Table ofContents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10 - Q**

 

**QUARTERLYREPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended June 30, 2010**

 

**Commission File Number - 001-32217**

 

**InfoSonics Corporation**

(Exact name of registrant as specified inits charter)

 

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

 

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

(Address of principal executive officesincluding zip code)

 

**(858) 373-1600**

(Registrant’s telephonenumber, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  x   No  o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes  o No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

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

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes  o   No  x

 

As of August 16, 2010, theRegistrant had 14,184,146 shares outstanding of its $0.001 par value commonstock.

 

 

 

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**InfoSonicsCorporation**

**FORM 10-Q**

**Forquarterly period ended June 30, 2010**

 

**Table ofContents**

 
| **PART I - FINANCIAL INFORMATION** |                                                                                                               |       |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------|------------|
|                                    |                                                                                                               |       |   |
| Item 1.                                 | Financial  Statements                                                                                              |       |   |
|                                    |                                                                                                               |       |   |
| ·                                  | Consolidated  Statements of Operations for the three and six months ended June 30,  2010 and 2009 (unaudited) |       | 2 |
|                                    |                                                                                                               |       |   |
| ·                                  | Consolidated  Balance Sheets at June 30, 2010 (unaudited) and December 31, 2009                          |       | 3 |
|                                    |                                                                                                               |       |   |
| ·                                  | Consolidated  Statements of Cash Flows for the six months ended June 30, 2010 and 2009  (unaudited)           |       | 4 |
|                                    |                                                                                                               |       |   |
| ·                                  | Condensed  Notes to Consolidated Financial Statements (unaudited)                                                  |       | 5 |
|                                    |                                                                                                               |       |   |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |       | 13 |
|                                    |                                                                                                               |       |   |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                                        |       | 18 |
|                                    |                                                                                                               |       |   |
| Item 4.                                 | Controls and Procedures                                                                                            |       | 18 |
| ** **                              | ** **                                                                                                         | ** ** | ** ** |
| **PART II - OTHER INFORMATION**    |                                                                                                               |       |
|                                    |                                                                                                               |       |   |
| Item 1.                                 | Legal Proceedings                                                                                                  |       | 19 |
|                                    |                                                                                                               |       |   |
| Item 1A.                                | Risk Factors                                                                                                       |       | 19 |
|                                    |                                                                                                               |       |   |
| Item 6.                                 | Exhibits                                                                                                           |       | 21 |

 

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**Part I.  FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements of Operations**

**(Amounts in thousands, except per share data)**

**(unaudited)**

** **
| ** **                                                                                | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2010**                                                          | ** ** | **2009**                                                   | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                | ** ** | ** **                                                        | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales**                                                                             |       | $                                                                 | 22,353     |                                                       | $          | 61,706 |   | $ | 49,894 |   | $ | 104,331 |   |
| **Cost of sales**                                                                         |       | 20,784                                                            |       | 57,634                                                     |       | 46,884 |   | 96,904 |   |
|                                                                                      |       |                                                              |       |                                                       |       |   |   |   |   |
| **Gross profit**                                                                          |       | 1,569                                                             |       | 4,072                                                      |       | 3,010 |   | 7,427 |   |
|                                                                                      |       |                                                              |       |                                                       |       |   |   |   |   |
| **Operating expenses**                                                                    |       |                                                              |       |                                                       |       |   |   |   |   |
| Selling, general and administrative                                                       |       | 2,134                                                             |       | 3,549                                                      |       | 4,088 |   | 6,401 |   |
| Research and development                                                                  |       | 227                                                               |       | 10                                                         |       | 247 |   | 35 |   |
|                                                                                      |       | 2,361                                                             |       | 3,559                                                      |       | 4,335 |   | 6,436 |   |
|                                                                                      |       |                                                              |       |                                                       |       |   |   |   |   |
| **Operating income (loss) from  continuing operations**                                   |       | (792                                                              | )          | 513                                                        |       | (1,325 | ) | 991 |   |
|                                                                                      |       |                                                              |       |                                                       |       |   |   |   |   |
| **Other income (expense):**                                                               |       |                                                              |       |                                                       |       |   |   |   |   |
| Other income                                                                              |       | 3                                                                 |       | —                                                     |       | 2 |   | — |   |
| Interest expense                                                                          |       | —                                                            |       | (109                                                       | )          | (23 | ) | (137 | ) |
|                                                                                      |       |                                                              |       |                                                       |       |   |   |   |   |
| **Income (loss) from continuing  operations before benefit (provision) for income taxes** |       | (789                                                              | )          | 404                                                        |       | (1,346 | ) | 854 |   |
| **Benefit (provision) for income  taxes**                                                 |       | 399                                                               |       | (7                                                         | )          | 395 |   | (17 | ) |
|                                                                                      |       |                                                              |       |                                                       |       |   |   |   |   |
| **Income (loss) from continuing  operations**                                             |       | (390                                                              | )          | 397                                                        |       | (951 | ) | 837 |   |
| **Income (loss) from discontinued  operations, net of tax (Note 11)**                     |       | 76                                                                |       | (167                                                       | )          | 70 |   | (359 | ) |
| ** **                                                                                | ** ** | ** **                                                        | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income (loss)**                                                                     |       | $                                                                 | (314       | )                                                          | $          | 230 |   | $ | (881 | ) | $ | 478 |   |
|                                                                                      |       |                                                              |       |                                                       |       |   |   |   |   |
| **Basic earnings (loss) per  share:**                                                     |       |                                                              |       |                                                       |       |   |   |   |   |
| Continuing operations                                                                     |       | $                                                                 | (0.03      | )                                                          | $          | 0.03 |   | $ | (0.07 | ) | $ | 0.06 |   |
| Discontinued operations                                                                   |       | 0.01                                                              |       | (0.01                                                      | )          | 0.01 |   | (0.02 | **)** |
| Net income (loss)                                                                         |       | $                                                                 | (0.02      | )                                                          | $          | 0.02 |   | $ | (0.06 | ) | $ | 0.04 |   |
| **Diluted earnings (loss) per  share:**                                                   |       |                                                              |       |                                                       |       |   |   |   |   |
| Continuing operations                                                                     |       | $                                                                 | (0.03      | )                                                          | $          | 0.03 |   | $ | (0.07 | ) | $ | 0.06 |   |
| Discontinued operations                                                                   |       | 0.01                                                              |       | (0.01                                                      | )          | 0.01 |   | (0.02 | **)** |
| Net income (loss)                                                                         |       | $                                                                 | (0.02      | )                                                          | $          | 0.02 |   | $ | (0.06 | ) | $ | 0.04 |   |
|                                                                                      |       |                                                              |       |                                                       |       |   |   |   |   |
| **Basic weighted-average number  of common shares outstanding**                           |       | 14,184                                                            |       | 14,593                                                     |       | 14,184 |   | 14,737 |   |
| ** **                                                                                | ** ** | ** **                                                        | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Diluted weighted-average number  of common shares outstanding**                         |       | 14,184                                                            |       | 14,786                                                     |       | 14,184 |   | 14,851 |   |

