash and cash equivalents, beginning of period**                                                          |       | 2,570                         |          | 1,240,451 |   |
| **Cash and cash equivalents, end of period**                                                                | ** ** | **$**                         | **6,477,766** | ** ** | **$** | **8,297** | ** ** |

*See accompanying notes*.

 

6

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**InfoSonicsCorporation**

**Notes to Consolidated Financial Statements**

**September30, 2004**

 

## **NOTE 1 - Basis of Presentation**

 

The accompanying unaudited Consolidated FinancialStatements have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X of theSecurities Exchange Act of 1934. Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements. The preparation offinancial statements requires management to make estimates and assumptions thataffect amounts reported in the financial statements and accompanying notes.Actual results are likely to differ from those estimates, but management doesnot believe such differences will materially affect the financial position orresults of operations of InfoSonics Corporation (the “Company”). TheConsolidated Financial Statements reflect all adjustments considered, in theopinion of the Company, necessary to fairly present the results for theperiods. Such adjustments are of a normal recurring nature.

 

The Consolidated Financial Statements include the accountsof the Company and its subsidiaries, Axcess Mobile and InfoSonics de Mexico,both of which are wholly-owned. Significant intercompany accounts andtransactions have been eliminated in consolidation.

 

The Consolidated Balance Sheet at December 31, 2003 hasbeen derived from the audited Consolidated Financial Statements at that date,but does not include all of the information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements. The unaudited Consolidated Statements of Income for thethree and nine months ended September 30, 2004 and September 30, 2003 and the unaudited Consolidated Statement of CashFlows for the nine months ended September 30, 2004 and September 30, 2003 arenot necessarily indicative of the operating results or cash flows that may beexpected for the entire year.

 

Due to seasonal factors, the Company’s interim results maynot be indicative of annual results.

 

The Company has not changed its significant accountingpolicies from those disclosed in its financial statements as of and  for the year ended December 31, 2003 asincluded in its Registration Statement on Form S-1 that became effective onJune 17, 2004.   For further information,reference is made to the audited Consolidated Financial Statements and thenotes thereto included in the Company’s financial statements as of and for theyear ended December 31, 2003 as included in its Registration Statement on FormS-1 that became effective on June 17, 2004.

 

                **Use of Estimates**

## ** **

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes. Actualresults could differ from those estimates and such differences may be materialto the financial statements

 

## **                ConsolidationPolicy**

 

The accompanying unauditedconsolidated financial statements include the accounts of InfoSonicsCorporation and its wholly-owned subsidiary corporations, Axcess Mobile, LLC.and InfoSonics de Mexico, since their respective acquisition dates, and afterelimination of all material intercompany accounts, transactions, and profits.

 

**NOTE 2.  Stock-Based Compensation**

 

The Company has elected to followAPB Opinion No. 25 and related interpretations in accounting for its stockoptions and grants since the alternative fair market value accounting providedfor under Statement of Financial Accounting Standards (SFAS) No. 123requires use of grant valuation models that were not developed for use invaluing employee stock options and grants. Under APB Opinion No. 25, ifthe exercise price of the Company’s stock grants and options equals or exceedsthe fair value of the underlying stock on the date of grant, no compensationexpenses are recognized.

 

7

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If compensation cost for the Company’sstock-based compensation plans had been determined based on the fair value atthe grant dates for awards under those plans consistent with the method of SFASNo. 123, then the Company’s net income for the three months and ninemonths ended September 30, 2004 and September 30, 2003, respectively,would have been adjusted to the pro forma amounts indicated below:

 
| ** **                                                                                                                                                                       | ** ** | **Three Months  ended September 30,** | ** ** | **Nine Months  ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income as reported                                                                                                                                                           |       | $                                     | (459,987   | )                                    | $          | 192,764 |   | $ | (34,438 | ) | $ | 379,086 |   |
|                                                                                                                                                                             |       |                                  |       |                                 |       |   |   |   |   |
| Stock-based employee  compensation cost, net of related tax effects, that would have been included  in the determination of net income if the fair value method had been applied |       | (183,453                              | )          | (—                              | )          | (183,453 | ) | (— | ) |
| Pro forma                                                                                                                                                                        |       | $                                     | (643,440   | )                                    | $          | 192,764 |   | $ | (217,891 | ) | $ | 379,086 |   |
|                                                                                                                                                                             |       |                                  |       |                                 |       |   |   |   |   |
| Basic earnings per common  share as reported                                                                                                                                     |       | $                                     | (0.09      | )                                    | $          | 0.06 |   | $ | (0.01 | ) | $ | 0.12 |   |
| Stock-based employee  compensation cost, net of related tax effects, that would have been included  in the determination of net income if the fair value method had been applied |       | $                                     | (0.03      | )                                    | $          | (0.00 | ) | $ | (0.03 | ) | $ | (0.00 | ) |
| Pro forma                                                                                                                                                                        |       | $                                     | (0.12      | )                                    | $          | 0.06 |   | $ | (0.04 | ) | $ | 0.12 |   |
| Diluted earning per share                                                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| As reported                                                                                                                                                                      |       | $                                     | (0.09      | )                                    | $          | 0.05 |   | $ | (0.01 | ) | $ | 0.10 |   |
| Stock-based employee  compensation cost, net of related tax effects, that would have been included  in the determination of net income if the fair value method had been applied |       | $                                     | (0.03      | )                                    | $          | (0.00 | ) | $ | (0.03 | ) | $ | (0.00 | ) |
| Pro forma                                                                                                                                                                        |       | $                                     | (0.12      | )                                    | $          | 0.05 |   | $ | (0.04 | ) | $ | 0.10 |   |
|                                                                                                                                                                                  |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**NOTE 3.  Earnings Per Share**

 

The Company utilizes SFASNo. 128, ‘‘Earnings per Share.’’ Basic earnings per share is computed bydividing income available to common stockholders by the weighted-average numberof common shares outstanding. Diluted earnings per share is computed similar tobasic earnings per share except that the denominator is increased to includethe number of additional common shares that would have been outstanding if thepotential common shares had been issued and if the additional common shareswere dilutive. Common equivalent shares are excluded from the computation iftheir effect is anti-dilutive. The Company’s common share equivalents consistof stock options.

 

The following table represents areconciliation of the shares used to calculate basic and diluted earnings pershare for the respective periods indicated: 
| ** **                                                                                                | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| Numerator: Net Income  (Loss)                                                                             |       | $                                     | (459,987   | )                                    | $          | 192,764 |   | $ | (34,438 | ) | $ | 379,086 |   |
| Denominator:                                                                                              |       |                                  |       |                                 |       |   |   |   |   |
| Denominator for basic  earnings pershare — weighted average shares                                   |       | 5,212,000                             |       | 3,200,000                            |       | 3,977,197 |   | 3,200,000 |   |
| Effect of dilutive  securities                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Employee stock options                                                                                    |       | —                                |       | 708,098                              |       | — |   | 708,098 |   |
| Denominator for diluted  earnings pershare — adjusted weighted average shares and assumed conversion |       | 5,212,000                             |       | 3,908,098                            |       | 3,977,197 |   | 3,908,098 |   |
|                                                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| Basic earnings (loss) per  share                                                                          |       | $                                     | (0.09      | )                                    | $          | 0.06 |   | $ | (0.01 | ) | $ | 0.12 |   |
|                                                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| Diluted earnings (loss)  per share                                                                        |       | $                                     | (0.09      | )                                    | $          | 0.05 |   | $ | (0.01 | ) | $ | 0.09 |   |
|                                                                                                           |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

## ** **

 

8

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**NOTE 4.  Income Taxes**

 

SFAS No. 109, “ACCOUNTINGFOR INCOME TAXES”, establishes financial accounting and reporting standards forthe effect of income taxes. The objectives of accounting for income taxes areto recognize the amount of taxes payable or refundable for the current year anddeferred tax liabilities and assets for the future tax consequences of eventsthat have been recognized in an entity’s financial statements or tax returns.Judgment is required in assessing the future tax consequences of events thathave been recognized in our financial statements or tax returns. Fluctuationsin the actual outcome of these future tax consequences could materially impactour financial position or our results of operations.

