**UNITEDSTATES SECURITIES AND EXCHANGECOMMISSION**

** **

**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 OF 1934.**

 

**For the quarterly period ended June 30, 2005.**

 

**005-79915**

**(Commission File Number)**

 

**InfoSonicsCorporation**

(Exact name of registrant as specified in itscharter)

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

 

**5880 Pacific Center Blvd**

**San Diego, CA 92121**

(Address of principal executive officesincluding zip code)

 

**(858) 373-1600**

(Registrant’s telephonenumber, including area code)

 

**Not Applicable**

(Former Name or Former Address, if ChangedSince Last Report)

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes   ý   No o

 

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

Yes   o   No ý

 

As of August 10, 2005, the Registrant had 5,212,000 shares outstandingof its $.001 par value common stock.

 

 

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**InfoSonicsCorporation**

 

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

 

**June 30, 2005**

 

**Table of Contents**

 
| **PART I. FINANCIAL INFORMATION** |                                                                                                                         |
|-----------------------------------|------------------------------------------------------------------------------------------------------------------------------|
|                              |                                                                                                                         |   |
| Item 1.                           | Financial Statements                                                                                                         |   |
|                              |                                                                                                                         |   |
|                              | Consolidated Balance Sheets as of June 30, 2005 (unaudited) and  December 31, 2004                                           |   |
|                              |                                                                                                                         |   |
|                              | Consolidated Statements of Income for the  Three Months and Six Months Ended June 30, 2005 (unaudited) and 2004  (unaudited) |   |
|                              |                                                                                                                         |   |
|                              | Consolidated Statements of Cash Flows for  the Six Months Ended June 30, 2005 (unaudited) and 2004 (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.                           | Unregistered Sales of Equity Securities and Use of Proceeds                                                                  |   |
|                              |                                                                                                                         |   |
| Item 3.                           | Defaults Upon Senior Securities                                                                                              |   |
|                              |                                                                                                                         |   |
| Item 4.                           | Submission of Matters to a Vote of Security Holders                                                                          |   |
|                              |                                                                                                                         |   |
| Item  5.                          | Other  Information                                                                                                           |   |
|                              |                                                                                                                         |   |
| Item 6.                           | Exhibits                                                                                                                     |   |
|                              |                                                                                                                         |   |
| Signatures                        |                                                                                                                         |
|                              |                                                                                                                         |   |
| Exhibit 31.1                      |                                                                                                                         |
|                              |                                                                                                                         |   |
| Exhibit 32.1                      |                                                                                                                         |

 

2

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**Part I.  FINANCIAL INFORMATION**

 

Item 1. Financial Statements

 

**InfoSonicsCorporation and Subsidiaries**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                              | ** ** | **June 30  2005** | ** **     | **December 31  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------|----------------|-----------------------|------------|
| ** **                                                                                              | ** ** | **(unaudited)**   | ** **     | ** **            | ** ** |
| **ASSETS**                                                                                              |       |              |           |                  |       |
| **Current assets**                                                                                      |       |              |           |                  |       |
| Cash and cash equivalents                                                                               |       | $                 | 712,899        |                  | $          | 5,183,876 |   |
| Trade accounts receivable, net of allowance  for doubtful accounts of $542,566 (unaudited) and $250,000 |       | 19,583,436        |           | 7,596,104             |       |
| Inventory, net of reserves of $132,269  (unaudited) and $141,086                                        |       | 4,512,405         |           | 4,640,756             |       |
| Prepaid inventory                                                                                       |       | —            |           | 71,850                |       |
| Prepaid expenses                                                                                        |       | 250,076           |           | 384,456               |       |
| Net assets of discontinued operations                                                                   |       | 176,784           |           | 181,010               |       |
| Deferred tax assets - current                                                                           |       | 381,000           |           | 285,000               |       |
|                                                                                                    |       |              |           |                  |       |
| Total current assets                                                                                    |       | 25,616,600        |           | 18,343,052            |       |
|                                                                                                    |       |              |           |                  |       |
| Property and equipment, net                                                                             |       | 321,762           |           | 237,853               |       |
| Deferred tax assets - noncurrent                                                                        |       | —            |           | 67,000                |       |
| Other assets                                                                                            |       | 86,266            |           | 71,851                |       |
|                                                                                                    |       |              |           |                  |       |
| **Total assets**                                                                                        | ** ** | **$**             | **26,024,628** | ** **            | **$**      | **18,719,756** | ** ** |
|                                                                                                    |       |              |           |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                          | ** ** | ** **        | ** **     | ** **            | ** ** |
|                                                                                                    |       |              |           |                  |       |
| **Current liabilities**                                                                                 |       |              |           |                  |       |
| Line of credit                                                                                          |       | $                 | 6,277,634      |                  | $          | 2,564,115 |   |
| Accounts payable                                                                                        |       | 4,649,919         |           | 2,576,034             |       |
| Accrued expenses                                                                                        |       | 1,168,381         |           | 447,054               |       |
| Income taxes payable                                                                                    |       | 90,485            |           | —                |       |
| Net liabilities of discontinued operations                                                              |       | 676,434           |           | 693,542               |       |
|                                                                                                    |       |              |           |                  |       |
| Total current liabilities                                                                               |       | 12,862,853        |           | 6,280,745             |       |
|                                                                                                    |       |              |           |                  |       |
| **Stockholders’ equity**                                                                           |       |              |           |                  |       |
| Preferred stock, $0.001 par value  10,000,000 shares authorized 0 and 0 shares issued and outstanding   |       | —            |           | —                |       |
| Common stock, $0.001 par value 40,000,000  shares authorized 5,212,000 shares issued and outstanding    |       | 5,212             |           | 5,212                 |       |
| Additional paid-in capital                                                                              |       | 10,529,652        |           | 10,529,652            |       |
| Retained earnings                                                                                       |       | 2,626,911         |           | 1,904,147             |       |
|                                                                                                    |       |              |           |                  |       |
| Total stockholders’ equity                                                                         |       | 13,161,775        |           | 12,439,011            |       |
|                                                                                                    |       |              |           |                  |       |
| **Total liabilities and stockholders’ equity**                                                     | ** ** | **$**             | **26,024,628** | ** **            | **$**      | **18,719,756** | ** ** |
|                                                                                                         |            |                   |                |                       |            |  |  |  |  |

 

*See accompanying notes.*

 

3

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**InfoSonicsCorporation and Subsidiaries**

**ConsolidatedStatements of Income**

**(unaudited)**

** **
| ** **                                                               | ** ** | **For the Three Months  Ended June 30,** | ** **  | **For the Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------|-------------|----------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                                 | ** **  | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                               | ** ** | ** **                               | ** **  | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales**                                                            |       | $                                        | 32,527,630  |                                   | $          | 17,660,301 |   | $ | 56,551,847 |   | $ | 36,423,227 |   |
| **Cost of sales**                                                        |       | 29,871,047                               |        | 16,116,885                             |       | 51,764,004 |   | 33,465,134 |   |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Gross profit**                                                         |       | 2,656,583                                |        | 1,543,416                              |       | 4,787,843 |   | 2,958,093 |   |
| **Operating expenses**                                                   |       | 1,980,779                                |        | 1,016,808                              |       | 3,547,693 |   | 2,037,789 |   |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Operating income from continuing operations**                          |       | 675,804                                  |        | 526,608                                |       | 1,240,150 |   | 920,304 |   |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Other income (expense)**                                               |       |                                     |        |                                   |       |   |   |   |   |
| Interest income (expense)                                                |       | (61,155                                  | )           | (39,662                                | )          | (85,975 | ) | (86,111 | ) |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Income from continuing operations before  provision for income taxes** |       | 614,649                                  |        | 486,946                                |       | 1,154,175 |   | 834,193 |   |
| **Provision for income taxes**                                           |       | 195,705                                  |        | 118,176                                |       | 414,315 |   | 235,934 |   |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Income from continuing operations**                                    | ** ** | 418,944                                  |        | 368,770                                |       | 739,860 |   | 598,259 |   |
| **Loss from discontinued operations**                                    | ** ** | (11,007                                  | )           | (139,155                               | )          | (17,084 | ) | (172,709 | ) |
| ** **                                                               | ** ** | ** **                               | ** **  | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income**                                                           | ** ** | **$**                                    | **407,937** | ** **                             | **$**      | **229,615** | ** ** | **$** | **722,776** | ** ** | **$** | **425,550** | ** ** |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Basic earnings per share**                                             |       |                                     |        |                                   |       |   |   |   |   |
| From continuing operations                                               | ** ** | **$**                                    | **0.08**    | ** **                             | **$**      | **0.11** | ** ** | **$** | **0.14** | ** ** | **$** | **0.18** | ** ** |
| From discontinued operations                                             | ** ** | **$**                                    | **(0.00**   | **)**                                  | **$**      | **(0.04** | **)** | **$** | **($0.00** | **)** | **$** | **(0.05** | **)** |
| Net Income                                                               | ** ** | **$**                                    | **0.08**    | ** **                             | **$**      | **0.07** | ** ** | **$** | **0.14** | ** ** | **$** | **0.13** | ** ** |
| **Diluted earnings per share**                                           | ** ** | ** **                               | ** **  | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| From continuing operations                                               | ** ** | **$**                                    | **0.07**    | ** **                             | **$**      | **0.09** | ** ** | **$** | **0.13** | ** ** | **$** | **0.14** | ** ** |
| From discontinued operations                                             | ** ** | **$**                                    | **(0.00**   | **)**                                  | **$**      | **(0.04** | **)** | **$** | **(0.01** | **)** | **$** | **(0.04** | **)** |
| Net Income                                                               | ** ** | **$**                                    | **0.07**    | ** **                             | **$**      | **0.05** | ** ** | **$** | **0.12** | ** ** | **$** | **0.10** | ** ** |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Basic weighted-average number of common  shares outstanding**          | ** ** | **5,212,000**                            | ** **  | **3,500,889**                          | ** ** | **5,212,000** | ** ** | **3,353,011** | ** ** |
|                                                                     |       |                                     |        |                                   |       |   |   |   |   |
| **Diluted weighted-average number of common  shares outstanding**        | ** ** | **5,827,793**                            | ** **  | **4,217,217**                          | ** ** | **5,843,153** | ** ** | **4,069,339** | ** ** |