 

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

 

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**InfoSonicsCorporation**

**Consolidated Balance Sheets**

**(Amounts in thousands, except per share data)**

** **
| ** **                                                                                                                                           | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                           | ** ** | **(unaudited)**         | ** ** | **(audited)**               | ** ** |
| **ASSETS**                                                                                                                                           |       |                    |       | ** **                  |       |
| Current assets:                                                                                                                                      |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                            |       | $                       | 12,459     |                        | $          | 18,418 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $191 and $590                                                                        |       | 18,197                  |       | 41,914                      |       |
| Accounts receivable other                                                                                                                            |       | 1,365                   |       | 1,004                       |       |
| Inventory, net of reserves of $99 and $112                                                                                                           |       | 2,330                   |       | 3,423                       |       |
| Prepaid assets                                                                                                                                       |       | 370                     |       | 369                         |       |
| Assets of discontinued operations                                                                                                                    |       | 951                     |       | 880                         |       |
| Total current assets                                                                                                                                 |       | 35,672                  |       | 66,008                      |       |
|                                                                                                                                                 |       |                    |       |                        |       |
| Property and equipment, net                                                                                                                          |       | 304                     |       | 316                         |       |
| Other assets                                                                                                                                         |       | 91                      |       | 98                          |       |
|                                                                                                                                                 |       |                    |       |                        |       |
| Total assets                                                                                                                                         |       | $                       | 36,067     |                        | $          | 66,422 |   |
|                                                                                                                                                 |       |                    |       |                        |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                       | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                                                                                                                                                 |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                 |       |                    |       |                        |       |
| Accounts payable                                                                                                                                     |       | $                       | 8,655      |                        | $          | 9,619 |   |
| Accrued expenses                                                                                                                                     |       | 3,277                   |       | 5,666                       |       |
| Line of credit                                                                                                                                       |       | —                  |       | 25,494                      |       |
| Income taxes payable                                                                                                                                 |       | 95                      |       | 91                          |       |
| Liabilities of discontinued operations                                                                                                               |       | 62                      |       | 724                         |       |
| Total current liabilities                                                                                                                            |       | 12,089                  |       | 41,594                      |       |
|                                                                                                                                                 |       |                    |       |                        |       |
| Commitments and Contingencies (Note 13)                                                                                                              |       |                    |       |                        |       |
|                                                                                                                                                 |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                           |       |                    |       |                        |       |
| Preferred stock, $0.001 par value, 10,000 shares  authorized (no shares issued and outstanding)                                                      |       | —                  |       | —                      |       |
| Common stock, $0.001 par value, 40,000 shares  authorized; 14,184 shares issued and outstanding as of June 30, 2010 and  December 31, 2009 |       | 14                      |       | 14                          |       |
| Additional paid-in capital                                                                                                                           |       | 31,769                  |       | 31,727                      |       |
| Accumulated other comprehensive loss                                                                                                                 |       | (18                     | )          | (7                          | )          |
| Accumulated deficit                                                                                                                                  |       | (7,787                  | )          | (6,906                      | )          |
| Total stockholders’ equity                                                                                                                      |       | 23,978                  |       | 24,828                      |       |
|                                                                                                                                                 |       |                    |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                      |       | $                       | 36,067     |                        | $          | 66,422 |   |

 

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

 

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**InfoSonicsCorporation**

**Consolidated Statements of Cash Flows**

**(Amounts in thousands)**

**(unaudited)**

 
| ** **                                                                                         | ** ** | **For the Six Months Ended********June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2010**                                                    | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities:**                                                         | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                  |       | $                                                           | (881       | ) | $ | 478 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities |       |                                                        |       |   |   |
| Depreciation                                                                                       |       | 152                                                         |       | 121 |   |
| Provision for (recovery of) bad debt                                                               |       | (399                                                        | )          | 151 |   |
| Provision for obsolete inventory                                                                   |       | —                                                      |       | 63 |   |
| Stock-based compensation expense                                                                   |       | 42                                                          |       | 31 |   |
| (Increase) decrease in:                                                                            |       |                                                        |       |   |   |
| Accounts receivable                                                                                |       | 24,116                                                      |       | (29,179 | ) |
| Accounts receivable other                                                                          |       | (361                                                        | )          | 3,781 |   |
| Inventory                                                                                          |       | 1,094                                                       |       | (548 | ) |
| Prepaids                                                                                           |       | (1                                                          | )          | (43 | ) |
| Other assets                                                                                       |       | 6                                                           |       | (90 | ) |
| Increase (decrease) in:                                                                            |       |                                                        |       |   |   |
| Accounts payable                                                                                   |       | (964                                                        | )          | (1,129 | ) |
| Accrued expenses                                                                                   |       | (2,388                                                      | )          | 179 |   |
| Income tax liabilities                                                                             |       | 4                                                           |       | 15 |   |
| Cash provided by (used in) continuing operations                                                   |       | 20,420                                                      |       | (26,170 | ) |
| Cash provided by (used in) discontinued operations                                                 |       | (733                                                        | )          | 296 |   |
| Net cash provided by (used in) operating  activities                                               |       | 19,687                                                      |       | (25,874 | ) |
|                                                                                               |       |                                                        |       |   |   |
| **Cash flows from investing  activities:**                                                         | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                                                 |       | (141                                                        | )          | (51 | ) |
| Net cash used in investing activities                                                              |       | (141                                                        | )          | (51 | ) |
|                                                                                               |       |                                                        |       |   |   |
| **Cash flows from financing  activities:**                                                         | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
| Net borrowings (payments on) line of credit                                                        |       | (25,494                                                     | )          | 17,202 |   |
| Cash paid for treasury stock                                                                       |       | —                                                      |       | (483 | ) |
| Net cash provided by (used in) financing activities                                                |       | (25,494                                                     | )          | 16,719 |   |
|                                                                                               |       |                                                        |       |   |   |
| Effect of exchange rate changes on cash                                                            |       | (11                                                         | )          | 14 |   |
|                                                                                               |       |                                                        |       |   |   |
| Net decrease in cash and cash equivalents                                                          |       | (5,959                                                      | )          | (9,192 | ) |
|                                                                                               |       |                                                        |       |   |   |
| **Cash and cash equivalents,  beginning of period**                                                |       | 18,418                                                      |       | 24,715 |   |
|                                                                                               |       |                                                        |       |   |   |
| **Cash and cash equivalents, end  of period**                                                      |       | $                                                           | 12,459     |   | $ | 15,523 |   |
| ** **                                                                                         | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
| **Cash paid for interest**                                                                         |       | $                                                           | 23         |   | $ | 137 |   |
| **Cash paid for taxes**                                                                            |       | —                                                      |       | — |   |