 

**NOTE 5.  Inventory**

 

Inventory is valued at the lower ofcost or market using standard costs that approximate average cost.  Inventories are reviewed periodically anditems considered to be slow-moving or obsolete are reduced to estimated netrealizable value through an appropriate reserve.  Inventory consists of the following:

 
| ** **        | ** ** | **September  30,** | ** ** | **December 31,** | ** ** |
|-------------------|------------|--------------------|------------|------------------|------------|
| ** **        | ** ** | **2004**           | ** ** | **2003**         | ** ** |
| Finished goods    |       | $                  | 5,170,820  |             | $          | 1,652,819 |   |
| Inventory reserve |       | (168,539           | )          | (76,820          | )          |
| Net inventory     |       | 5,002,281          |       | 1,575,999        |       |
|                   |            |                    |            |                  |            |  |  |

 

## **NOTE6.  Revolving Bank Loan Agreements andNotes Payable**

 

The Company has available a line ofcredit from a bank, which allows the Company and its subsidiaries to borrow upto a maximum of $7,500,000. The line of credit provides for advances not toexceed 85% of eligible domestic accounts receivable and 70% to 90% of foreigninsured accounts depending on the country of the debtor.  The majority of the debtors aredomestic.  As of September 30, 2004, theCompany’s available borrowing capacity is $4,661,940, which represents themaximum line of credit less restricted receivables.

 

Interest is payable on a monthlybasis at prime (4.75% at September 30, 2004) or at the London Inter-BankOffering Rate (1.25% at September 30, 2004), plus 2.25% for the first $500,000and 2.5% for amounts over $500,000.  Theline of credit is collateralized by substantially all of the assets of the Company,personally guaranteed by the Company’s majority stockholder, and expires in May2005.  In addition to reporting and othernon financial covenants, the line of credit contains certain financialcovenants which require the Company to maintain a tangible net worth of notless than $1,050,000, a quick ratio of not less than 0.7-to-1, a debt-to-networth ratio of not greater than 5-to-1 and quarterly net income after taxes ofat least $1(excluding losses from discontinued operations).  At December 31, 2003 and September 30, 2004,the amounts drawn against the line of credit were $5,236,432, and $4,031,227(unaudited), respectively.

 

 

## **NOTE7.  Equity Transactions**

 

During the nine months endedSeptember 30, 2004, in connection with the Company’s initial public offering,the Company issued 2,000,000 shares of common stock for gross proceeds of$12,000,000.  The Company paidcommissions and fees of $2,050,599 in connection with the offering.

 

During the year ended December 31,2003, the Company entered into a consulting agreement with an advisor relatedto certain financial and advisory services. This agreement as amended in March2004, provides for such services to be rendered for a twelve month periodfollowing the initial public offering date. In connection with such financialand advisory services the Company will be obligated to compensate theconsultant in the amount of $5,000 per month for a period of twelve months. Inaddition, the Company will issue options to purchase 125,000 shares of theCompany’s common stock at an exercise price of 120% of the initial publicoffering price. The options will be exercisable for a period of three yearsfollowing the effective date of the initial public offering. This agreement wassubsequently amended in April, 2004, at which time the Company cancelled the consultingagreement and hired the consultant as an employee of the Company and all of thecompensation terms remained the same.

 

9

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On June 17, 2004, the Companyissued options to purchase 200,500 shares of the Company’s common stock toemployees with an exercise price of $6.00 per share. One-third of the optionsbecome exercisable on June 17, 2005, and the remaining options will vest on apro rata basis thereafter. A compensation charge was not recorded in connectionwith the issuance of such options as the exercise price of the stock optionsgranted was not less than the fair market value of the Company’s stock price asof the date of grant.

 

## **NOTE8.  Recent Accounting Pronouncements**

 

In January 2003, the FASB issuedFASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN46”). This interpretation of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements,” addresses consolidation by business enterprises ofvariable interest entities with certain characteristics. FIN 46 is effectiveimmediately for all enterprises with variable interests in variable interestentities created after January 31, 2003, and is effective beginning withthe September 30, 2003, quarterly financial statements for all variableinterests in a variable interest entity created before February 1, 2003. Theadoption of this interpretation did not have any impact on the Company’sfinancial position or results of operations.

 

In April 2003, the FASB issuedStatement of Financial Accounting Standards No. 149, “Amendment of Statement133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149amends Statement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”) for certaindecisions made as part of the Derivatives Implementation Group process. SFAS149 also amends SFAS 133 to incorporate clarifications of the definition of aderivative. This statement is effective for contracts entered into or modifiedafter June 30, 2003, and for hedging relationships designated after June 30,2003. The Company does not anticipate that the adoption of SFAS 149 will have asignificant impact on the Company’s financial position or results of operations.

 

In May 2003, the FASB issuedStatement of Financial Accounting Standards No. 150, “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity”(“SFAS 150”). SFAS 150 establishes standards for the classification andmeasurement of certain financial instruments with characteristics of bothliabilities and equity. This Statement is effective for financial instrumentsentered into or modified after May 31, 2003, and is effective for all affectedfinancial instruments beginning with the September 30, 2003, quarterlyfinancial statements. The adoption of this statement did not have any impact onthe Company’s financial position or results of operations.

 

**NOTE 9.  Discontinued Operations.**

 

During the quarter ended September 30, 2004, the Company and its Board ofdirectors discussed Axcess Mobile, LLC and its mall-based kiosk locations andthe Company began to implement actions necessary to close those mall-basedkiosk locations.  On October 28, 2004,the Company assigned the leases for six of the mall-based kiosk locations to athird party; however, the assignment did not release the Company from thefuture lease obligations.  The thirdparty assignee operates approximately 400 mall-based kiosks in 28 states.  A third party is holding in escrow two monthsrent for the locations from the assignee, and in the event of default by theassignee those funds will be released to the Company.  The other lease locations were closed inOctober 2004.  The results of thediscontinued operations are as follows:

 
| ** **                    | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **September 30,**              | ** ** | **September 30,**             | ** ** |
| ** **                    | ** ** | **2004**                       | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net Sales                     |       | $                              | 475,188    |                          | $          | 1,160,844 |   | $ | 2,224,307 |   | $ | 3,040,184 |   |
| Gross profit                  |       | 221,596                        |       | 757,581                       |       | 1,325,609 |   | 1,694,527 |   |
| Operating income (loss)       |       | $                              | (656,365   | )                             | $          | 20,296 |   | $ | (825,544 | ) | $ | (55,417 | ) |
| Identifiable assets           |       | $                              | 545,778    |                          | $          | 1,439,312 |   | $ | 545,778 |   | $ | 1,439,312 |   |
| Capital expenditures          |       | $                              | 1,474      |                          | $          | 15,733 |   | $ | 44,928 |   | $ | 17,400 |   |
| Depreciation and amortization |       | $                              | 5,774      |                          | $          | 3,990 |   | $ | 13,516 |   | $ | 11,969 |   |
|                               |            |                                |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of September 30, 2004, the plans for the discontinued operations weresubstantially complete, however the Company expects to continue to recordadjustments and expenses through discontinued operations as necessary.