 

*See accompanyingnotes*.

 

4

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**InfoSonicsCorporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**

 
| ** **                                                                                                             | ** ** | **For the Six Months Ended June 30,** | ** **  |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                                                                                             | ** ** | **2005**                              | ** **  | **2004** | ** ** |
| **Cash flows from operating activities**                                                                               |       |                                  |        |   |   |
| Net income from continuing operations                                                                                  |       | $                                     | 739,860     |   | $ | 598,259 |   |
| Adjustments to reconcile net income from  continuing operations to net cash provided by (used in) operating activities |       |                                  |        |   |   |
| Depreciation and amortization                                                                                          |       | 30,537                                |        | 30,091 |   |
| Provision for bad debt                                                                                                 |       | 292,566                               |        | (104,095 | ) |
| Provision for obsolete inventory                                                                                       |       | (8,817                                | )           | 33,987 |   |
| (Increase) decrease in                                                                                                 |       |                                  |        |   |   |
| Trade accounts receivable                                                                                              |       | (12,279,898                           | )           | 2,675,002 |   |
| Inventory                                                                                                              |       | 137,168                               |        | (1,212,144 | ) |
| Prepaid Inventory                                                                                                      |       | 71,850                                |        | (1,435,921 | ) |
| Prepaid expenses                                                                                                       |       | 134,380                               |        | (75,045 | ) |
| Other assets                                                                                                           |       | (14,415                               | )           | (48,507 | ) |
| Increase (decrease) in                                                                                                 |       |                                  |        |   |   |
| Accounts payable                                                                                                       |       | 2,073,885                             |        | 2,033,693 |   |
| Accrued expenses                                                                                                       |       | 721,327                               |        | 137,808 |   |
| Deferred tax asset current                                                                                             |       | (98,000                               | )           | — |   |
| Deferred tax asset non current                                                                                         |       | 69,000                                |        | — |   |
| Income tax liabilities                                                                                                 |       | 90,485                                |        | (381,150 | ) |
|                                                                                                                   |       |                                  |        |   |   |
| Cash provided by (used in) continuing  operations                                                                      |       | (8,040,072                            | )           | 2,251,978 |   |
| Cash provided by (used in) discontinued  operations                                                                    |       | (29,979                               | )           | (19,603 | ) |
|                                                                                                                   |       |                                  |        |   |   |
| Net cash provided by (used in) operating  activities                                                                   |       | (8,070,051                            | )           | 2,232,375 |   |
|                                                                                                                   |       |                                  |        |   |   |
| **Cash flows from investing activities**                                                                               |       |                                  |        |   |   |
|                                                                                                                   |       |                                  |        |   |   |
| Purchase of property and equipment                                                                                     |       | (114,445                              | )           | (139,541 | ) |
|                                                                                                                   |       |                                  |        |   |   |
| Net cash provided by (used in) investing  activities                                                                   |       | (114,445                              | )           | (139,541 | ) |
|                                                                                                                   |       |                                  |        |   |   |
| **Cash flows from financing activities**                                                                               |       |                                  |        |   |   |
| Bank overdraft                                                                                                         |       | —                                |        | (867,555 | ) |
| Borrowings from line of credit                                                                                         |       | 36,417,712                            |        | 14,200,736 |   |
| Payments on line of credit                                                                                             |       | (32,704,193                           | )           | (16,092,551 | ) |
| Cash paid for offering costs                                                                                           |       | —                                |        | (1,887,686 | ) |
| Cash received for stock                                                                                                |       | —                                |        | 12,054,000 |   |
|                                                                                                                   |       |                                  |        |   |   |
| Net cash provided by (used in) financing  activities                                                                   |       | 3,713,519                             |        | 7,406,944 |   |
|                                                                                                                   |       |                                  |        |   |   |
| Net increase (decrease) in cash and cash  equivalents                                                                  |       | (4,470,977                            | )           | 9,499,778 |   |
|                                                                                                                   |       |                                  |        |   |   |
| **Cash and cash equivalents, beginning of  period**                                                                    |       | 5,183,876                             |        | 2,570 |   |
|                                                                                                                   |       |                                  |        |   |   |
| **Cash and cash equivalents, end of period**                                                                           | ** ** | **$**                                 | **712,899** | ** ** | **$** | **9,502,348** | ** ** |

 

*See accompanyingnotes*.

 

5

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**InfoSonicsCorporation**

**Notes toConsolidated Financial Statements**

**June 30,2005**

 

**NOTE 1. Basis of Presentation**

 

The accompanying unauditedConsolidated Financial Statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q and Article 10 ofRegulation S-X of the Securities Exchange Act of 1934. Accordingly, they do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements. Thepreparation of financial statements requires management to make estimates andassumptions that affect amounts reported in the financial statements andaccompanying notes. Actual results are likely to differ from those estimates,but management does not believe such differences will materially affect thefinancial position or results of operations of InfoSonics Corporation (the “Company”).The Consolidated Financial Statements reflect all adjustments considered, inthe opinion of the Company, necessary to fairly present the results for theperiods. Such adjustments are of a normal recurring nature.

 

The unaudited Consolidated Financial Statementsinclude the accounts of the Company and its subsidiaries, Axcess Mobile LLC,InfoSonics De Mexico, InfoSonics de Guatemala, InfoSonics El Salvador andInfoSonics S.A., all of which are wholly owned. Significant intercompanyaccounts and transactions have been eliminated in consolidation.

 

The unaudited ConsolidatedFinancial Statements at June 30, 2005 do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. Due to seasonal and other factors,the Company’s interim results may not be indicative of annual results. Theunaudited Consolidated Statements of Income for the three months and six monthsended June 30, 2005 and the unaudited Consolidated Statement of Cash Flows forthe six months ended June 30, 2005 are not necessarily indicative of theoperating results or cash flows that may be expected for the entire year.

 

The Company has not changed itssignificant accounting policies from those disclosed in its financialstatements as of and for the year ended December 31, 2004 as included in itsForm 10-K for the year ended December 31, 2004 that was filed with theSecurities and Exchange Commission. For further information, reference is madeto the audited Consolidated Financial Statements and the notes thereto includedin the Company’s financial statements as of and for the year ended December 31,2004 as included in its Form 10-K.

 

**NOTE 2.Acquisition**

 

On January 19, 2005, the Company purchased PrimaselS.A., from Fanrock Investments Limited for up to 120,000 shares of InfoSonicscommon stock, based on sales of certain levels being achieved in the next threeyears. In addition InfoSonics will pay profit sharing tied to sales andprofitability for sales in Argentina. During the three months ended June 30,2005, no shares of common stock were issued related to this transaction andthere was profit sharing expense and accrual of $335,000 related to sales andprofitability. The Company has accounted for the transaction as a stockpurchase. As Primasel had no assets or liabilities at the time of the purchase,there was no goodwill recorded. In February 2005, Primasel S.A. changed itsname to InfoSonics S.A.