 

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

 

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**InfoSonicsCorporation**

**Condensed Notes to Consolidated Financial Statements**

**(unaudited)**

 

**NOTE 1.  Basis of Presentation**

 

The accompanying unauditedconsolidated financial statements and these condensed notes have been preparedin accordance with accounting principles generally accepted in the UnitedStates (“GAAP”) for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X of the Securities Exchange Act of 1934,as amended (the “Exchange Act”). Accordingly, they do not include all of theinformation and notes required by GAAP for complete financial statements. Thepreparation of financial statements requires management to make estimates andassumptions that affect amounts reported in the financial statements andaccompanying notes. Actual results are likely to differ from those estimates,but management does not believe such differences will materially affect thefinancial position or results of operations of InfoSonics Corporation (the “Company”),although they may. These unaudited consolidated financial statements andcondensed notes should be read in conjunction with the financial statements andnotes as of and for the year ended December 31, 2009 included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2009.

 

The Company’s consolidatedfinancial statements include assets, liabilities and operating results of itswholly-owned subsidiaries.  Allsignificant intercompany accounts and transactions have been eliminated.

 

In the opinion of management, theseunaudited consolidated financial statements reflect all normal recurringadjustments considered necessary to fairly present the Company’s results ofoperations, financial position and cash flows as of June 30, 2010 and forall periods presented.  The resultsreported in these consolidated financial statements for the three and sixmonths ended June 30, 2010 are not necessarily indicative of the operatingresults, financial condition or cash flows that may be expected for the fullfiscal year of 2010 or for any future period.

 

**NOTE 2.****Stock-Based Compensation**

 

TheCompany has three equity incentive plans: the 2006 Equity Incentive Plan (“2006Plan”), the 2003 Stock Option Plan (“2003 Plan”) and the 1998 Stock Option Plan(“1998 Plan”).  Each of the plans wasapproved by our stockholders.  As of June 30,2010, options to purchase 255,000 shares, 12,000 shares and 400,000 shares wereoutstanding under the 2006 Plan, the 2003 Plan and the 1998 Plan, respectively,and a total of 1,088,000 share are available for grant at June 30, 2010under the 2006 Plan.  There are nooptions available for grant under the 2003 and the 1998 Plans. The Company isalso a party to non-plan option agreements with several non-employee directors.

 

TheCompany’s stock options vest on an annual or a monthly basis.  TheCompany recognizes stock-based compensation expense on a straight-line basisover the requisite service period of the award, which is generally the optionvesting term.  Such amount maychange as a result of additional grants, forfeitures, modifications inassumptions and other factors. Income tax effects of share-based payments arerecognized in the financial statements for those awards which will normallyresult in tax deductions under existing tax law. During the three and sixmonths ended June 30, 2010, we recorded an expense of $10,000 and $42,000,respectively, related to options previously granted. During the three and sixmonths ended June 30, 2009, we recorded an expense of $18,000 and $31,000,respectively, related to options previously granted. Under current U.S. federaltax law, we receive a compensation expense deduction related to non-qualifiedstock options only when those options are exercised and vested shares arereceived. Accordingly, the financial statement recognition of compensationexpense for non-qualified stock options creates a deductible temporarydifference that results in a deferred tax asset and a corresponding deferredtax benefit in our consolidated statements of operations.

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model with the following weighted-averageassumptions used for grants in 2009 (there have been no grants in 2010):risk-free interest rate of 0.91% in 2009, based on the U.S. Treasury yields ineffect at the time of grant; expected dividend yields of 0% as the Company hasnot, and does not intend to, declare dividends; and expected life of 3 to 6years based upon the historical life of options. For grants in 2009, theexpected volatility used ranged from 88% to 108%, based on the Company’shistorical stock price fluctuations for a period matching the expected life ofthe options.  As of June 30, 2010,there was $75,000 of total unrecognized compensation expense related tonon-vested stock options.  That expenseis expected to be recognized over the remaining weighted-average period of 3.5years.