 

 

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**NOTE 10.  Segment Information**

 

SFAS No. 131 “Disclosure aboutSegments of an Enterprise and Related Information” requires that the Companydisclose certain information about its operating segments where operatingsegments are defined as components of an enterprise about which separatefinancial information is available that is evaluated regularly by the chiefoperating decision maker in deciding how to allocate resources and in assessingperformance. Generally, financial information is required to be reported on thebasis that is used internally for evaluating segment performance and decidinghow to allocate resources to segments.

 

Summarized financial informationconcerning the Company’s reportable segments is shown in the following tablesfor the three and nine months ended September 30, 2004 and 2003.

 

Geographical revenues for the threeand nine months ended September 30, 2004 and September 30, 2003.

 
| ** **    | ** ** | **Three Months  Ended** | ** ** | **Nine Months  Ended**  | ** ** |
|---------------|------------|-------------------------|------------|-------------------------|------------|
| ** **    | ** ** | **September  30, 2004** | ** ** | **September  30, 2003** | ** ** | **September  30, 2004** | ** ** | **September  30, 2003** | ** ** |
| United States |       | $                       | 16,608,797 |                    | $          | 16,636,682 |   | $ | 51,117,177 |   | $ | 38,676,369 |   |
| Latin America |       | 784,284                 |       | 316,599                 |       | 2,611,394 |   | 1,849,160 |   |
| Asia Pacific  |       | —                  |       | 653                     |       | — |   | 1,517,687 |   |
| Europe        |       | —                  |       | 122,000                 |       | 87,737 |   | 142,000 |   |
|               |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

**Item 2****.  Management’sDiscussion and Analysis of Results of Operations and Financial Condition**

 

Thisdiscussion and analysis should be read in conjunction with the accompanyingConsolidated Financial Statements and related notes.  Our discussion and analysis of our financialcondition and results of operations are based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities, disclosure of anycontingent liabilities at the financial statement date and reported amounts ofrevenue and expenses during the reporting period. On an on-going basis wereview our estimates and assumptions. Our estimates were based on ourhistorical experience and other assumptions that we believe to be reasonableunder the circumstances. Actual results are likely to differ from thoseestimates under different assumptions or conditions, but we do not believe suchdifferences will materially affect our financial position or results ofoperations. Our critical accounting policies, the policies we believe are mostimportant to the presentation of our financial statements and require the mostdifficult, subjective and complex judgments, are outlined below in “—CriticalAccounting Policies,’’ and have not changed significantly.

 

Inaddition, certain statements made in this report may constitute“forward-looking statements”.  Theseforward-looking statements involve known or unknown risks, uncertainties andother factors that may cause the actual results, performance, or achievementsof InfoSonics to be materially different from any future results, performanceor achievements expressed or implied by the forward-looking statements.Specifically, 1) the actions of competitors and customers and our abilityto execute our business plans; and 2) our ability to increase revenues andoperating income is dependent upon our ability to continue to expand ourcurrent businesses and to enter new business areas, general economic conditions,and other factors. You can identify forward-looking statements by terminologysuch as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,”“believes,” “estimates,” “predicts,” “potential,” “continues” or the negativeof these terms or other comparable terminology. Although we believe that theexpectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements.

 

**Overview**

 

InfoSonicsis one of the largest distributors of wireless handsets and accessories in theUnited States and Latin America.  Wedistribute products of a number of manufacturers, including Audiovox, Kyocera,LG, Motorola, Nokia, Panasonic, Samsung, Sony-Ericsson and others. Our distributionservices include the purchasing, marketing, selling, warehousing, orderassembly, programming, packing, shipping, and delivery of handsets for wirelesstelecommunications from manufacturers to agents, resellers, distributors,independent dealers and retailers in the United States and to wireless networkoperators and resellers in Latin America.

 

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As a partof our distribution activities, we perform value added services when requestedby the customer. These services include but are not limited to programming,locking, software loading, packaging, and quality assurance testing.   We operate distribution hubs in San Diego,California and Miami, Florida. The San Diego facility primarily serves theneeds of our West Coast and Midwest customers and the Florida location servicescustomers primarily on the EastCoast and in Latin America.

 

Since ourfounding in 1994, we have grown our business by focusing on the needs of ourcustomers, developing and maintaining close relationships with manufacturers,entering new markets, and sourcing new and innovative products, whilemaintaining close attention to operational efficiencies and costs.

 

Wesuccessfully completed an initial public offering of our shares of common stockin June 2004 and became a reporting company. We are currently listed on the American Stock Exchange under the symbol“IFO”.

 

Due toseasonal and other factors, our interim results may not be indicative of annualresults.  Our operating results areinfluenced by several seasonal factors, which may cause our revenues andoperating results to fluctuate on a quarterly basis.  These fluctuations are a result of severalfactors, including but not limited to the timing and introduction of newproducts by our suppliers and competitors, promotions and subsidies by wirelessnetwork operators, purchasing patterns of customers and the timing of holidaysand other events effecting consumer demand.

 

**Areas of Management Focus and Performance Indicators**

 

We manageour business by focusing on the needs of our customers, developing andmaintaining close relationships with manufacturers, entering new markets, andsourcing new and innovative products, while maintaining close attention tooperational efficiencies and costs. The desired results of this focus areincreased shipping volumes and improved efficiencies to enable higher levels ofprofitability and earnings growth. Other areas that we focus on includemanagement execution, employee development, customer service, risk management,legal and ethical compliance and corporate governance.

 

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

 

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

 

Accordingto Merrill Lynch “Wireless Handsets” dated June 4, 2004, in 2003 wirelesshandset sales in North and Latin America increased by 17% and 25% respectively,and are forecasted to increase 16% and 16% respectively in 2004. This 2004projection is based on worldwide sales of 600 million handsets sold for thefull year 2004; January to June 2004 sales are estimated to have been justunder 300 million.  A rapid decline inwireless handset sales growth could negatively impact our net sales. Higherthan anticipated growth in demand could strain our resources and affect ourability to meet these unanticipated demands.

 

Excesssupply conditions can reduce the market prices of the products we sell andtherefore affect our ability to generate net sales and gross profit athistorical levels and could affect the value of our inventory. Conversely,should manufacturers be unable to respond to an unanticipated increase indemand on a timely basis, we, along with others in our industry, couldexperience supply constraints that would affect our ability to deliver product.We are unable to quantify these effects, as it is difficult to predict futuresupply conditions and demand patterns which affect our ability to meet customerdemand or sell handsets at an acceptable gross profit.

 

**Company Specific Trends, Challenges, Risks and Growth Opportunities**

 

In 2003,net sales increased by 39.5%, and handsets sold increased by 12.7% comparedwith 2002.  For the nine months endedSeptember 30, 2004, net sales increased 27.6% and handsets sold increased 9.4%compared with 

 

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the nine months endedSeptember 30, 2003. Although we have incorporated growth into our strategy,there can be no assurance these trends will continue. Similarly, while we haveexperienced high levels of growth in income from continuing operations for thenine months ended September 30, 2004 (29.3%), we cannot anticipate futuregrowth to be at the same levels. Our strategy incorporates overall growthelements for each aspect of our business, which we hope will result in continuedearnings growth; however there can be no assurance this trend will continue.Potential investment in growth opportunities and assumed additional risks couldalter our earnings trend.