 

**NOTE 3.Discontinued Operations**

 

During the quarter ended September 30,2004, the Company and its Board of Directors discussed Axcess Mobile, LLC andits mall-based kiosk locations and the Company began to implement actionsnecessary to close those mall-based kiosk locations. On October 28, 2004, theCompany assigned the leases for six of the mall-based kiosk locations to anunrelated assignee; however, the assignment did not release the Company fromthe future lease obligations. The assignee operates approximately 400mall-based kiosks in 28 states. A third party is holding in escrow two monthsrent for the locations from the assignee, and in the event of default by theassignee, those funds will be released to the Company.  The other lease locations were closed in October2004.  SFAS No. 142, “Goodwill and OtherIntangible Assets,” prohibits the amortization of goodwill, but requires thatit be reviewed for impairment at least annually or on an interim basis if anevent occurs or circumstances change that could indicate that its value hasdiminished or been impaired. As a result of the discontinued operation, the

 

6

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Company has reassessed the goodwill andwritten down the value to zero.  Thiswrite-down was recorded as an operating expense in the year ended December 31,2004. The results of the discontinued operations are as follows

 

| ** **                    | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30** | ** ** |
|-------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                    | ** ** | ** **                     | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Sales                     |       | $                              | —     |                         | $          | 755,315 |   | $ | — |   | $ | 1,749,120 |   |
| Gross Profit                  |       | —                         |       | 447,508                      |       | — |   | 1,104,014 |   |
| Operating loss                |       | (11,007                        | )          | (139,155                     | )          | (17,084 | ) | (172,709 | ) |
| Capital Expenditures          |       | —                         |       | 11,405                       |       | — |   | 43,454 |   |
| Depreciation and Amortization |       | —                         |       | 3,751                        |       | — |   | 7,741 |   |
|                               |            |                                |            |                              |            |  |  |  |  |  |  |  |  |

 

As of June 30, 2005 andDecember 31, 2004, net assets of discontinued operations consist of receivablesof $177,000 and $181,000, respectively, and net liabilities of discontinuedoperations consist of accounts payable of $676,000 and $693,000, respectively.The Company is currently in the process of resolving these balances.

 

As of June 30, 2005, theactions related to the discontinued operations had been completed, however theCompany expects to continue to record adjustments and expenses concerningdiscontinued operations as necessary.

 

**NOTE 4. Stock-Based Compensation**

 

TheCompany has elected to follow APB Opinion No. 25 and relatedinterpretations in accounting for its stock options and grants since thealternative fair market value accounting provided for under Statement ofFinancial Accounting Standards (SFAS) No. 123 requires use of grantvaluation models that were not developed for use in valuing employee stockoptions and grants. Under APB Opinion No. 25, if the exercise price of theCompany’s stock grants and options equals or exceeds the fair value of theunderlying stock on the date of grant, no compensation expenses are recognized.

 

Ifcompensation cost for the Company’s stock-based compensation plans had beendetermined based on the fair value at the grant dates for awards under thoseplans consistent with the method of SFAS No. 123, then the Company’s netincome for the three months ended and the six months ended June 30, 2005 andJune 30, 2004 would have been adjusted to the pro forma amounts indicatedbelow:

 
| ** **                                                                                                                                                                        | ** ** | **Three Months  ended  June 30,** | ** ** | **Six Months  ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2004**                          | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net income as  reported                                                                                                                                                           |       | $                                 | 229,615    |                            | $          | 407,937 |   | $ | 425,550 |   | $ | 722,776 |   |
|                                                                                                                                                                              |       |                              |       |                            |       |   |   |   |   |
| Stock-based  employee compensation cost, net of related tax effects, that would have been  included in the determination of net income if the fair value method had been  applied |       | (22,963                           | )          | (51,311                         | )          | (45,927 | ) | (511,322 | ) |
| Pro forma                                                                                                                                                                         |       | $                                 | 206,652    |                            | $          | 356,626 |   | $ | 379,623 |   | $ | 211,454 |   |
|                                                                                                                                                                              |       |                              |       |                            |       |   |   |   |   |
| Basic earnings  per common share as reported                                                                                                                                      |       | $                                 | 0.07       |                            | $          | 0.08 |   | $ | 0.13 |   | $ | 0.14 |   |
| 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 |       | $                                 | (0.01      | )                               | $          | (0.01 | ) | $ | (0.01 | ) | $ | (0.10 | ) |
| Pro forma                                                                                                                                                                         |       | $                                 | 0.06       |                            | $          | 0.07 |   | $ | 0.12 |   | $ | 0.04 |   |
| Diluted earning per  share                                                                                                                                                        |       |                              |       |                            |       |   |   |   |   |
| As reported                                                                                                                                                                       |       | $                                 | 0.05       |                            | $          | 0.07 |   | $ | 0.10 |   | $ | 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 |       | $                                 | (0.01      | )                               | $          | (0.01 | ) | $ | (0.01 | ) | $ | (0.10 | ) |
| Pro forma                                                                                                                                                                         |       | $                                 | 0.04       |                            | $          | 0.06 |   | $ | 0.09 |   | $ | 0.02 |   |

 

7

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**NOTE 5. Earnings Per Share**

 

The Company utilizes SFAS No. 128, ‘‘Earningsper Share.’’ Basic earnings per share is computed by dividing income availableto common stockholders by the weighted-average number of common sharesoutstanding. Diluted earnings per share is computed similarly to basic earningsper share, except that the denominator is increased to include the number ofadditional common shares that would have been outstanding if the potentialadditional common shares that were dilutive had been issued. Common equivalentshares are excluded from the computation if their effect is anti-dilutive. TheCompany’s common share equivalents consist of stock options.

 

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

 
| ** **                                                                                                  | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                  | ** ** | **June 30,  2004**      | ** ** | **June 30,  2005**    | ** ** | **June 30,  2004** | ** ** | **June 30,  2005** | ** ** |
|                                                                                                        |       |                    |       |                  |       |   |   |   |   |
| Numerator: Net  Income                                                                                      |       | $                       | 229,615    |                  | $          | 407,937 |   | $ | 425,550 |   | $ | 722,776 |   |
| Denominator:                                                                                                |       |                    |       |                  |       |   |   |   |   |
| Denominator for  basic earnings per share – weighted average shares                                    |       | 3,500,889               |       | 5,212,000             |       | 3,353,011 |   | 5,212,000 |   |
| Effect of  dilutive securities                                                                              |       |                    |       |                  |       |   |   |   |   |
| Employee stock  options                                                                                     |       | 716,328                 |       | 615,793               |       | 716,328 |   | 631,153 |   |
| Denominator for  diluted earnings per share – adjusted weighted average shares and assumed  conversion |       | 4,217,217               |       | 5,827,793             |       | 4,069,339 |   | 5,843,153 |   |
|                                                                                                             |            |                         |            |                       |            |  |  |  |  |  |  |  |  |

 

Potential common shares have been excluded from thecomputation of diluted earnings per share due to their exercise price beinggreater than the Company’s weighted average stock price for the period. For thethree months ended June 30, 2005 and 2004, the number of shares excluded were 1,141,000and 570,500, respectively.  For the sixmonths ended June 20, 2005 and 2004 the number of shares excluded were 1,141,000and 570,500, respectively.

 

**NOTE 6. IncomeTaxes**

 

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

 

**NOTE 7. Inventory**

 

Inventoryis valued at the lower of cost or market using standard costs that approximateaverage cost. Inventories are reviewed periodically and items considered to beslow moving or obsolete are reduced to estimated net realizable value throughan appropriate reserve. Inventory consists of the following:

 
| ** **        | ** ** | **June 30,  2005** | ** ** | **December 31,    2004** | ** ** |
|-------------------|------------|--------------------|------------|--------------------------|------------|
| Finished goods    |       | $                  | 4,644,674  |                     | $          | 4,781,842 |   |
| Inventory reserve |       | (132,269           | )          | (141,086                 | )          |
| Net inventory     |       | $                  | 4,512,405  |                     | 4,640,756  |   |
|                   |            |                    |            |                          |            |  |  |

 

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**NOTE 8. Property and Equipment**

 

Property and equipment consists of the following:

 

| ** **                    | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------|------------|--------------------|------------|------------------------|------------|
| Machinery and Equipment       |       | $                  | 324,716    |                   | $          | 221,739 |   |
| Furniture and Fixtures        |       | 112,087            |       | 100,619                |       |
|                          |       | 436,803            |       | 322,358                |       |
| Less Accumulated Depreciation |       | 115,042            |       | 84,505                 |       |
| Total                         |       | $                  | 321,762    |                   | $          | 237,853 |   |

 

Depreciation expense was $30,537 and 30,091for the six months ended June 30, 2005 and 2004, respectively.

 

**NOTE 9. Revolving Bank Loan Agreements andNotes Payable**

 

TheCompany has a line of credit from a bank, which 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, up to a maximum of$12,500,000.

 

Interestis payable on a monthly basis at prime (6.25% at June 30, 2005) or at theLondon Inter-Bank Offering Rate (3.34% at June 30, 2005), plus 2.25% for thefirst $500,000 and 2.5% for amounts over $500,000. The line of credit iscollateralized by substantially all of the assets of the Company, personallyguaranteed by the Company’s majority stockholder, who is also our ChiefExecutive Officer, and expires on September 15, 2005.  Althoughthere are no assurances, we believe that we will be able to extend thisrevolving line of credit with equal or better terms.  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 require the Company to maintain aquarterly net income after taxes of at least $1. Management believes theCompany was in compliance with these covenants at June 30, 2005. At June 30,2005 and December 31, 2004, the amounts drawn against the line of credit were$6,277.634 and $2,564,115, respectively.