 

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A summary of option activityunder all of the above plans as of June 30, 2010 and changes during thesix months then ended is presented in the table below (shares in thousands):

 
| ** **                            | ** ** | **Shares** | ** ** | **Wtd. Avg.  Exercise Price** | ** ** | **Wtd. Avg.  Remaining  Contractual  Life** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------------------------|------------|--------------------------------------------------|------------|
| Outstanding at December 31, 2009 |       | 1,282      |       | $                                       | 1.65       |                                             | 3.25       |   |
| Granted                               |       | —     |       | $                                       | —     |                                             | —     |   |
| Exercised                             |       | —     |       | $                                       | —     |                                             | —     |   |
| Forfeited                             |       | 615        |       | $                                       | 2.35       |                                             | —     |   |
| Outstanding at June 30, 2010     |       | 667        |       | $                                       | 1.01       |                                             | 2.41       |   |
|                                  |       |       |       |                                    |       |                                             |       |
| Vested and expected to vest           |       | 667        |       | $                                       | 1.01       |                                             | 2.41       |   |
| Exercisable at June 30, 2010     |       | 489        |       | $                                       | 1.14       |                                             | 1.31       |   |

 

Asummary of the status of the Company’s non-vested options at June 30, 2010and changes during the six months then ended is presented below (shares inthousands):

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted-average  grant-date fair value** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| Non-vested at December 31, 2009 |       | 255        |       | $                                                     | 0.72       |   |
| Granted                              |       | —     |       | $                                                     | —     |   |
| Vested                               |       | (24        | )          | $                                                     | 1.77       |   |
| Forfeited                            |       | (53        | )          | $                                                     | 0.51       |   |
| Non-vested at June 30, 2010     |       | 178        |       | $                                                     | 0.64       |   |

 

During the quarter ended June 30, 2010, theCompany established a wholly owned subsidiary in Hong Kong to serve as the basefor the Company’s sales and marketing efforts of its proprietary line of *verykool®* products in Asia-Pacific.  It also established a wholly owned subsidiaryof the Hong Kong entity in China for the purpose of designing and developing *verykool®* products.  The Company funded the combined operations ofthese entities with $1.0 million and agreed to invest up to $1.0 million inadditional funding as needed.  In orderto provide incentives to the China development team, the Company granted awarrant exercisable for 38% of the equity ownership of the Hong Kong subsidiaryto a management company for the benefit of the China employees.  The Company also committed to reserve up to5% more to attract additional talent as needed. The total price of the warrant is $1.00, with vesting to occur one-thirdupon the first anniversary of the warrant and the remaining two-thirds to veston a monthly basis over the succeeding 24 months.  The warrant has a 6-year life, but will notbe exercisable until the third anniversary of its issuance.

 

The Company evaluated thewarrant on its Hong Kong subsidiary in accordance with ASC 718-50 and concludedthat because the warrants were issued to the management company for allocationat their discretion, the proper treatment of the warrants was as specified inASC 505-50 as equity-based payments to non-employees in exchange for services.  The Company also concluded that the estimatedfair value at June 30, 2010 of the warrant based on the cost valuation methodwas $365,000.  The Company will continueto record the expense for this warrant based upon the current fair value of thewarrant at each reporting period over the three year performance period.  The amount of expense recorded during thequarter ended June 30, 2010 was $20,000.

 

TheCompany’s stock-based compensation is classified in the same expense line itemsas cash compensation. Information about stock-based compensation included inthe unaudited results of operations for the three and six months ended June 30,2010 and 2009 is as follows (in thousands):

 
| ** **                                                                | ** ** | **For the Three Months Ended********June 30,** | ** ** | **For the Six Months Ended******** June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2010**                                                      | ** ** | **2009**                                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                      |       |                                                          |       |                                                              |       |   |   |   |   |
| Officer compensation                                                      |       | $                                                             | 4          |                                                              | $          | 4 |   | $ | 8 |   | $ | 3 |   |
| Non-employee directors                                                    |       | —                                                        |       | 1                                                                 |       | — |   | 1 |   |
| Sales, general and administrative                                         |       | 6                                                             |       | 13                                                                |       | 14 |   | 27 |   |
| Research and development                                                  |       | 20                                                            |       | —                                                            |       | 20 |   | — |   |
| Total stock option/warrant expense, included in  total operating expenses |       | $                                                             | 30         |                                                              | $          | 18 |   | $ | 42 |   | $ | 31 |   |

 

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**NOTE 3. Earnings Per Share**

 

Basic earnings per share arecomputed by dividing income available to common stockholders by theweighted-average number of common shares outstanding. Diluted earnings pershare is computed similarly to basic earnings per share, except that thedenominator is increased to include the number of additional common shares thatwould have been outstanding if the potential additional common shares that weredilutive had been issued. Common share equivalents are excluded from thecomputation if their effect is anti-dilutive. The Company’s common share equivalentsconsist of stock options and warrants.

 

Commonshares from the potential exercise of certain options and warrants have beenexcluded from the computation of diluted earnings per share for the three andsix months ended June 30, 2010 because their exercise prices are greaterthan the Company’s weighted-average stock price for the period.  Forthe three and six months ended June 30, 2009, the number ofshares excluded was 1,573,000 and 1,654,000, respectively.

 

**NOTE 4. Income Taxes**

 

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

 

The Company is subject to U.S.federal income tax as well as income tax in multiple states and foreignjurisdictions. For all major taxing jurisdictions, the tax years 2004 through2008 remain open to examination or re-examination. As of June 30, 2010,the Company does not expect any material changes to unrecognized tax positionswithin the next twelve months.

 

The Company recognizes the amountof taxes payable or refundable for the current year and deferred taxliabilities and assets for the future tax consequences of events that have beenrecognized in an entity’s financial statements or tax returns. Judgment isrequired in assessing the future tax consequences of events that have beenrecognized in our financial statements or tax returns. Fluctuations in theactual outcome of these future tax consequences could materially impact theCompany’s financial position or results of operations.  For the three and six months ended June 30,2010, deferred income tax assets and the corresponding valuation allowanceincreased by $6,000 and $374,000, respectively.

 

Includedin the income tax provision for both the three and six months ended June 30,2010 is a $400,000 U.S. federal income tax benefit from the carry back of netoperating losses in 2007 and 2008 to prior years.  There was no such benefit in the same periodof the prior year.