 

***Our operatingresults may vary significantly, which may cause our stock price to fluctuate.***

 

Our operating results are influenced by a number offactors, which may cause our revenue and operating results to fluctuate. Thesefactors include:

 

•                  promotions and subsidies by wirelessnetwork operators.

•                  the timing of introduction of newproducts by our suppliers and competitors;

•                  purchasing patterns of customers indifferent markets;

•                  general economic conditions; and

•                  product availability and pricing.

 

Both our wholesale distribution and retail businesseshistorically have experienced increased sales during the third and the fourthquarters of the calendar year due to holiday gift buying. In addition, ifunanticipated events occur, including delays in securing adequate inventoriesof competitive products at times of peak sales or significant decreases insales during these periods, it could result in a material decrease in ourrevenues and losses or lower profits.

 

***We buy asignificant amount of our products from a limited number of suppliers, who maynot provide us with competitive products at reasonable prices when we need themin the future.***

 

We purchase wireless handsets and accessoriesprincipally from wireless communications equipment manufacturers anddistributors. We depend on these suppliers to provide us with adequate inventoriesof currently popular brand name products on a timely basis and on favorablepricing and other terms. Our agreements with our principal suppliers arenon-exclusive, require us to satisfy minimum purchase requirements, can beterminated on short notice and provide for certain territorial restrictions, asis common in our industry. Our suppliers may not offer us competitive productson favorable terms or with timely delivery. From time to time, we have beenunable to obtain sufficient product supplies. Any failure or delay by oursuppliers in supplying us with products on favorable terms may severelydiminish our ability to obtain and deliver products to our customers on atimely and competitive basis. If we lose any of our principal suppliers, or ifthese suppliers are unable to fulfill our product needs, or if any principalsupplier imposes substantial price increases and alternative sources of supplyare not readily available, it would have a material adverse effect on ourresults of operations.

 

***Our continuing liabilities on leases from our formermall-based retail kiosk locations could have a negative impact on earnings andcash flow.***

 

Althoughwe have assigned our six remaining retail leases to a third party and we havereceived indemnification from the third party, we also remain liable to thelessor for the respective remaining lease terms of one to three years, if thethird party does not fulfill its obligations under the leases.  As of September 30, 2004 the total potentialliability under these leases was $1,771,018, not including a $95,044 escrowdeposit held for the benefit of InfoSonics to the extent that the third partyshould default on any of the assigned leases. This escrow is not reflected onInfoSonics financial statements.

 

***The loss orreduction in orders from principal customers or a reduction in prices we areable to charge these***

***customers will havea negative impact upon our revenues and could cause our stock price to decline.***

 

Our three largest customers in the three months endedSeptember 30, 2004 accounted for approximately 18.5%, 10.5% and 10.5%,respectively, of our product sales.  Ourlargest customer for the nine months ended September 30, 2004 accounted for14.1% of our product sales, and no other customers accounted for 10% or greaterof our product sales.  The markets weserve are subject to severe price competition. Additionally, our customers arenot contractually obligated to purchase product from us. For these and otherreasons such as competitive pricing and competitive pressures, customers mayseek to obtain products or services from us at lower prices than we have beenable to obtain from these customers in the past. This could occur, for example,in the case of a customer purchasing 

 

13

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large quantities of a product from us, who then terminates thisrelationship because the customer can obtain a lower price by buying directlyfrom the manufacturer. The loss of any of our principal customers, a reductionin the amount of product or services our principal customers order from us orthe inability to maintain current terms, including price, with these or othercustomers could have an adverse effect on our financial condition, results ofoperations and liquidity. We have experienced losses of certain customersthrough industry consolidation and ordinary course of business and there can beno assurance that any of our customers will continue to purchase products orservices from us or that their purchases will be at the same or greater levelsthan in prior periods.

 

***Our futureprofitability depends on our ability to maintain existing margins and ourability to increase our sales, which we may not be able to do.***

 

The gross margins that we realize on sales of wirelesshandsets could be reduced due to increased competition or a growing industryemphasis on cost containment. Therefore, our future profitability will dependon our ability to maintain our margins or to increase our sales to help offsetpotential future declines in margins. We may not be able to maintain existingmargins for products or services offered by us or increase our sales. Ourability to generate sales is based upon demand for wireless telecommunicationsproducts and our having an adequate supply of these products. Even if our salesrates do increase, the gross margins that we receive from our sales may not besufficient to make our future operations profitable or as profitable.

 

***Our businessdepends on the continued tendency of wireless equipment manufacturers andnetwork operators to outsource aspects of their business to us.***

 

Our business depends in large part on wirelessequipment manufacturers and network operators outsourcing some of theirbusiness functions to us. We provide functions such as distribution, inventorymanagement, customized packaging, activation management and other services.Certain wireless equipment manufacturers and network operators have elected,and others may elect, to undertake these services internally. Additionally, ourcustomer service levels, industry consolidation, competition, deregulation,technological changes or other factors could reduce the degree to which membersof the wireless telecommunications industry rely on outsourced services such asthe services we provide. Any significant change in the market for theseservices could have a material adverse effect on our current and plannedbusiness.

 

***We may not be ableto effectively compete in our industry if consolidation of wireless networkoperators continues.***

 

The past several years have witnessed a consolidationwithin the wireless network operator community. If this trend continues, itcould result in a reduction or elimination of promotional activities by theremaining wireless network operators as they seek to reduce their expenditureswhich could, in turn, result in decreased demand for our products or services.Moreover, consolidation of wireless network operators reduces the number ofpotential contracts available to us. We could also lose business if wirelessnetwork operators, which currently are our customers, are acquired by otherwireless network operators which are not our customers. Wireless operators mayalso change their policy regarding sales to their agents by independentdistributors, such as requiring those agents to purchase products from thewireless operator or manufacturer, rather than from distributors such asInfoSonics. This type of requirement could have a material adverse effect onour business and results of operations.

 

***Our sales andinventory risk may be materially affected by fluctuations in regional demandpatterns and economic factors for which we cannot plan.***

 

The demand for our products and services hasfluctuated and may continue to vary substantially within the regions served byus. We believe the roll-out of third generation, or 3G, cellular telephonesystems and other new technologies, which has been delayed and could further bedelayed, has had and will continue to have an effect on overall subscribergrowth and handset replacement demand. Economic slow-downs in regions served byus or changes in promotional programs offered by wireless network operators maylower consumer demand for our products and create higher levels of inventorieswhich could decrease our gross and operating margins. We could face asubstantial inventory risk due to depreciation and equipment price erosion ifour products are not sold in a timely manner. We believe our operations wereadversely affected by an economic slow-down in the United States starting inthe fourth quarter of 2000. A prolonged economic slow-down in the United Statesor any other regions in which we have significant operations could negativelyimpact our results of operations and financial position.