 

TheCompany has no other notes payable.

 

**NOTE 10. Stockholders’ Equity**

 

Stock Options

 

EffectiveJanuary 21, 2005 and May 25, 2005 the Company granted options to purchase anaggregate of 335,000 and 39,500 shares, respectively, of its common stock tocertain employees, including certain of the Company’s officers (the “EmployeeOptions”). The 335,000 Employee Options vest upon the later of 1) one yearafter the date on which the employee was hired by the Company; or 2) the dateof grant.  The 39,500 Employee Optionsvest on December 31, 2005. The Employee Options have an exercise price of $3.29per share, which was the closing price per share of the Company’s common stockon January 21, 2005.  On May 25, 2005 thestock price was $3.05.  The EmployeeOptions expire three years from the date of grant.

 

EffectiveJanuary 21, 2005, the Company granted options to purchase 15,000 shares ofcommon stock to each of its three outside board members as consideration fortheir serving as members of the Board of Directors. These options vest onDecember 31, 2005 and terminate five years from the date of grant. Theseoptions have an exercise price of $3.29 per share, which was the closing price pershare of the Company’s common stock on January 21, 2005.

 

**NOTE 11. Recent AccountingPronouncements**

 

InMarch 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting forConditional Asset Retirement Obligations”. FIN No. 47clarifies that the term conditional asset retirement obligation asused in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refersto a legal obligation to perform an asset retirement activity in which thetiming and (or) method of settlement are conditional on a future event that mayor

 

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maynot be within the control of the entity. The obligation to perform the asset retirement activity is unconditionaleven though uncertainty exists about the timing and (or) method ofsettlement.  Uncertainty about the timingand/or method of settlement of a conditional asset retirement obligation shouldbe factored into the measurement of the liability when sufficient informationexists.  This interpretation also clarifies when an entity wouldhave sufficient information to reasonably estimate the fair value of an assetretirement obligation**.**FIN No. 47 is effective no later thanthe end of fiscal years ending after December 15, 2005 (which would be December31, 2005 for calendar-year companies). Retrospective application of interimfinancial information is permitted but is not required.  Management does not expect adoption of FINNo. 47 to have a material impact on the Company’s financial statements.

 

In April 2005, the Securities and Exchange Commission amended thecompliance dates to allow companies to implement SFAS No. 123(R) at thebeginning of their next fiscal year, instead of the next reporting period, thatbegins after June 15, 2005, or December 15, 2005 for small business issuers. Asa result, SFAS No. 123(R) must be adopted by the Company by the first quarterof 2006.

 

In May 2005, the FASB issued Statement of Accounting Standards (SFAS)No. 154, “Accounting Changes and Error Corrections” an amendment to AccountingPrinciples Bulletin (APB) Opinion No. 20, “Accounting Changes”, and SFAS No. 3,“Reporting Accounting Changes in Interim Financial Statements” though SFAS No.154 carries forward the guidance in APB No. 20 and SFAS No. 3 with respect toaccounting for changes in estimates, changes in reporting entity, and thecorrection of errors. SFAS No. 154 establishes new standards on accounting forchanges in accounting principles, whereby all such changes must be accountedfor by retrospective application to the financial statements of prior periodsunless it is impracticable to do so. SFAS No. 154 is effective for accountingchanges and error corrections made in fiscal years beginning after December 15,2005, with early adoption permitted for changes and corrections made in yearsbeginning after May 2005.

 

**NOTE 12. Geographic Information**

 

Revenues by geographical area forthe three and six months ended June 30, 2005 and June 30, 2004:

 
| ** **    | ** ** | **Three months  ended** | ** ** | **Six months  ended** | ** ** |
|---------------|------------|-------------------------|------------|-----------------------|------------|
| ** **    | ** ** | **June 30,  2005**      | ** ** | **June 30,  2004**    | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| United States |       | $                       | 11,283,892 |                  | $          | 17,483,406 |   | $ | 26,624,770 |   | $ | 34,508,380 |   |
| Argentina     |       | 16,593,032              |       | —                |       | 19,124,448 |   | — |   |
| Latin America |       | 4,650,706               |       | 1,172,175             |       | 10,802,629 |   | 1,827,110 |   |
| Europe        |       | —                  |       | 87,737                |       | — |   | 87,737 |   |
| Total         |       | $                       | 32,527,630 |                  | $          | 17,660,301 |   | $ | 56,551,847 |   | $ | 36,423,227 |   |

 

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

 

This discussion and analysis shouldbe read in conjunction with the accompanying Consolidated Financial Statementsand related notes. Our discussion and analysis of our financial condition andresults of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, disclosure of any contingentliabilities at the financial statement date, and reported amounts of revenueand expenses during the reporting period. On an ongoing basis we review ourestimates and assumptions. Our estimates are based on our historical experienceand other assumptions that we believe to be reasonable under the circumstances.Actual results are likely to differ from those estimates under differentassumptions or conditions, but we do not believe such differences willmaterially affect our financial position or results of operations. Our criticalaccounting policies, the policies we believe are most important to thepresentation of our financial statements and require the most difficult,subjective and complex judgments, are outlined below in’’—Critical AccountingPolicies,’’ and have not changed significantly.

 

In addition, certain statementsmade in this report may constitute “forward-looking statements”. Theseforward-looking statements involve known or unknown risks, uncertainties and otherfactors that may cause the actual results, performance, or achievements ofInfoSonics to be materially different from any future results, performance orachievements 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 economicconditions, and other factors. You can identify forward-looking statements byterminology such as “may,” “will,” “should,” “expects,” “intends,”

 

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“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,”“continues” or the negative of these terms or other comparable terminology.Although we believe that the expectations reflected in the forward-lookingstatements are reasonable, we cannot guarantee future results, levels ofactivity, performance or achievements.

 

**Overview**

 

Weare one of the largest distributors of wireless handsets and accessories in theUnited States and Latin America. We distribute products of several keymanufacturers, including Kyocera, LG, Motorola, Nokia, Samsung, VK Mobile, andothers. As an integral part of our customers’ supply chain, we perform valueadded services and customization processes. Our distribution and customizationservices include the purchasing, marketing, selling, software customization,warehousing, assembly, programming, packing, hardware customization, shippingand delivery of handsets for wireless telecommunications from manufacturers tocarriers (wireless network operators), agents, resellers, distributors,independent dealers and retailers in the United States and Latin America.

 

As a part of our distributionactivities, we perform value added services when requested by the customer.These services include but are not limited to programming, locking, softwareloading, packaging, and quality assurance testing. We operate a distributionhub in Miami, Florida.

 

Since our founding in 1994, we havegrown our 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.

 

We successfully completed aninitial public offering of our shares of common stock in June 2004 and ourcommon stock is currently traded on the American Stock Exchange under thesymbol “IFO”.

 

We also have wholly owned subsidiaries to perform certain functions forsome of our Latin American customers, these include InfoSonics De Mexico,InfoSonics de Guatemala, InfoSonics El Salvador and InfoSonics S.A., all ofwhich are wholly owned.  AxcessMobile, LLC, another of our subsidiaries, is our discontinued operation.  We no longer operate mall-based kiosks and onOctober 28, 2004, we assigned the leases for six of the mall-based kiosklocations to an unrelated assignee; however, the assignment did not release theCompany from the future lease obligations. The assignee operates approximately400 mall-based kiosks in 28 states. A third party is holding in escrow twomonths rent for the locations from the assignee, and in the event of default bythe assignee, those funds will be released to the Company.  The other lease locations were closed inOctober 2004.  These subsidiariesare included in our consolidated financial statements and significant inter-companyamounts have been eliminated.

 

Due to seasonal and other factors,our interim results may not be indicative of annual results. Our operatingresults are influenced by several seasonal and other factors, which may causeour revenues and operating results to fluctuate on a quarterly basis, includingbut not limited to the timing and introduction of new products by our suppliersand competitors, promotions and subsidies by wireless network operators,purchasing patterns of customers, and the timing of holidays and other eventsaffecting consumer demand.

 

**Areas ofManagement Focus and Performance Indicators**

 

Wemanage our 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 that are key for the monitoring and management of our businessinclude operating and net income, cost of sales and gross profit percentage,operating expenses as a percent of revenues, and overall net sales growth.These items are specifically discussed further in this section. We make extensiveuse of our customized information system to closely monitor all aspects of ourbusiness, including subsidiary performance, 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.