 

**NOTE 5.  Comprehensive Income (Loss**)

 

Comprehensive income (loss) for theCompany includes net income (loss) and foreign currency translationadjustments.  Comprehensive income (loss)was as follows (in thousands):

 
| ** **                               | ** ** | **For the Three Months Ended******** June 30,** | ** ** | **For the Six Months Ended******** June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                                            | ** ** | **2009**                                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                     |       |                                                                |       |                                                              |       |   |   |   |   |
| Net profit (loss)                        |       | $                                                                   | (314       | )                                                                 | $          | 230 |   | $ | (881 | ) | $ | 478 |   |
| Other comprehensive income (loss):       |       |                                                                |       |                                                              |       |   |   |   |   |
| Foreign currency translation adjustments |       | (5                                                                  | )          | (1                                                                | )          | (18 | ) | 14 |   |
| Comprehensive income (loss)              |       | $                                                                   | (319       | )                                                                 | $          | 229 |   | $ | (899 | ) | $ | 492 |   |

 

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**NOTE 6. Inventory**

 

Inventoryis stated at the lower of cost (first-in, first-out) or market and consistsprimarily of cellular phones and cellular phone accessories.  The Company records a reserve againstinventories to account for obsolescence and possible price concessions requiredto liquidate inventories below cost.  Asof June 30, 2010 and December 31, 2009, the inventory reserve was$99,000 and $112,000, respectively.  Fromtime to time, the Company has prepaid inventory as a result of payments forproducts which have not been received by the balance sheet date.  As of June 30, 2010 and December 31,2009, the prepaid inventory balances were $99,000 and $119,000, respectively,which are included in prepaid assets in the accompanying consolidated balancesheets.  Inventory consists of thefollowing (in thousands):

 
| ** **         | ** ** | **June 30,  2010********(unaudited)** | ** ** | **December 31,  2009********(audited)** | ** ** |
|--------------------|------------|--------------------------------------------|------------|----------------------------------------------|------------|
| Finished  goods    |       | $                                          | 2,429      |                                         | $          | 3,535 |   |
| Inventory  reserve |       | (99                                        | )          | (112                                         | )          |
| Net  inventory     |       | $                                          | 2,330      |                                         | $          | 3,423 |   |

 

**NOTE 7. Property and Equipment**

 

Property and equipment areprimarily located in the United States, with the exception of test fixtures andcomputer equipment at the Company’s development subsidiary in China and certaintooling and product molds located at outsourced manufacturers in Asia.  Fixed assets consisted of the following (inthousands):

 
| ** **                    | ** ** | **June 30,  2010********(unaudited)** | ** ** | **December 31,  2009********(audited)** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|----------------------------------------------|------------|
| Machinery and equipment       |       | $                                          | 401        |                                         | $          | 472 |   |
| Furniture and fixtures        |       | 175                                        |       | 106                                          |       |
| Tooling and molds             |       | 550                                        |       | 482                                          |       |
| Subtotal                      |       | 1,126                                      |       | 1,060                                        |       |
| Less accumulated depreciation |       | 822                                        |       | 744                                          |       |
| Total                         |       | $                                          | 304        |                                         | $          | 316 |   |

 

Depreciation expense for the threeand six months ended June 30, 2010 was $81,000 and $152,000, respectively,and for the three and six months ended June 30, 2009 was $47,000 and$121,000, respectively.

 

**NOTE 8.  Accrued Expenses**

 

Asof June 30, 2010 and December 31, 2009, accrued expenses consisted ofthe following (in thousands):

 
| ** **                       | ** ** | **June 30,  2010********(unaudited)** | ** ** | **December 31,  2009********(audited)** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------|------------|
| Accrued product costs            |       | $                                          | 1,745      |                                         | $          | 1,477 |   |
| Other accruals (including taxes) |       | 1,532                                      |       | 4,189                                        |       |
| Total                            |       | $                                          | 3,277      |                                         | $          | 5,666 |   |

 

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**NOTE 9.  Borrowings**

 

Pursuant to the Company’s Loan, Security and BulkPurchase Agreement and a Letter of Credit and Security Agreement (collectively,the “Agreement”) with Wells Fargo Trade Capital LLC (“Lender”), the Lender mayadvance up to $45 million to the Company based on the expected collections ofeligible receivables as well as value of the Company’s eligible inventorydetermined in accordance with the Agreement. The outstanding advances may not exceed the lesser of (i) $45million or (ii) the sum of the value of the eligible receivables andeligible inventory multiplied by their respective advance rates as set forth inthe Agreement.  This creditfacility is secured by all of the assets of the Company. The Agreementautomatically renews annually, and is currently set to expire in April 2011.  The interest rate for each borrowing underthe credit facility is, at the option of the Company, either the Wells FargoBank N.A. prime rate minus 0.50% or the LIBOR rate plus 2.00%.  Asof June 30, 2010, there were no advances outstanding under the Agreement,there were $2.1 million of outstanding letters of credit supported by theAgreement and the Company was in compliance with all the covenants of theAgreement.  See Note 15 for a descriptionof a subsequent event related to the Agreement.

 

**NOTE 10.  Recent Accounting Pronouncements**

 

RecentlyAdopted:

 

OnJanuary 1, 2010, the Company adopted changes issued by the FASB toaccounting for variable-interest entities. These changes require an enterpriseto perform an analysis to determine whether the enterprise’s variable interestor interests give it a controlling financial interest in a variable-interestentity; to require ongoing reassessments of whether an enterprise is theprimary beneficiary of a variable-interest entity; to eliminate the solelyquantitative approach previously required for determining the primarybeneficiary of a variable-interest entity; to add an additional reconsiderationevent for determining whether an entity is a variable-interest entity when anychanges in facts and circumstances occur such that holders of the equityinvestment at risk, as a group, lose the power from voting rights or similarrights of those investments to direct the activities of the entity that mostsignificantly impact the entity’s economic performance; and to require enhanceddisclosures that will provide users of financial statements with moretransparent information about an enterprise’s involvement in avariable-interest entity. The adoption of these changes had no impact on thecondensed consolidated financial statements.

 

OnJanuary 1, 2010, the Company adopted changes issued by the FASB toaccounting for transfers of financial assets. These changes remove the conceptof a qualifying special-purpose entity and remove the exception from theapplication of variable interest accounting to variable-interest entities thatare qualifying special-purpose entities; limit the circumstances in which atransferor derecognizes a portion or component of a financial asset; define aparticipating interest; require a transferor to recognize and initially measureat fair value all assets obtained and liabilities incurred as a result of atransfer accounted for as a sale; and require enhanced disclosure. The adoptionof these changes had no impact on the condensed consolidated financialstatements.