 

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***We may not be ableto adequately respond to rapid technological changes in the wirelesstelecommunications industry, which could cause us to lose customers.***

 

The technology relating to wireless telecommunicationsequipment changes rapidly resulting in product obsolescence or short productlife cycles. We are required to anticipate future technological changes in ourindustry and to continually identify, obtain and market new products in orderto satisfy evolving industry and customer requirements. Competitors ormanufacturers of wireless equipment may market products which have perceived oractual advantages over products that we handle or which otherwise render thoseproducts obsolete or less marketable. We have made and continue to makesignificant capital investments in accordance with evolving industry andcustomer requirements including maintaining levels of inventories of currentlypopular products that we believe are necessary based on current marketconditions. This utilization of capital for inventory buildup of this natureincreases our risk of loss due to product obsolescence.

 

***Substantialdefaults by our customers on accounts receivables could have a significantnegative impact on our***

***cash flow andfinancial condition.***

 

We currently offer and intend to offer open accountterms to certain of our customers, which may subject us to credit risks,particularly to the extent that our receivables represent sales to a limitednumber of customers or are concentrated in particular geographic markets. Althoughwe have an accounts receivable insurance policy, this policy carries asubstantial deductible and may not cover us in all instances. We also have anaccounts receivable credit facility in order to reduce our working capitalrequirements. The extent of our ability to use our accounts receivable creditfacility is dependent on the amount of and collection cycle of our accountsreceivable. Adverse changes in our ability to use accounts receivable financingcould have a material adverse effect on our financial position, cash flows andresults of operations.

 

***We rely on oursuppliers to provide trade credit facilities to adequately fund our on-goingoperations and product purchases, and without those facilities, our ability toprocure products could be reduced.***

 

Our business is dependent on our ability to obtainadequate supplies of currently popular products on favorable pricing and otherterms. Our ability to fund our product purchases is dependent on our principalsuppliers providing favorable payment terms that allow us to maximize theefficiency of our capital usage. The payment terms we receive from oursuppliers are dependent on several factors, including, but not limited to, ourpayment history with the supplier, the suppliers’ credit granting policies, contractualprovisions, our overall credit rating as determined by various credit ratingagencies, industry conditions, our recent operating results, financial positionand cash flows and the supplier’s ability to obtain credit insurance on amountsthat we owe them. Adverse changes in any of these factors, certain of which maynot be wholly in our control, could have a material adverse effect on our

operations.

 

***Approximately 4.5%of our revenues for the three months ended September 30, 2004 and approximately5.0% of our revenues for the nine months ended September 30, 2004 weregenerated outside of the United States in countries that may have political orother risks.***

 

We engage in sales activities in territories andcountries outside of the United States. The fact that we distribute productsinto a number of countries exposes us to increased credit risks, customsduties, import quotas and other trade restrictions, potentially greaterinflationary pressures, and shipping delays. Changes may occur in social, political,regulatory and economic conditions or in laws and policies governing foreigntrade and investment in the territories and countries where we currentlydistribute products. United States laws and regulations relating to investmentand trade in foreign countries could also change to our detriment. Any of thesefactors could have a material adverse effect on our business and operations.Although we purchase and sell products and services in United States 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 United States dollars. We cannot predict the effect thatfuture exchange rate fluctuations will have on our operating results. We may inthe future engage in currency hedging transactions, which could result in ourincurring significant additional losses.

 

***We rely on ourinformation system technology to function efficiently, without interruptions,and if it does not,***

***customerrelationships could be harmed.***

 

We have focused on the application of our informationsystem technology to provide customized services to wireless communicationsequipment manufacturers and network operators. Our ability to meet ourcustomers’ 

 

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technical and performance requirements is highly dependent on theeffective functioning of our information technology systems, which mayexperience interruptions. These business interruptions could cause us to fallbelow acceptable performance levels pursuant to our customers’ requirements andcould result in the loss of the related business relationship.

 

***We have outstandingindebtedness, which is secured by substantially all our assets and which couldprevent us from borrowing additional funds, if needed.***

 

We have outstanding debt in the amount ofapproximately $4.0 million and $5.2 million at September 30, 2004 and December31, 2003, respectively, in the form of a bank line of credit which is based onaccounts receivable. If we violate our loan covenants, default on ourobligations or become subject to a change of control, our indebtedness wouldbecome immediately due and payable. Our credit facility is secured bysubstantially all of our assets and borrowing availability is based primarilyon a percentage of eligible accounts receivable. Consequently, any significantdecrease in eligible accounts receivable will limit our ability to borrowadditional funds to adequately finance our operations and expansion strategies.The terms of our credit facility could substantially prohibit us from incurringadditional indebtedness, which could limit our ability to expand ouroperations. The terms of our credit facility also include 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.

 

***The wirelesstelecommunications industry is intensely competitive and we may not be able tocontinue to compete against well established competitors with greater financialand other resources.***

 

We compete for sales of wireless telecommunicationsequipment and accessories, and expect that we will continue to compete, withnumerous well-established wireless network operators, distributors andmanufacturers, including our own suppliers. Many of our competitors possessgreater financial and other resources than we do and may market similarproducts or services directly to our customers. Distribution of wirelesstelecommunications equipment and accessories has generally had low barriers toentry. As a result, additional competitors may choose to enter our industry inthe future. The markets for wireless handsets and accessories are characterizedby intense price competition and significant price erosion over the life of aproduct. Many of our competitors have the financial resources to withstandsubstantial price competition and to implement extensive advertising andpromotional programs, both generally and in response to efforts by additionalcompetitors to enter into new markets or introduce new products. Our ability tocontinue to compete successfully will depend largely on our ability to maintainour current industry relationships. We may not be successful in anticipatingand responding to competitive factors affecting our industry, including new orchanging outsourcing requirements, the entry of additional well-capitalizedcompetitors, new products which may be introduced, changes in consumerpreferences, demographic trends, international, national, regional and localeconomic conditions and competitors’ discount pricing and promotion strategies.As wireless telecommunications markets mature and as we seek to enter into newmarkets and offer new products in the future, the competition that we face maychange and grow more intense.

 

***Our continuedgrowth depends on retaining our current key employees and attracting additionalqualified personnel, and we may not be able to continue to do so.***

 

Our success depends in large part on the abilities andcontinued service of our executive officers and other key employees,particularly Joseph Ram, our Chief Executive Officer. Although we have enteredinto employment agreements with several of our officers and employees,including Mr. Ram, we may not be able to retain their services under applicablelaw. The loss of executive officers or other key personnel could have amaterial adverse effect on us. In addition, in order to support our continuedgrowth, we will be required to effectively recruit, develop and retainadditional qualified management. If we are unable to attract and retainadditional necessary personnel, it could delay or hinder our plans for growth.

 

***We rely on tradesecret laws and agreements with our key employees and other third parties toprotect our proprietary rights, and there is no assurance that these laws oragreements adequately protect our rights.***

 

We rely on trade secret laws to protect ourproprietary knowledge, particularly our database of customers and suppliers andbusiness terms such as pricing. In general, we also have non-disclosureagreements with our key employees and limit access to and distribution of ourtrade secrets and other proprietary information. These 

 

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measures may prove difficult to enforce and may not prove adequate toprevent misappropriation of our proprietary information.

 

***We may becomesubject to suits alleging medical risks associated with our wireless handsets,and the cost of these suits could be substantial, and divert funds from ourbusiness.***

 

Lawsuits or claims have been filed or made againstmanufacturers of wireless handsets over the past years alleging possiblemedical risks, including brain cancer, associated with the electromagneticfields emitted by wireless communications handsets. There has been only limitedrelevant research in this area, and this research has not been conclusive as towhat effects, if any, exposure to electromagnetic fields emitted by wirelesshandsets has on human cells. Substantially all of our revenues are derived, eitherdirectly or indirectly, from sales of wireless handsets. We may become subjectto lawsuits filed by plaintiffs alleging various health risks from ourproducts. If any future studies find possible health risks associated with theuse of wireless handsets or if any damages claim against us is successful, itcould have a material adverse effect on our business. Even an unsubstantiatedperception that health risks exist could adversely affect our ability or theability of our customers to market wireless handsets.