 

Managementspends a significant amount of time traveling with the purpose of spending timewith key customers, suppliers and employees, as well as to identify newbusiness opportunities both in the United States and Latin America. We

 

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believe that theserelationships are vital to the success of the company and we will continue todedicate a significant amount of time to this area. We also focus on managementexecution, quality delivery of services to customers, risk management, andcorporate governance.

 

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

 

In2004, worldwide wireless handset sales increased by approximately 25%, and theyare forecasted to increase 11% in 2005. A rapid decline in wireless handsetsales growth could negatively impact our net sales. Higher than anticipatedgrowth in demand could strain our resources and affect our ability to meetthese unanticipated demands.

 

Excess supply conditions can reducethe market prices of the products we sell and therefore affect our ability togenerate net sales and gross profit at historical levels and could affect thevalue of our inventory. Conversely, should manufacturers be unable to respondto an unanticipated increase in demand on a timely basis, we, along with othersin our industry, could experience supply constraints that would affect ourability to deliver product. We are unable to quantify these effects, as it isdifficult to predict future supply conditions and demand patterns which affectour ability to meet customer demand or sell handsets at an acceptable grossprofit.

 

**Company Specific Trends, Challenges, Risks and GrowthOpportunities**

 

For the three months ended June 30,2005, net sales increased 84% and handsets sold increased 131% compared withthe three months ended June 30, 2004. Although we have incorporated growth intoour strategic objectives, there can be no assurance these trends will continue.Similarly, while we experienced a 26% increase in income from operations beforeprovision for taxes for the three months ended June 30, 2005 and an increase innet income of 78% compared with June 30, 2004, 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 incontinued earnings growth; however, there can be no assurance this trend willcontinue. Potential investment in growth opportunities and assumed additionalrisks could alter our earnings trend.

 

**Risk Related toOur Business**

 

***Ouroperating results may vary significantly, which may cause our stock price tofluctuate.***

 

Our operating results areinfluenced by a number of factors, which may cause our revenue and operatingresults to fluctuate. These factors include:

 

•      promotions and subsidy bywireless network operators;

 

•      the timing of introductionof new products by our suppliers and competitors;

 

•      purchasing patterns ofcustomers in different markets;

 

•      general economic conditions;and

 

•      product availability andpricing.

 

***Webuy a significant amount of our products from a limited number of suppliers,who may not provide us with competitive products at reasonable prices when weneed them in the future.***

 

We purchase wireless handsets andaccessories principally from wireless communications equipment manufacturersand distributors. We depend on these suppliers to provide us with adequateinventories of currently popular brand name products on a timely basis and onfavorable pricing and other terms. Our agreements with our principal suppliersare non-exclusive, can be terminated on short notice and provide for certainterritorial restrictions, as is common in our industry. For the three monthsended June 30, 2005 our top three suppliers accounted for 51%, 25% and 14%respectively of our purchases, compared to the three months ended June 30, 2004during which our top three suppliers accounted for 61%, 16% and 9% respectivelyof our purchases. Our suppliers may not offer us competitive products onfavorable terms or with timely delivery. From time to time, we have been unableto obtain sufficient product supplies. Any failure or delay by our suppliers insupplying us with products on favorable terms may severely diminish our abilityto obtain and deliver products to our customers on a timely and competitivebasis. If we lose any of our principal suppliers, or if these suppliers areunable to fulfill our product needs, or if any principal supplier imposessubstantial price increases and alternative sources of supply are not readilyavailable, it would have a material adverse effect on our results ofoperations.

 

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***Ourcontinuing liabilities on leases from our former mall-based retail kiosklocations could have a negative impact on earnings and cash flow.***

 

Although we have assigned our sixremaining retail leases to a third party and we have received indemnificationfrom the third party, we also remain liable to the lessor, for the respectiveremaining lease terms of one to three years, if the third party does notfulfill its obligations under the leases. As of December 31, 2004 the totalpotential liability under these leases was $1,629,520 which is partially offsetby a $95,044 escrow deposit held for the benefit of InfoSonics to the extentthat the third party should default on any of the assigned leases. This escrowis not reflected on our financial statements. This lease liability is discussedin the footnotes to our consolidated financial statements.

 

***Theloss or reduction in orders from principal customers or a reduction in priceswe are able to charge these customers will have a negative impact upon ourrevenues and could cause our stock price to decline.***

 

Our four largest customers duringthe three months ended June 30, 2005 accounted for approximately 25%, 24%, 12% and 11% respectively,of our product sales. The markets we serve are subject to severe pricecompetition. Additionally, our customers are not contractually obligated topurchase product from us. For these and other reasons such as competitivepricing and competitive pressures, customers may seek to obtain products orservices from us at lower prices than we have been able to obtain from thesecustomers in the past. This could occur, for example, in the case of a customerpurchasing large quantities of a product from us, who then terminates thisrelationship because the customer can obtain a lower price by buying directlyfrom the manufacturer. 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.

 

***Ourfuture profitability depends on our ability to maintain existing margins andour ability to increase our sales, which we may not be able to do.***

 

The gross margins that we realizeon sales of wireless handsets could be reduced due to increased competition ora growing industry emphasis on cost containment. Therefore, our futureprofitability will depend on our ability to maintain our margins or to increaseour sales to help offset potential future declines in margins. We may not beable to maintain existing margins for products or services offered by us orincrease our sales. Our ability to generate sales is based upon demand forwireless telecommunications products and our having an adequate supply of theseproducts. Even if our sales rates do increase, the gross margins that wereceive from our sales may not be sufficient to make our future operationsprofitable or as profitable.

 

***Ourbusiness depends on the continued tendency of wireless equipment manufacturersand network operators to outsource aspects of their business to us.***

 

Our business depends in large parton wireless equipment manufacturers and network operators outsourcing some oftheir business functions to us. We provide functions such as distribution,inventory management, customized packaging, activation management and otherservices. Certain wireless equipment manufacturers and network operators haveelected, and others may elect, to undertake these services internally.Additionally, our customer service levels, industry consolidation, competition,deregulation, technological changes or other factors could reduce the degree towhich members of the wireless telecommunications industry rely on outsourcedservices such as the services we provide. Any significant change in the marketfor these services could have a material adverse effect on our current andplanned business.

 

***Wemay not be able to effectively compete in our industry if consolidation ofwireless network operators continues.***

 

The past several years havewitnessed a consolidation within the wireless network operator community. Ifthis trend continues, it could result in a reduction or elimination ofpromotional activities by the remaining wireless network operators as they seekto reduce their expenditures, which could, in turn, result in decreased demandfor our products or services. Moreover, consolidation of wireless networkoperators reduces the number of potential contracts available to us. We couldalso lose business if wireless network operators, which currently are ourcustomers, are acquired by other wireless network operators which are not ourcustomers. Wireless operators may also change their policy regarding sales totheir agents by independent distributors, such as requiring those agents topurchase products from the wireless operator or manufacturer, rather than fromdistributors such as InfoSonics. This type of requirement could have a materialadverse effect on our business and results of operations.

 

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***Oursales and inventory risk may be materially affected by fluctuations in regionaldemand patterns and economic factors for which we cannot plan.***

 

The demand for our products andservices has fluctuated and may continue to vary substantially within theregions served by us. We believe the roll-out of third generation, or 3G,cellular telephone systems and other new technologies, which has been delayedand could further be delayed, has had and will continue to have an effect onoverall subscriber growth and handset replacement demand. Economic slow-downsin regions served by us or changes in promotional programs offered by wirelessnetwork operators may lower consumer demand for our products and create higherlevels of inventories which could decrease our gross and operating margins. Wecould face a substantial inventory risk due to depreciation and equipment priceerosion if our products are not sold in a timely manner. We believe ouroperations were adversely affected by an economic slow-down in the UnitedStates starting in the fourth quarter of 2000. A prolonged economic slow-downin the United States or any other regions in which we have significantoperations could negatively impact our results of operations and financialposition.

 

***Wemay not be able to adequately respond to rapid technological changes in thewireless telecommunications industry, which could cause us to lose customers.***

 

The technology relating to wirelesstelecommunications equipment changes rapidly resulting in product obsolescenceor short product life cycles. We are required to anticipate futuretechnological changes in our industry and to continually identify, obtain andmarket new products in order to satisfy evolving industry and customer requirements.Competitors or manufacturers of wireless equipment may market products whichhave perceived or actual advantages over products that we handle or whichotherwise render those products obsolete or less marketable. We have made andcontinue to make significant capital investments in accordance with evolvingindustry and customer requirements including maintaining levels of inventoriesof currently popular products that we believe are necessary based on currentmarket conditions. This utilization of capital for inventory buildup of thisnature increases our risk of loss due to product obsolescence.