 

EffectiveJanuary 1, 2010, the Company adopted changes issued by the FASB onJanuary 6, 2010 for a scope clarification to the FASB’s previously issuedguidance on accounting for noncontrolling interests in consolidated financialstatements. These changes clarify the accounting and reporting guidance fornoncontrolling interests and changes in ownership interests of a consolidatedsubsidiary. An entity is required to deconsolidate a subsidiary when the entityceases to have a controlling financial interest in the subsidiary. Upondeconsolidation of a subsidiary, an entity recognizes a gain or loss on thetransaction and measures any retained investment in the subsidiary at fairvalue. The gain or loss includes any gain or loss associated with thedifference between the fair value of the retained investment in the subsidiaryand its carrying amount at the date the subsidiary is deconsolidated. In contrast,an entity is required to account for a decrease in its ownership interestof a subsidiary that does not result in a change of control of the subsidiaryas an equity transaction. The adoption of these changes had no impact on thecondensed consolidated financial statements.

 

EffectiveJanuary 1, 2010, the Company adopted changes issued by the FASB onJanuary 21, 2010 to disclosure requirements for fair value measurements.Specifically, the changes require a reporting entity to disclose separately theamounts of significant transfers in and out of Level 1 and Level 2 fair valuemeasurements and describe the reasons for the transfers. The changes alsoclarify existing disclosure requirements related to how assets and liabilitiesshould be grouped by class and valuation techniques used for recurring andnonrecurring fair value measurements. The adoption of these changes had noimpact on the condensed consolidated financial statements.

 

EffectiveJanuary 1, 2010, the Company adopted changes issued by the FASB onFebruary 24, 2010 to accounting for and disclosure of events that occurafter the balance sheet date but before financial statements are issued oravailable to be issued, otherwise known as “subsequent events.” Specifically,these changes clarified that an entity that is required to file or furnish itsfinancial statements with the SEC is not required to disclose the date throughwhich subsequent events have been evaluated. Other than the elimination ofdisclosing the date through which management has performed its evaluation forsubsequent events (see Note 12), the adoption of these changes had no impact onthe condensed consolidated financial statements.

 

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ISSUED(Not adopted yet):

 

InOctober 2009, the FASB issued changes to revenue recognition formultiple-deliverable arrangements. These changes require separation ofconsideration received in such arrangements by establishing a selling pricehierarchy (not the same as fair value) for determining the selling price of adeliverable, which will be based on available information in the followingorder: vendor-specific objective evidence, third-party evidence, or estimatedselling price; eliminate the residual method of allocation and require that theconsideration be allocated at the inception of the arrangement to alldeliverables using the relative selling price method, which allocates anydiscount in the arrangement to each deliverable on the basis of eachdeliverable’s selling price; require that a vendor determine its best estimateof selling price in a manner that is consistent with that used to determine theprice to sell the deliverable on a stand-alone basis; and expand thedisclosures related to multiple-deliverable revenue arrangements. These changesbecome effective for the Company on January 1, 2011. Management hasdetermined that the adoption of these changes will not have an impact on thecondensed consolidated financial statements, as the Company does not currentlyhave any such arrangements with its customers.

 

InJanuary 2010, the FASB issued changes to disclosure requirements for fairvalue measurements. Specifically, the changes require a reporting entity todisclose, in the reconciliation of fair value measurements using significantunobservable inputs (Level 3), separate information about purchases, sales,issuances and settlements (i.e., on a gross basis rather than as a single netnumber). These changes become effective for The Company beginningJanuary 1, 2011. Other than the additional disclosure requirements,management has determined these changes will not have an impact on thecondensed consolidated financial statements.

 

InMarch 2010, the FASB issued changes related to existing accountingrequirements for embedded credit derivatives. Specifically, the changes clarifythe scope exception regarding when embedded credit derivative features are notconsidered embedded derivatives subject to potential bifurcation and separateaccounting. These changes become effective for the Company on July 1,2010. Management has determined these changes will not have an impact on thecondensed consolidated financial statements.

 

**NOTE 11.  Discontinued Operations**

 

Duringthe quarter ended June 30, 2008, the Company assessed its business in theUnited States and Mexico.  Due to thechanging environment and consolidation in the United States of the smallerregional cellular carriers (the Company’s target market) into larger nationalcarriers, along with the Company’s inability to penetrate the Mexico market dueto challenges of fostering sales relations with the dominant cellular carriersthere, management determined that it was necessary to take decisive actions to mitigatefurther losses.  The Company implementedactions necessary to close sales operations in both of those countries, whichactions were substantially completed by the end of 2009.  The results of the unaudited discontinuedoperations are as follows (in thousands):

 
| ** **                    | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **June 30,**              | ** ** | **June 30,**            | ** ** |
| ** **                    | ** ** | **2010**                       | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                     |       | $                              | 40         |                         | $          | 236 |   | $ | 64 |   | $ | 483 |   |
| Gross profit                  |       | 39                             |       | (156                         | )          | 63 |   | (312 | ) |
| Operating income (loss)       |       | 76                             |       | (167                         | )          | 70 |   | (360 | ) |
| Identifiable assets           |       | 951                            |       | 3,026                        |       | 951 |   | 3,026 |   |
| Capital expenditures          |       | —                         |       | —                       |       | — |   | — |   |
| Depreciation and amortization |       | —                         |       | —                       |       | — |   | — |   |
|                               |            |                                |            |                              |            |  |  |  |  |  |  |  |  |

 

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Liabilitiesof discontinued operations consist primarily of accounts payable.  Assets of discontinued operations are asfollows (in thousands):

 
| ** **          | ** ** | **June 30, 2010********(unaudited)** | ** ** | **December 31,2009********(audited)** | ** ** |
|---------------------|------------|-------------------------------------------|------------|--------------------------------------------|------------|
| Accounts receivable |       | $                                         | 36         |                                       | $          | 13 |   |
| Prepaid taxes       |       | 842                                       |       | 851                                        |       |
| Other assets        |       | 73                                        |       | 16                                         |       |
| Total               |       | $                                         | 951        |                                       | $          | 880 |   |

 

Asof June 30, 2010, the discontinuance of the domestic and Mexicanbusinesses is essentially complete. However, the Company is currently working to obtain a refund of the VATtax prepaid in Mexico and expects to continue to record adjustments andexpenses through discontinued operations as necessary until they are completelywound down.