 

**Risks Related To Our Common Stock**

 

***Stockholders may bediluted as a result of future offerings or other financings.***

 

We may need to raise additional capital through one ormore future public offerings, private placements or other financings involvingour securities. As a result of these financings, none of which is currentlyplanned, ownership interests in our company may be greatly diluted.

 

***Our common stock,and our stock price could be volatile and could decline, resulting in asubstantial loss on your investment.***

 

Prior to our initial public offering in June 2004,there was not a public market for our common stock. An active trading marketfor our common stock may never develop or be sustained, which could affect theability of our stockholders to sell their shares and could depress the marketprice of their shares.  The stock marketin general, and the market for telecommunications-related stocks in particular,has been highly volatile. As a result, the market price of our common stock islikely to be similarly volatile, and investors in our common stock mayexperience a decrease in the value of their stock, including decreasesunrelated to our operating performance or prospects. The price of our commonstock could be subject to wide fluctuations in response to a number of factors,including those listed in this ‘‘Risk Factors’’ section of this Form 10-Q.  In the past, securities class actionlitigation has often been instituted against companies following periods ofvolatility in their stock price. This type of litigation against us couldresult in substantial costs and divert our management’s attention andresources.

 

***Shares of commonstock that are issuable pursuant to our stock option plans and our outstandingwarrants, when issued, could result in dilution to existing stockholders andcould cause the market price of our common stock to fall.***

 

We have reserved shares of common stock that may beissuable pursuant to our stock option plans and our outstanding options outsidethose plans. These securities, when issued and outstanding, may reduce earningsper share under accounting principles generally accepted in the United Statesof America and, to the extent that they are exercised and shares of commonstock are issued, dilute percentage ownership to existing stockholders whichcould have an adverse effect on the market price of our common stock.

 

***The ability of ourstockholders to control our policies or effect a change in control of ourcompany is limited, which may not be in our stockholders’ best interests.***

 

Some provisions of our charter and bylaws and theGeneral Corporation Law of Maryland, where we are incorporated, may delay orprevent a change in control of our company or other transactions that couldprovide our common stockholders with a premium over the then-prevailing marketprice of our common stock or that might otherwise be in the best interests ofour stockholders. These include the ability of our Board of Directors toauthorize the issuance of preferred stock without stockholder approval, whichpreferred stock may have voting provisions that could delay or prevent a changein control or other transaction that might involve a premium price or otherwisebe in the best interests of our stockholders. Maryland law imposes restrictionson some business combinations and requires compliance with statutory proceduresbefore some mergers and acquisitions can occur. These provisions

 

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of Maryland law may have the effect of discouraging offers to acquireus even if the acquisition would be advantageous to our stockholders.

 

***Our currentcontrolling stockholders may have strategic interests that differ from those ofour other stockholders.***

 

Two of our stockholders, in the aggregate,beneficially own approximately 61.6% of our outstanding common stock. For theforeseeable future, to the extent that these stockholders vote similarly, theywill be able to exercise control over many matters requiring approval by theboard of directors or our stockholders. As a result, they will be able to:

 

•                  control the composition of our board ofdirectors;

•                  control our management and policies;

•                  determine the outcome of significantcorporate transactions, including changes in control that may be beneficial tostockholders; and

•                  act in their mutual interests, which mayconflict with, or be different from, the interests of other stockholders.

 

**Results of Operations:**

 

**                *DiscontinuedOperations***

 

                During thequarter ended September 30, 2004, the Company and its Board of directorsdiscussed Axcess Mobile, LLC and it’s mall-based kiosk locations and theCompany began to implement actions necessary to close those mall-based kiosklocations.  Due to the changingenvironment for mall-based kiosks, and the challenges associated with AT&Trelated to the Cingular transaction, management felt it was necessary to takedecisive actions to mitigate further losses. Another contributing factor to the decision was the lack of synergiesand operational efficiencies between the mall-based kiosks and our coredistribution business.  The loss duringthe quarter of $789,000, included non-cash charges of $182,000 to write-off ofgoodwill and $135,000 related to the reduction of a deferred tax asset. Duringthe month of October four of the mall-based kiosk location leases wereterminated without any financial implications, current or future.  On October 28, 2004, the Company assigned theleases for six of the mall-based kiosk locations to a third party; however, theassignment did not release the Company from the future lease obligations.  The third party assignee operatesapproximately 400 mall-based kiosks in 28 states.  A third party is holding in escrow two monthsrent for the locations from the assignee, and in the event of default by theassignee those funds will be released to the Company.  As of September 30, 2004, the plans for thediscontinued operations were substantially complete, however the Companyexpects to continue to record adjustments and expenses through the discontinuedoperations as necessary.

 

***Quarter ended September30, 2004 Compared with Quarter ended September 30, 2003***

 

Net salesfor the three months ended September 30, 2004 were $17.4 million, compared with$17.1 million in net sales for the three months ended September 30, 2003, anincrease of 1.9%.  The increase in netsales is due to an increase of $317,000 in distribution revenues.  The increase in distribution revenues isprimarily due to a 15.5% increase in average unit selling price, and a 75%increase in sales personnel, compared to the three months ended September 30,2003.  In 2004, the availability offeature-rich wireless devices, wireless network operator promotional activityand compelling pricing by manufacturers induced subscribers to upgrade theirwireless devices, creating end-user demand. Our revenues in the United States were 95% and 97% of total sales,respectively, for the three months ended September 30, 2004 and September 30,2003.

 

Cost ofsales for the three months ended September 30, 2004 was $16.1 million, or 92.7%of net sales, compared with $15.7 million, or 91.9% of net sales, for the threemonths ended September 30, 2003.  The2.7% dollar increase in cost of sales is primarily attributable to our purchaseof products necessary to meet our customers’ increased demand, as well asincreased carrier promotional activity, and competitive pricing in the regionswe operate.  In addition there werecertain products which needed to be written down in order to be sold atcompetitive prices.

 

Grossprofit for the three months ended September 30, 2004 was $1.3 million, or 7.3%of net sales, compared with $1.4 million, or 8.1% of net sales, for the threemonths ended September 30, 2003.  The7.8% dollar decrease in gross profit is a result of increased end-user demandwhich resulted in more competitive pricing pressures and less marginopportunity during the quarter.

 

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Operatingexpenses for the three months ended September 30, 2004 were $1.1 million, or6.2% of net sales, compared with $.87 million, or 5.1% of net sales, for thethree months ended September 30, 2003. The $208,000 increase is primarily due to increased personnel(executive, sales, warehouse and back office) to support our anticipated salesincreases, larger office and warehouse facilities, as well as additional costs(including legal and accounting) associated with being a publicly-tradedcompany.

 

Income fromcontinuing operations for the three months ended September 30, 2004 was$200,000, representing a decrease of $317,000 compared to the three monthsended September 30, 2003.  As apercentage of net sales, income from continuing operations was 1.1% for thethree months ended September 30, 2004 compared with 3.0% for the three monthsended September 30, 2003.  This decreasein income from continuing operations, both in dollars and as a percentage ofnet sales, is the result of the factors discussed above.