 

***Substantialdefaults by our customers on accounts receivables could have a significantnegative impact on our cash flow and financial condition.***

 

We currently offer and intend tooffer open account terms to certain of our customers, which may subject us tocredit risks, particularly to the extent that our receivables represent salesto a limited number of customers or are concentrated in particular geographicmarkets. Although we have an accounts receivable insurance policy, this policycarries a substantial deductible and may not cover us in all instances. We alsohave an accounts receivable credit facility in order to reduce our workingcapital requirements. The extent of our ability to use our accounts receivablecredit facility is dependent on the amount of and collection cycle of ouraccounts receivable. Adverse changes in our ability to use accounts receivablefinancing could have a material adverse effect on our financial position, cashflows and results of operations.

 

***Werely on our suppliers to provide trade credit facilities to adequately fund ouron-going operations and product purchases, and without those facilities, ourability to procure products could be reduced.***

 

Our business is dependent on ourability to obtain adequate supplies of currently popular products on favorablepricing and other terms. Our ability to fund our product purchases is dependenton our principal suppliers providing favorable payment terms that allow us tomaximize the efficiency of our capital usage. The payment terms we receive fromour suppliers are dependent on several factors, including, but not limited to,our payment history with the supplier, the suppliers’ credit granting policies,contractual provisions, our overall credit rating as determined by variouscredit rating agencies, industry conditions, our recent operating results,financial position and cash flows and the supplier’s ability to obtain creditinsurance on amounts that we owe them. Adverse changes in any of these factors,certain of which may not be wholly in our control, could have a materialadverse effect on our operations.

 

***Approximately65% and 53% of our revenues during the three and six months ended June 30,2005, respectively, were generated outside of the United States in countriesthat may have political or other risks.***

 

We engage in sales activities interritories and countries outside of the United States. The fact that wedistribute products into a number of countries exposes us to increased creditrisks, customs duties, import quotas and other trade restrictions, potentiallygreater inflationary pressures, and shipping delays. Changes may occur insocial, political, regulatory and economic conditions or in laws and policiesgoverning foreign trade and investment in the territories and countries wherewe currently distribute products. United States laws and regulations relatingto investment and trade in foreign countries could also change to our detriment.Any of these factors could have a material adverse effect on our business andoperations. Although we purchase and sell products and services in UnitedStates dollars and do not engage in exchange swaps, futures

 

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or options contracts or other hedging techniques, fluctuations incurrency exchange rates could reduce demand for products sold in United Statesdollars. We cannot predict the effect that future exchange rate fluctuationswill have on our operating results. We may in the future engage in currencyhedging transactions, which could result in our incurring significantadditional losses.

 

***Werely on our information system technology to function efficiently, withoutinterruptions, and if it does not, customer relationships could be harmed.***

 

We have focused on the applicationof our information system technology to provide customized services to wirelesscommunications equipment manufacturers and network operators. Our ability tomeet our customers’ technical and performance requirements is highly dependenton the effective 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.

 

***Wehave outstanding indebtedness, which is secured by substantially all our assetsand which could prevent us from borrowing additional funds, if needed.***

 

We had outstanding debt in theamount of approximately $6.3 million at June 30, 2005 in the form of a bankline of credit which is based on accounts receivable. If we violate our loancovenants, default on our obligations or become subject to a change of control,our indebtedness would become immediately due and payable. Our credit facilityis secured by substantially all of our assets and borrowing availability isbased primarily on a percentage of eligible accounts receivable. Consequently,any significant decrease in eligible accounts receivable will limit our abilityto borrow additional funds to adequately finance our operations and expansionstrategies. The terms of our credit facility could substantially prohibit usfrom incurring additional indebtedness, which could limit our ability to expandour operations. The terms of our credit facility also include negativecovenants that, among other things, limit our ability to sell certain assetsand make certain payments, including but not limited to, dividends, repurchasesof common stock and other payments outside the normal course of business aswell as prohibiting us from merging or consolidating with another corporationor selling all or substantially all of our assets. This current facility expireson September 15, 2005. Although there are no assurances, we believethat we will be able to extend this revolving line of credit with equal orbetter terms.

 

***Thewireless telecommunications industry is intensely competitive and we may not beable to continue to compete against well-established competitors with greaterfinancial and other resources.***

 

We compete for sales of wirelesstelecommunications equipment and accessories, and expect that we will continueto compete, with numerous well-established wireless network operators,distributors and manufacturers, including our own suppliers. Many of ourcompetitors possess greater financial and other resources than we do and maymarket similar products 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 consumer preferences,demographic trends, international, national, regional and local economicconditions and competitors’ discount pricing and promotion strategies. Aswireless 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.

 

***Ourcontinued growth depends on retaining our current key employees and attractingadditional qualified personnel, and we may not be able to continue to do so.***

 

Our success depends in large parton the abilities and continued service of our executive officers and other keyemployees, particularly Joseph Ram, our Chief Executive Officer. Although wehave entered into 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.

 

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***Werely on trade secret laws and agreements with our key employees and other thirdparties to protect our proprietary rights, and there is no assurance that theselaws or agreements adequately protect our rights.***

 

We rely on trade secret laws toprotect our proprietary knowledge, particularly our database of customers andsuppliers and business terms such as pricing. In general, we also havenon-disclosure agreements with our key employees and limit access to anddistribution of our trade secrets and other proprietary information. Thesemeasures may prove difficult to enforce and may not prove adequate to preventmisappropriation of our proprietary information.

 

***Wemay become subject to suits alleging medical risks associated with our wirelesshandsets, and the cost of these suits could be substantial, and divert fundsfrom our business.***

 

Lawsuits or claims have been filedor made against manufacturers of wireless handsets over the past years allegingpossible medical risks, including brain cancer, associated with theelectromagnetic fields emitted by wireless communications handsets. There hasbeen only limited relevant research in this area, and this research has notbeen conclusive as to what effects, if any, exposure to electromagnetic fieldsemitted by wireless handsets has on human cells. Substantially all of ourrevenues are derived, either directly or indirectly, from sales of wirelesshandsets. We may become subject to lawsuits filed by plaintiffs allegingvarious health risks from our products. If any future studies find possiblehealth risks associated with the use of wireless handsets or if any damagesclaim against us is successful, it could have a material adverse effect on ourbusiness. Even an unsubstantiated perception that health risks exist could adverselyaffect our ability or the ability of our customers to market wireless handsets.

 

**Risks Related ToOur Common Stock**

 

***Stockholdersmay be diluted as a result of future offerings or other financings.***

 

We may need to raise additionalcapital through one or more future public offerings, private placements orother financings involving our securities. As a result of these financings,none of which is currently planned, ownership interests in our company may begreatly diluted.

 

***Ourcommon stock, and our stock price could be volatile and could decline,resulting in a substantial loss on your investment.***

 

Prior to our initial publicoffering in June 2004, there was not a public market for our common stock. Anactive trading market for our common stock may never develop or be sustained,which could affect the ability of our stockholders to sell their shares andcould depress the market price of their shares. The stock market in general andthe market for telecommunications-related stocks in particular, has been highlyvolatile. As a result, the market price of our common stock is likely to besimilarly volatile, and investors in our common stock may experience a decreasein the value of their stock, including decreases unrelated to our operatingperformance or prospects. The price of our common stock could be subject towide fluctuations in response to a number of factors, including those listed inthis ‘‘Risk Factors’’ section of this Form 10-Q. In the past, securities classaction litigation has often been instituted against companies following periodsof volatility in their stock price. This type of litigation against us couldresult in substantial costs and divert our management’s attention andresources.

 

***Sharesof common stock that are issuable pursuant to our stock option plans and ouroutstanding warrants, when issued, could result in dilution to existingstockholders and could cause the market price of our common stock to fall.***

 

We have reserved shares of commonstock that may be issuable pursuant to our stock option plans and ouroutstanding options outside those plans. These securities, when issued andoutstanding, may reduce earnings per share under accounting principlesgenerally accepted in the United States of America and, to the extent that theyare exercised and shares of common stock are issued, dilute percentageownership to existing stockholders which could have an adverse effect on themarket price of our common stock.

 

***Theability of our stockholders to control our policies or effect a change incontrol of our company is limited, which may not be in our stockholders’ bestinterests.***

 

Some provisions of our charter andbylaws and the General Corporation Law of Maryland, where we are incorporated,may delay or prevent a change in control of our company or other transactionsthat could provide our common stockholders with a premium over thethen-prevailing market price of our common stock or that might otherwise be inthe best interests of our stockholders. These include the ability of our Boardof Directors to authorize the issuance of preferred

 

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stock without stockholder approval, which preferred stock may havevoting provisions that could delay or prevent a change in control or othertransaction that might involve a premium price or otherwise be in the bestinterests of our stockholders. Maryland law imposes restrictions on somebusiness combinations and requires compliance with statutory procedures beforesome mergers and acquisitions can occur. These provisions of Maryland law mayhave the effect of discouraging offers to acquire us even if the acquisitionwould be advantageous to our stockholders.