 

TheCompany re-evaluated its discontinued operations as of June 30, 2010 inaccordance with applicable FASB guidance due to the Company’s remainingdiscontinued operations being outstanding for more than one year since thedeclaration to discontinue. As discussed above, the prepaid taxes are in theprocess of being recovered from a foreign government, with the ability tosettle beyond the Company’s control. As this matter is beyond the Company’scontrol, classification as discontinued operations is still deemed appropriate.

 

**NOTE 12.  GeographicInformation**

 

TheCompany currently operates in one business segment.  All fixed assets are located in Company orthird-party facilities in the United States and Asia. The unaudited net salesby geographical area for the three and six months ended June 30, 2010 and2009 were (in thousands):

 
| ** **      | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-----------------|------------|------------------------------------------|------------|-----------------------------------|------------|
| ** **      | ** ** | **June 30, 2010**              | ** ** | **June 30, 2009**       | ** ** | **June 30, 2010** | ** ** | **June 30, 2009** | ** ** |
| Central America |       | $                                        | 3,672      |                              | $          | 5,624 |   | $ | 5,167 |   | $ | 8,738 |   |
| South America   |       | 18,681                                   |       | 56,082                            |       | 44,727 |   | 95,593 |   |
| Total           |       | $                                        | 22,353     |                              | $          | 61,706 |   | $ | 49,894 |   | $ | 104,331 |   |

 

**NOTE 13.  Commitments and Contingencies**

 

*LG Electronics Litigation*

 

On July 1, 2009, the Company filed suit in theSuperior Court of the State of California, County of San Diego (Case No. 37-2009-00092797-CU-BT-CTL)against defendants LG Electronics, Inc., LG Electronics USA, Inc., LGElectronics Panama S.A., LG Electronics Inc. Chile LTDA, LG ElectronicsGuatemala S.A. de C.V. and DOES 1-10. The complaint alleges claims for interference with contractualrelations/inducing breach of contract, intentional interference with prospectiveeconomic relations, negligent interference with prospective economic relations,breach of contract, breach of implied covenant of good faith and fair dealing,unjust enrichment, fraud, promissory estoppel and violation of CaliforniaBusiness and Professions Code §§ 17200, et seq. The Company is seeking in excess of $5 million in damages On July 31,2009, the defendants removed the case to federal court in San Diego, CA.  On April 23, 2010, the Company filed anamended complaint.

 

The Company may become involved incertain other legal proceedings and claims which arise in the normal course ofbusiness. Other than as described above, as of the filing date of this report,the Company did not have any significant litigation outstanding.

 

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**NOTE 14.  Fair Value of Financial Instruments**

 

The Company’s financial instrumentsinclude cash and cash equivalents, accounts receivable, prepaid expenses,accounts payable and accrued expenses. The book value of all other financialinstruments is representative of their fair values. Cash and cash equivalentsare the Company’s only financial instruments required to be measured at fairvalue and are measured using quoted prices for identical assets in an identicalmarket.

 

**NOTE15.  Subsequent Event**

 

As described in Note 9, the Companyis party to a Loan, Security and BulkPurchase Agreement and a Letter of Credit and Security Agreement (collectively,the “Agreement”) with Wells Fargo Trade Capital LLC (“Lender”).  Section 6.2 of theAgreement provides that the Agreement may be terminated for convenience byeither party with 60 days’ written notice. Although the Company is currently in compliance with all of itscovenants under the Agreement, on July 22, 2010, it received a notice fromthe Lender of its election to terminate the Agreement on September 22,2010, the end of the 60-day notice period. It is the Company’s belief that the principal reasons for the Lender’sactions are the decreased utilization of the facility by the Company, the highlevel of capital reserves required by the Lender to support the facility andthe Company’s lack of profitability.  TheCompany believes that its current cash resources and working capital aresufficient to fund its operations for the foreseeable future.  In addition, the Company is considering otheralternatives, including replacing the facility with another lender.

 

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

 

**Forward-Looking Statements andOther General Information**

 

This discussion and analysis offinancial condition and results of operations should be read in conjunctionwith the accompanying unaudited consolidated financial statements and condensednotes thereto and other information included in this report and our Annual Reporton Form 10-K for the year ended December 31, 2009 (including our 2009audited consolidated financial statements and related notes thereto and otherinformation). Our discussion and analysis of financial condition and results ofoperations are based upon, among other things, our unaudited consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States (“GAAP”). The preparation offinancial statements in conformity with GAAP requires us to, among otherthings, make estimates and assumptions that affect the reported amounts ofassets and liabilities, the disclosures of contingent liabilities as of thedate of our most recent balance sheet, and the reported amounts of revenues andexpenses during the reporting periods. We review our estimates and assumptionson an ongoing basis. Our estimates are based on our historical experience andother assumptions that we believe to be reasonable under the circumstances.Actual results are likely to differ from these estimates under differentassumptions or conditions, but we do not believe such differences willmaterially affect our financial position or results of operations, althoughthey may. Our critical accounting policies, the policies we believe are mostimportant to the presentation of our financial statements and require the mostdifficult, subjective and complex judgments are outlined below in “CriticalAccounting Policies.”  All references toresults of operations in this discussion generally are to results fromcontinuing operations, unless otherwise noted.

 

We decided during the secondquarter of 2008 to discontinue our operations in Mexico and the U.S.  Although we have essentially completed thisprocess, we are currently working to obtain a refund of the $842,000 of VAT taxprepaid in Mexico and expect to continue to record adjustments required in thefinancial statements, which affects certain amounts of our results ofoperations and the classifications on the balance sheet, statement ofoperations and statement of cash flows for prior periods, and as of priordates, as well as our disclosure in this report, including management’sdiscussion and analysis.  The amountsrelated to our discontinued operations are shown separate from our continuingoperations in our consolidated financial statements.