 

Net incomefrom continuing operations for the three months ended September 30, 2004 was$329,000, or $0.06 earnings per diluted share, compared to net income of$268,000, or $0.07 earnings per diluted share, for the three months endedSeptember 30, 2003, representing an increase of 22.5%.  The increase in net income from continuingoperations is due to the tax provision adjustment for the quarter.  Net income from continuing operations beforetax provision for the three months ended September 30, 2004 was $211,000compared to $498,000 for the three months ended September 30, 2003, thisdecrease was due to both a decrease in gross profit dollars as well as anincrease in operating expense dollars for the three months ended September 30,2004 as compared with gross profit and operating expenses for the three monthsended September 30, 2003.

 

For thequarter ended September 30, 2004 we incurred a loss of $ 789,000 fromdiscontinued operations, as compared to a loss of $76,000 for the quarter endedSeptember 30, 2003.  The loss wasprimarily a result of decreased cellular activations in our mall-based kiosks,the shift in retail sales and activations from mall-based to on-line sales, ourwrite-off of the goodwill ($182,000) associated with these operations, and atax adjustment ($135,000) to reduce our deferred asset related to theseoperations.

 

***Nine Months endedSeptember 30, 2004 Compared with Nine Months ended September 30, 2003***

 

Net salesfor the nine months ended September 30, 2004 were $53.8 million compared with$42.1 million for the nine months ended September 30, 2003, representing anincrease of 27.6 %.  The increase in netsales is primarily due to an increase in distribution revenues of $11.6 millionwhich result from increased end-user demand.

 

 The increase in distribution revenues isprimarily due to a 9.4% increase in units sold, a 17.4% increase in averageunit selling price, and a 75% increase in sales personnel as compared with thenine months ended September 30, 2003. Our revenues in the United States were 95% and 92% of total sales,respectively, for the nine months ended September 30, 2004 and September 30,2003.

 

Cost ofsales for the nine months ended September 30, 2004 was $49.6 million, or 92.1%of net sales, compared with $39.0 million, or 92.4% of net sales, for the ninemonths ended September 30, 2003.  The27.2% dollar increase in cost of sales is attributed to our purchase ofproducts necessary to meet our customers’ increased demand and is consistentwith our increase in net sales.

 

Grossprofit for the nine months ended September 30, 2004 was $4.2 million, or 7.9%of net sales, compared with $3.2 million, or 7.6% of net sales, for the ninemonths ended September 30, 2003.  The32.5% dollar increase in gross profit is in excess of our 27.6% dollar increasein net sales for the same period, in addition to increased gross profit as apercentage of net sales by 0.3%.  Theincrease in gross profit reflects management’s ability to leverage buyingefficiencies, when the opportunities arise, while still increasing net sales.

 

Operatingexpenses for the nine months ended September 30, 2004 were $3.1 million, or5.8% of net sales, compared to $2.3 million, or 5.5% of net sales, for the ninemonths ended September 30, 2003.  The$812,000 increase is primarily due to increased personnel (executive, sales andback office) to support the increased sales levels, larger office and warehousefacilities, as well as additional costs (including legal and accounting costs)associated with being a publicly traded company.

 

Income fromcontinuing operations for the nine months ended September 30, 2004 was$1,120,000, representing an increase of 25.3% compared with the nine monthsended September 30, 2003.  As apercentage of net sales, income from continuing operations was 2.1% for thenine months ended September 30, 2004, which 

 

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remained unchanged from thenine months ended September 30, 2003. The increase in dollars is the result of the factors discussed above aswell as the operational efficiency of the Company, which has allowed us to increasesales volumes at a high rate while we increase cost of sales at a lower rateand thus have maintained a consistent level of operating income as a percentageof net sales.

 

Net incomefrom continuing operations for the nine months ended September 30, 2004 was$927,000, or $0.20 earnings per diluted share, as compared with $485,000, or$0.12 per diluted share, for the nine months ended September 30, 2003.  The 91.1% increase is due to increased netsales, increased gross profits in dollars, increased gross margins anddecreased tax provisions.

 

Salesincreased 27.6%, gross profit increased 32.5%, income from continuingoperations increased 25.3%, and net income from continuing operations increased91.1% for the nine months ended September 30, 2004 as compared with the ninemonths ended September 30, 2003.

 

For thenine months ended September 30, 2004, we incurred a loss of $961,000 fromdiscontinued operations, as compared to a loss of $106,000 for the nine monthsended September 30, 2003.  The loss inthe nine months ended September 30, 2004 was due to a more challengingmall-based retail environment and was affected by our selling AT&T productsand services, with AT&T having been recently acquired by Cingular.  These factors contributed to decreased netactivations for our mall-based kiosk locations, resulting in the lossesincurred.

 

## **FinancialCondition, Liquidity and Capital Resources**

 

                *Cash*

 

                At September 30, 2004, we had cash and cashequivalents of $6,477,766, and at December 31, 2003, we had cash and cash equivalentsof $2,570.

 

                *Cash Flows*

 

                Cashfrom our initial public offering, together with our line of credit, continue tohelp finance our continuing operations. The net cash used by operating activities was $0.9 million for the ninemonths ended September 30, 2004, compared with $3.8 million, for the ninemonths ended September 30, 2003. The decrease in net cash used by operations in2004 was primarily due to a decrease in accounts receivable offset by increasedlevels of inventory and prepaid expenses as well as decreased income taxliabilities for the nine months ended September 30, 2004**.** The increase in inventory and prepaid expense was due to anticipatedhigher levels of sales as the Company continues to grow.  The decrease in accounts receivable is due toshifting payment patterns of customers, and the addition of new customers, manyof which have short credit terms.  Thedecrease in income taxes payable is a result of the profitability achieved infiscal 2003, whose taxes were paid in 2004.  The increase in inventory ($3.5 million) and increase in prepaidexpenses ($1.4 million) was funded primarily by the decrease in accountsreceivable ($2.4 million) and an increase in accounts payable ($1.2million).  Allowance for doubtfulaccounts at September 30, 2004 decreased approximately $100,000 to$258,000.  This decrease****was a result of a few accounts becominginsolvent during the nine months ended September 30, 2004, some of which wascovered under our accounts receivable insurance policy, and the reduction wasto absorb our deductible related to the policy. We believe that at September 30, 2004, our reserve for doubtful accountsis adequate.  Cash used by discontinuedoperations was $473,000 and $400,000, respectively, for the nine months endedSeptember 30, 2004, and September 30, 2003.

 

**                               **Day’s sales outstanding atSeptember 30, 2004 were 31 days compared with 37 days at June 30, 2004.  Normal payment terms require our customerpayments on a net 30 day basis.  We areconstantly working with our customers to reduce our day’s sales outstanding.

 

                Thenet cash used in investing activities was $200,000 for the nine months endedSeptember 30, 2004 compared with $7,000 for the nine months ended September 30,2003.  This increase is primarily theresult of expenditures for new furniture and fixtures related to increasedoffice and warehouse space and additional headcount.

 

                Thenet cash provided by financing activities for the nine months ended September30, 2004 of $8.1 million is primarily the result of our completed initialpublic offering.

 

                Ourworking capital at September 30, 2004 was $12.1 million, compared with $2.2million at December 31, 

 

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2003. This change was due primarilyto the completion of our initial public offering.   In addition, we have a $7.5 millionrevolving line of credit, and as of September 30, 2004 we had $4.7 millionavailable (based on a borrowing base calculation), and $4.0 million drawn fromthe line of credit, leaving net availability of $700,000.  As of October 31, 2004 our net availabilitywas approximately $ 3.5 million.