 

***Ifour two largest stockholders have strategic interests that are similar and thatdiffer from those of our other stockholders, and if those two stockholders votein the same manner, they may be able to cause results that the otherstockholders do not believe to be beneficial to their interests.***

 

Two of our stockholders, in theaggregate, beneficially own approximately 61.6% of our outstanding commonstock. To the extent that these stockholders vote their shares similarly, theywill be able to exercise control over many matters requiring approval by theboard of directors or our stockholders. As a result, they would be able to:

 

•      control the composition ofour board of directors;

 

•      control our management andpolicies;

 

•      determine the outcome ofsignificant corporate transactions, including changes in control that may bebeneficial to stockholders; and

 

•      act in their mutualinterests, which may conflict with, or be different from, the interests ofother stockholders.

** **

**Available Information**

 

Ourwebsite at www.infosonics.com provides a link to the Securities and ExchangeCommission’s website where our Annual Reports on Form 10-K, QuarterlyReports on Form 10-Q, Current Reports on Form 8-K (including exhibits andsupplementary schedules) and amendments to those reports, filed or furnishedunder Section 13(a) or 15(d) of the Securities Exchange Act of 1934, can beaccessed free of charge.

 

**Results ofOperations:**

 

***Three months ended June 30, 2005 compared with three months ended June30, 2004***

 

Net sales for the three monthsended June 30, 2005 were $32.5 million, compared with $17.7 million for thethree months ended June 30, 2004, an increase of 84%. The increase in net salesis primarily due to a 131% increase in units sold, which was partially offsetby a 19% decrease in average unit selling price compared to the three monthsended June 30, 2004. The significant progress the Company has made sellingdirectly to the cellular carriers in the Untied States and Latin America isdirectly responsible for the increased sales, both in dollars and unitssold.  Net sales from Argentina and LatinAmerica increased to $21.2 million for the three months ended June 30, 2005, ascompared with $1.2 million for the three months ended June 30, 2004. Thisincrease is primarily the result of our acquisition in Argentina which wascompleted in January 2005, in addition to increased personnel and sellingefforts in Latin America.  Revenues inthe United States were $11.3 million for the three months ended June 30, 2005as compared with $17.5 million for the three months ended June 30, 2004. Thisdecrease was primarily due to lack of sufficient products available frommanufacturers to fill in-house orders due to component shortages for higher-endcamera phones.  In addition we areshifting our U.S. sales focus from the dealer/agent channel to rural U.S.carriers, and the resulting sales to rural U.S. carriers have not beensufficient to offset our decline in sales to U.S. dealer/agents.

 

Cost of sales for the three monthsended June 30, 2005 was $29.9 million, or 91.8% of net sales, compared with$16.1 million, or 91.3% of net sales, for the three months ended June 30, 2004.The $13.8 million (85%) increase in cost of sales is consistent with our 84%increase in net sales.

 

Gross profit for the three monthsended June 30, 2005 was $2.7 million, or 8.2% of net sales, compared with $1.5million, or 8.7% of net sales, for the three months ended June 30, 2004. The 6%decrease in gross profit percentage from 8.7% to 8.2% represents increasedsales volume to large key accounts in both the United States and Latin America.In addition, we have increased our sales into Latin America, where it is moredifficult to secure products with greater margin opportunities than it is inthe United States.

 

Operating expenses for the threemonths ended June 30, 2005 were $2.0 million, or 6.1% of net sales, comparedwith $1.0 million, or 5.8% of net sales, for the three months ended June 30,2004. The $1.0 million increase is primarily due

 

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to expenses related to 1) increased investments in infrastructure dueto expenses in obtaining type approval certification from key carrier customersin the United States and in Latin America, 2) being a public company and 3) ourexpanded operations in Latin America, all of which have contributed to ourincreased sales levels. We now also occupy larger office and warehousefacilities. The increase in operating expenses as a percentage of revenues isrelated to the factors discussed above.

 

Income from continuing operationsbefore provision for income taxes for the three months ended June 30, 2005 was$615,000, representing an increase of 26% compared to the three months endedJune 30, 2004. As a percentage of net sales, income from operations was 1.9%for the three months ended June 30, 2005 compared with 2.8% for the threemonths ended June 30, 2004. This increase in income from continuing operations,in dollars, is the result of increased sales volumes and increased grossprofit, while the decrease as a percentage of net sales is due to the factorsdiscussed above in gross profit and operating expenses.

 

For the three months ended June 30, 2005, we incurreda loss from discontinued operations of $11,000, or less than $.01 per share, ascompared with a loss of $139,000, or $.04 per share, for the three months endedJune 30, 2004.

 

Net income for the three monthsended June 30, 2005 was $408,000, or $0.07 earnings per diluted share, comparedto net income of $230,000, or $0.05 earnings per diluted share, for the threemonths ended June 30, 2004, representing a dollar increase of 78%. The increasein net income is primarily due to increased net sales and increased grossprofits. Primarily because of the new shares issued in our June 2004 initialpublic offering, the weighted average number of fully diluted shares of 5.8million was significantly higher for the second quarter of 2005 than for thesecond quarter of 2004 when it was 4.2 million.

 

***Six Months Ended June 30, 2004 Compared with Six Months Ended June 30,2005***

 

Net sales for the six months endedJune 30, 2005 were $56.6 million, compared with $36.4 million for the sixmonths ended June 30, 2004, an increase of 55%. The increase in net sales isprimarily due to a 66% increase in units sold, which was partially offset by a6% decrease in average unit selling price compared to the six months ended June30, 2004. The first six months of 2005 have begun to show results for theefforts and focus the Company has had with the Latin American carriers and therural carriers in the United States.  Netsales from Argentina and Latin America increased to $29.9 million for the sixmonths ended June 30, 2005, as compared with $1.8 million for the three monthsended June 30, 2004. This increase is primarily the result of our focusedefforts in Latin America during the first six months of 2005, which includedour acquisition in Argentina which was completed in January 2005, as well asincreased personnel and selling efforts in Latin America.  Revenues in the United States were $26.6million for the six months ended June 30, 2005 as compared with $34.5 millionfor the six months ended June 30, 2004. This decrease was primarily due to ourshifting our U.S. sales focus from the dealer/agent channel to rural carriersin the United States, and the resulting sales to these carriers have not been ata level sufficient to offset our decline in sales to the dealer/agents in theUnited States.

 

Cost of sales for the six monthsended June 30, 2005 was $51.8 million, or 91.5% of net sales, compared with$33.5 million, or 91.9% of net sales, for the six months ended June 30, 2004.The $18.3 million (55%) increase in cost of sales is consistent with our 55%increase in net sales.

 

Gross profit for the six monthsended June 30, 2005 was $4.8 million, or 8.5% of net sales, compared with $2.9million, or 8.1% of net sales, for the six months ended June 30, 2004. The 5%increase in gross profit percentage from 8.1% to 8.5% is primarily due to ourshift in sales to rural carriers in the United States as well as sales tocarriers sales in Latin America for the six months ended June 30, 2005, ascompared with the six months ended June 30, 2004.

 

Operating expenses for the sixmonths ended June 30, 2005 were $3.5 million, or 6.3% of net sales, comparedwith $2.0 million, or 5.6% of net sales, for the six months ended June 30,2004. The $1.5 million increase is primarily due to expenses related to 1)increased investments in infrastructure due to expenses in obtaining typeapproval certification from key carrier customers in the United States and inLatin America, 2) being a public company and 3) our expanded operations inLatin America, all of which have contributed to our increased sales levels. Wenow also occupy larger office and warehouse facilities. The increase inoperating expenses as a percentage of revenues is related to the factorsdiscussed above.

 

Income from continuing operationsbefore provision for income taxes for the six months ended June 30, 2005increased to $1.2 million from $834,000 for the six months ended June 30, 2004,representing an increase of 38%. As a percentage of net sales, income fromcontinuing operations was 2.0% for the six months ended June 30, 2005 comparedwith 2.3% for the six months ended June 30, 2004. This increase in income fromcontinuing operations, in dollars, is the result of increased sales volumes andgross profit, while the decrease as a percentage of net sales is due to thefactors discussed above in operating expenses.

 

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For the six months ended June 30, 2005, we incurred aloss from discontinued operations of $17,000, or $.01 per share, as comparedwith a loss of $173,000, or $.04 per share, for the six months ended June 30,2004.

 

Netincome for the six months ended June 30, 2005 was $723,000, or $0.12 earningsper diluted share, compared to net income of $425,000, or $0.10 earnings perdiluted share, for the six months ended June 30, 2004, representing a dollarincrease of 70%. The increase in net income is primarily due to increased netsales and increased gross profits. Primarily because of the new shares issuedin our June 2004 initial public offering, the weighted average number of fullydiluted shares of 5.8 million was significantly higher for the six months endedJune 30, 2005 than for the six months ended June 30, 2004 when it was 4.1million.

 

**Financial Condition, Liquidityand Capital Resources**

 

*Cash andCash Flows*

 

At June 30, 2005, we had cash andcash equivalents of $713,000, and at December 31, 2004, we had cash and cashequivalents of $5,184,000.

 

During the quarter ended June 30, 2005, we continued toleverage our bank and vendor lines of credit to help fund our growth. The netcash used by operating activities was $8.0 million for the six months endedJune 30, 2005, which resulted primarily from increased accounts receivable. The$12.3 million increase in accounts receivable was due to increased sales in thequarter ended June 30, 2005. Allowance for doubtful accounts at June 30, 2005increased to $543,000 compared to $250,000 at December 31, 2004. This increase****was related to our increased sales levelsand increased accounts receivable balance at June 30, 2005. We believe that atJune 30, 2005, our reserve for doubtful accounts is adequate.  The increase of cash used in operationsrelated to accounts receivable was partially offset by an increase in ouraccounts payable of $2.1 million, and an increase in accrued expenses of$721,000, which were both a direct result of increasing lines of credit fromour vendor partners.

 

Days’ sales outstanding at June 30, 2005 was 44 dayscompared with 40 days at December 31, 2004. Normal payment terms require ourcustomer payment on a net 30-day basis and during the quarter ended June 30,2005 some of our larger customers had temporary terms of net 60-day, thosecustomers have returned to net 30-day terms subsequent to June 30, 2005. We areconstantly working with our customers to reduce our days’ sales outstanding.

 

The net cash used in investing activities was $114,000 forthe six months ended June 30, 2005 compared with $140,000 for the six monthsended June 30, 2004. The cash used in the period ended June 30, 2005wasprimarily the result of expenditures for machinery and equipment to supporttechnical capabilities and assembly machines and increased warehouse andfacility space, as well as the technical tools and equipment necessary for thetesting, repair and customization process.

 

The net cash provided by financing activities for the six monthsended June 30, 2005 of $3.7 million is the result of borrowings from our bankline of credit.

 

Our net working capital at June 30, 2005 was $13.2 million,compared with $12.4 million at December 31, 2004. This change was due primarilyto our increased net income for the six months ended June 30, 2005.

 

**Borrowings**

 

We utilize a bank line of creditwhich is based upon eligible accounts receivable. As of June 30, 2005 andDecember 31, 2004, amounts advanced against that line were approximately$6,300,000 and $2,600,000,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 June 30, 2005 and December 31, 2004,advances were 84% and 47%, respectively, of the available borrowing base. Thiscurrent facility expires on September 15, 2005. Although there are no assurances, we believe that we will be able toextend this revolving line of credit with equal or better terms.As of July 31, 2005, our net availability on the maximum borrowing amount as ofthat date was approximately $2.4 million. In August 2005, the maximum amount available to us under the creditfacility was increased to $12,500,000.

 

We believe that our existing cashresources, together with our projected cash flow from operations and the net proceedsfrom our bank line of credit, will be sufficient to allow us to implement ourstrategy and growth plan.

 

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**CriticalAccounting Policies**

 

We believe the following criticalaccounting 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 and Accrued Chargebacks***

 

Revenues are recognized upon (1)shipment of the products to customers, (2) when collection of the outstandingreceivables is probable, and (3) the final price of the product is determined.Commission revenue, paid by the carrier, on phone activations is recorded atthe time of the activation and may be charged back to us in future periods.Commission revenue and accrued chargebacks are related to our discontinuedoperations. The carrier has six months from date of activation to charge backamounts previously credited to us if the customer terminates its service. Weprovide an allowance for estimated returns based on our experience, whichestimate is recorded as a contra asset against accounts receivable. A provisionfor returns is provided in the same period in which the related revenue isrecorded. Customer credit-worthiness and economic conditions may change andincrease the risk of collectibility and contract terminations and may requireadditional provisions, which would negatively impact our operating results.

 

***Allowance for Doubtful Accounts and Sales Return Reserve***

 

Credit evaluations are undertakenfor all major sale transactions before shipment is authorized. Normal paymentterms require payment on a net ninety-day basis. On an on-going basis, we analyzethe payment history of customer accounts, including recent customer purchases.We evaluate aged items in the accounts receivable aging and provide reservesfor doubtful accounts and estimated sales returns. Customer credit-worthinessand economic conditions may change and increase the risk of collectibility andsales returns, and may require additional provisions, which would negativelyimpact our operating results.

 

***Inventory Write-Off and Effect on Gross Margin***

 

We regularly monitor inventoryquantities on hand and record a provision for excess and obsolete inventoriesbased primarily on historical usage rates and our estimated forecast of productdemand for a period of time, which is generally nine months. Because ofobsolescence, we will generally provide a full reserve for the costs of ourinventories in excess of our relevant forecast for the applicable period. Weattempt to control our inventory levels so that we do not hold inventories inexcess of demand for the succeeding nine months. However, because we need toplace non-cancelable orders with significant lead time and because it isdifficult to estimate product demand, it is possible that we will buildinventories in excess of demand for the future periods. If we have inventoriesin excess of estimated product demand, we will provide a reserve, which couldhave a material adverse effect on our reported results of operations andfinancial position.

 

**Off-Balance Sheet Arrangements**

 

We do not have any off-balance sheet arrangements.

 

**Contractual Obligations**

 

Welease corporate and administrative office facilities, and equipment undernon-cancelable operating leases. Certain of these leases contain renewaloptions. Rent expense under these leases was approximately $319,000 and$126,000 for the six months ended June 30, 2005 and 2004, respectively.

 

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

 

We are subject to market risks with respect to interestrates because our line of credit has a floating interest rate. We can chooseamong the bank’s prime rate, which was 6.25% at June 30, 2005, and the one-,two-, and three-month LIBOR rates plus 2.25% for the first $500,000 ofborrowings and plus 2.5% for borrowing above $500,000. As ofJune30, 2005, our borrowings were all at the bank’s prime rate. If the full$12,500,000 available under our credit facility were outstanding for a fullyear, each increase of 1% in the applicable interest rate would result in anadditional $75,000 in interest expense for that year.

 

Our business outside the United States is conducted inUnited States dollars. Although we purchase and sell products and services inUnited States dollars and do not engage in exchange swaps, futures or optionscontracts or other

 

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hedging techniques, fluctuations in currency exchange rates couldreduce demand for products sold in United States dollars. We cannot predict theeffect that future exchange rate fluctuations will have on our operatingresults. We believe our exposure to market risks, including exchange rate risk,interest rate risk and commodity price risk, is not material at the presenttime. We may in the future engage in currency hedging transactions, which couldresult in our incurring significant additional losses.

 

**Item 4. Controls and Procedures**

 

As of the end of the period coveredby this report, we conducted an evaluation, under the supervision and with theparticipation of the principal executive officer and principal financialofficer, of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “ExchangeAct”)). Based on this evaluation, the principal executive officer and principalfinancial officer concluded that our disclosure controls and procedures areeffective to ensure that information required to be disclosed by us in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission (“SEC”) rules and forms. There was no change in ourinternal control over financial reporting during our most recently completedfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

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

 

The Company may become involved in certain legalproceedings and claims which arise in the normal course of business. As of June30, 2005, the Company did not have any significant litigation outstanding, andmanagement does not expect any pending litigation matters to have a materialimpact on the Company’s liquidity or the financial statements taken as a whole.

 

**Item 2.****   ****Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

Effective May 25, 2005, the Companyissued options to purchase 39,500shares of common stock to certain employees (the “Employee Options”).  The Employee Options vest on December 31,2005 and have an exercise price of $3.29 per share, which was higher than theclosing price per share of the Company’s common stock on May 25, 2005. TheEmployee Options expire three years from the date of grant.  These grants were made pursuant toexemptions from registration under the Securities Act of 1933, including but notlimited to Section 4(2) of the Securities Act of 1933.

 

**Item 3.****   ****Defaults Upon Senior Securities.**

 

None.

 

**Item 4.****   ****Submission of Matters to a Voteof Security Holders.**

 

None.

 

**Item 5.****   ****Other Information.**

 

None.

 

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

 
| 31.1   |   | Certifications of the Chief Executive  Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                            |
| 32.1   |   | Certifications of Chief Executive Officer  and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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** **

**SIGNATURE**

 

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

 
|   |            |   |       InfoSonics  Corporation |
|--------|-----------------|--------|-------------------------------------------------------------|
|   |            |   |                                                        |
|   |            |   |                                                        |
| Date:  | August 15, 2005 | By:    | /S/ Joseph Ram                                              |   |
|   |            |   | Joseph Ram                                                  |
|   |            |   | Chief Executive Officer                                     |
|   |            |   |                                                        |
|   |            |   |                                                        |
| Date:  | August 15, 2005 | By:    | /S/ Jeffrey Klausner                                        |   |
|   |            |   | Jeffrey Klausner                                            |
|   |            |   | Chief Financial Officer                                     |
|        |                 |        |                                                             |  |  |

 

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