 

On June 17,2004, we issued and sold to the public 2,000,000 shares of common stock, listedon the American Stock Exchange.  Ourinitial public offering increased our outstanding shares to 5,212,000.  Proceeds from the public offering to usbefore expenses were $12 million.

 

**Borrowings**

 

 

We utilizea bank line of credit which is based upon eligible accounts receivable. As ofSeptember 30, 2004 and December 31, 2003, amounts advanced against that linewere approximately $4,031,000 and $5,236,000,respectively. This credit line has been an important part of growing ourbusiness, and market changes affecting accounts receivable could diminish theborrowing base of available funds. As of September 30, 2004 and December 31,2003, advances were 86% and 88% respectively, of the available borrowing base.This current facility expires May 2005.

 

 We believe that our existing cash resources,together with our projected cash flow from operations and the net proceeds fromour initial public offering, will be sufficient to allow us to implement ourstrategy and growth plan

 

 

**Critical Accounting Policies**

 

We believe the followingcritical accounting policies are important to the presentation of our financialcondition and results, and require management’s judgments often as a result ofthe need to make estimates about the affect of matters that are inherentlyuncertain.

 

***Revenue Recognition andAccrued Chargebacks***

 

Revenues are recognized upon(1) shipment of the products to customers, (2) when collection of theoutstanding receivables are probable, and (3) the final price of the product isdetermined.  Commission revenue on phoneactivations is recorded at the time of the activation and may be charged backto us in future periods. The carrier has nine months from date of activation tocharge back amounts previously credited to us if the customer terminates itsservice. We provide an allowance for estimated returns based on our experience,which estimate is recorded as a contra asset against accounts receivable. Aprovision for returns is provided in the same period in which the relatedcommission revenue is recorded. Customer credit-worthiness and economicconditions may change and increase the risk of collectibility and contractterminations and may require additional provisions, which would negativelyimpact our operating results.

 

***Allowance for DoubtfulAccounts and Sales Return Reserve***

 

Credit evaluations areundertaken for all major sale transactions before shipment is authorized.  Normal payment terms require payment on a net90 day basis. On an ongoing basis, we analyze the payment history of customeraccounts, including recent customer purchases. We evaluate aged items in theaccounts receivable aging and provide reserves for doubtful accounts andestimated sales returns.  Customer creditworthiness and economic conditions may change and increase the risk ofcollectibility and sales returns, and may require additional provisions, whichwould negatively impact our operating results.

 

***Inventory Write-Off andEffect 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 forecast for the applicable period.  We attempt to control our inventory levels sothat we do not hold inventories in excess of demand for the succeeding ninemonths. However, because we need to place non-cancelable orders withsignificant lead time and because it is difficult to estimate product demand,it is possible that we will build inventories in excess of demand for thefuture periods. If we have inventories in excess of estimated product 

 

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demand, we will provide areserve, which could have a material adverse effect on our reported results ofoperations and financial position.

 

**Off-Balance SheetArrangements**

 

We do not have any off-balancesheet arrangements.

 

**ContractualObligations**

 

During the quarter ended September30, 2004 we did not enter into any new lease contracts.

 

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

 

We are subject to market risks withrespect to interest rates because our line of credit has a floating interestrate.  We can choose among the bank’sprime rate, which was 4.75% at September 30, 2004, and the one-, two-, andthree-month LIBOR rates plus (with respect to the LIBOR rate) 2.25% for thefirst $500,000 of borrowings and 2.5% for borrowing above $500,000.  As of September 30, 2004, we had zero LIBORborrowings, rather funds borrowed are at the bank’s prime rate.  If the full $7,500,000 available under ourcredit facility were outstanding for a full year, each increase of 1% in theapplicable interest rate would result in an additional $75,000 in interestexpense for that year.

 

Our business outside the UnitedStates is conducted in United States dollars. Although we purchase and sell products and services in United Statesdollars and do not engage in exchange swaps, futures or options contracts orother hedging techniques, fluctuations in currency exchange rates could reducedemand for products sold in United States dollars.  We cannot predict the effect that futureexchange rate fluctuations will have on our operating results.  We believe our exposure to market risks,including exchange rate risk, interest rate risk and commodity price risk, isnot material at the present time.  We mayin the future engage in currency hedging transactions, which could result inour incurring significant additional losses.

 

**Item 4.****  Controlsand Procedures**

 

As of theend of the period covered by this report, we conducted an evaluation, under thesupervision and with the participation of the principal executive officer andprincipal financial officer, of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934 (the “Exchange Act”)).  Based onthis evaluation, the principal executive officer and principal financialofficer concluded that our disclosure controls and procedures are effective toensure that information required to be disclosed by us in reports that we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission (“SEC”) rules and forms. There was no change in our internal control over financial reportingduring our most recently completed fiscal quarter that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 

**PART II. OTHER INFORMATION**

 

**Item 1****.   Legal Proceedings**

 

None

 

 

**Item 2.****  Changesin Securities and Use of Proceeds.**

**Recent Sales ofSecurities**

 

Effective September 2, 2004, weissued options to purchase an aggregate of 12,000 shares of our common stock toemployees at an exercise price of $6.00 per share. For each optionee, optionscovering one-third of the number of shares underlying options granted to thatindividual will become exercisable one year from the date of grant.  Thereafter, options covering one thirty-sixthof the shares underlying options granted to each individual will becomeexercisable on the first day of each calendar month.  The options were issued pursuant to anexemption from registration under Section 4(2) of the Securities Act of 1933.

 

 

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**Use of Proceeds**

 

None

 

**Item 3****.  DefaultsUpon Senior Securities.**

 

None.

 

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

 

None.

 

**Item 5.  Other Information.**

 

None.

 

## **Item 6**.    ExhibitsAnd Reports On Form 8-K

 

(a)                                  Exhibits.

 

                                3.1           Certificate of Incorporation (1)

 

                                3.2           Bylaws (1)

 

                                10            Agreement for Purchase and Sale ofAssets between Axcess Mobile and TMS (2).

 

                                                                31.1         Certifications of the Chief Executive Officer and ChiefFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

                                                                32.1         Certifications of Chief Executive Officer and ChiefFinancial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

 

                                                (1)  Incorporated by reference from the Company’sRegistration Statement on Form S-1, filed on January 30, 2004.

(2)  Incorporated byreference from the Company’s Current Report on Form 8-K, filed on November 3,2004.

 

(b)                                 Reportson Form 8-K.

 

None.

 

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**SIGNATURE**

 

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

 
|        |              |   |   |   | InfoSonics Corporation |                    |   |
|-------------|-------------------|--------|--------|--------|------------------------|-------------------------|--------|
|        |              |   |   |   |                   |                    |   |   |
| Date:       | November 15, 2004 |   |   |   | By:                    | /S/ Joseph Ram          |   |   |
|        |              |   |   |   |                   | Joseph Ram              |   |   |
|        |              |   |   |   |                   | Chief Executive Officer |   |   |
|        |              |   |   |   |                   |                    |   |   |
|  Date: | November 15, 2004 |   |   |   | By:                    | /S/ Jeffrey Klausner    |   |   |
|        |              |   |   |   |                   | Jeffrey Klausner        |   |   |
|        |              |   |   |   |                   | Chief Financial Officer |   |   |

 

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