 

**Safe Harbor Statement**

 

This report contains “forward-lookingstatements,” including, without limitation, statements about future impacts ofa new Argentina tariff and possible actions to be taken in response, customerrelationships, marketing of our *verykool*®products, sales levels, cost reductions, operating efficiencies andprofitability, that are based on current management expectations and whichinvolve certain risks and uncertainties. These risks and uncertainties, in whole or in part, could cause suchexpectations to fail to be achieved and have a material adverse effect on ourbusiness, financial condition and results of operations, and include, withoutlimitation: (1) intense competition internationally, including competitionfrom alternative business models, such as manufacturer-to-carrier sales, whichmay lead to reduced prices, lower sales, lower gross margins, extended paymentterms with customers, increased capital investment and interest costs, bad debtrisks and product supply shortages; (2) dependency on sales in Argentinawhich have been and will continue to be significantly reduced or eliminated asa result of the recently adopted import tariff in that country; (3) theability of the Company’s new China R&D group to develop new *verykool*® handsets and successfullyintroduce them into new emerging markets; (4) extended general economicdownturn in world markets; (5) inability to secure adequate supply ofcompetitive products on a timely basis and on commercially reasonable terms; (6) foreignexchange rate fluctuations, devaluation of a foreign currency, adversegovernmental controls or actions, political or economic instability, ordisruption of a foreign market, including, without limitation, the imposition,creation, increase or modification of tariffs, taxes, duties, levies and othercharges and other related risks of our international operations, such as therecently adopted tax/duty change in Argentina on certain electronics (includingcellular phones) which could significantly increase selling prices to ourcustomers and end-users; (7) the ability to attract new sources ofprofitable business from expansion of products or services or risks associatedwith entry into new markets, including geographies, products and services; (8) aninterruption or failure of our information systems or subversion of access orother system controls may result in a significant loss of business, assets, orcompetitive information; (9) significant changes in supplier terms andrelationships or shortages in product supply; (10) continued consolidationin the wireless handset carrier market; (11) loss of business from one or moresignificant customers; (12) customer and geographical accounts receivableconcentration risk and other related risks; (13) rapid product improvement andtechnological change resulting in inventory obsolescence; (14) uncertainpolitical and economic conditions internationally, including terrorist ormilitary actions; (15) the loss of a key executive officer or other keyemployees and the integration of new employees; (16) changes in consumer demandfor multimedia wireless handset products and features; (17) our failure toadequately adapt to industry changes and to manage potential growth and/orcontractions; (18) seasonal buying patterns; (19) the resolution of anylitigation for or against the Company; (20) the recent loss of the Company’sbank line of credit and the ability of the company to have access to adequatecapital to fund its operations; and (21) the ability of the Company to generatetaxable income in future periods.  Referenceis also made to other factors detailed from time to time in our periodicreports filed with the Securities and Exchange Commission. These forward-lookingstatements speak only as of the date of this release and we undertake noobligation to publicly update any forward-looking statements to reflect newinformation, events or circumstances after the date of this release.

 

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We have instituted in thepast, and continue to institute, changes to our strategies, operations andprocesses to address risks and uncertainties and to mitigate their impacts onour results of operations and financial condition. However, no assurances canbe given that we will be successful in these efforts. For a further discussionof significant risk factors to consider, see “Risk Factors” below in thisreport and “Item 1A. Risk Factors” of our Annual Report on Form 10-K forthe year ended December 31, 2009. In addition, other risks oruncertainties may be detailed from time to time in our future SEC filings.

 

**Overview**

 

We are a leading distributorand provider of wireless handsets and accessories in Latin America. We provideend-to-end handset and wireless terminal solutions for carriers in LatinAmerica, and we distribute products of several key original equipmentmanufacturers (OEMs) such as Samsung.  Weare also involved in the design, development, sourcing and sale of aproprietary line of products under our own *verykool®*brand, which includes entry-level, mid-tier and high-end products.

 

The wireless business isextremely competitive.  We must developand deliver a constant flow of new and innovative products and foster closerelationships with carriers and other customers.  We also focus on cost and operationalefficiencies so that our products can be price-competitive in the marketplace.  It is important for us to manage our supplychain closely to provide timely delivery of product to our customers and tominimize exposure to inventory levels. We provide distribution and solution services, including integration andproduct testing, approval and certification, warehousing, logistics services(packing, shipping and delivery), marketing campaigns, warranty services andend-user support.

 

In 2010 we took asignificant strategic step in our business as we launched our own development teamin China.  Previous to this, the designand development of our *verykool®*phones were contracted out to third parties. Bringing design and engineering resources in-house will provide us theopportunity to focus entirely on our own branded products, acceleratetime-to-market, be more responsive to our customer base and reduce our costsand expenses to improve our gross margins and profitability.  The production of our *verykool®* phones continues to beoutsourced to EMS contract manufacturers in Asia, to which our development teamis in close proximity.  We recruited ateam of very experienced management and technical personnel who will serve asboth our design house for all markets and as the base for marketing and sellingour products in Asia-Pacific.  The teamconsists of 34 employees located in Beijing. The quarter ended June 30, 2010 was the first full quarter ofoperation of our China subsidiary.  Itsexpenses are classified as R&D expenses on our statement ofoperations.  We expect to generate initialrevenue in Asia-Pacific in the third quarter of 2010.

 

**Industry and Market Trends andRisks**

 

Since2008, a rapid decline in wireless handset sales in the Central and SouthAmerican markets we serve has negatively impacted and could continue tonegatively impact our sales. Some of the countries in the regions where weoperate, particularly in Central America, have close economic relations withthe United States, and we believe that weak economic conditions in the UnitedStates have adversely impacted consumer demand for the wireless handsets wesell in those countries.  Excess supplyconditions and the extended effects of the recent global economic downturn havereduced and may continue to reduce demand for our products and the marketprices of the products we sell.  Thesereductions affect our ability to generate sales, margins and gross profit atexpected levels and could continue to affect the value of our inventory, aswell as customer payment trends. Conversely, should manufacturers be unable torespond to an unanticipated increase in demand as the global economy recoverson a timely basis, we, along with others in our industry, could experiencesupply constraints that would affect our ability to deliver products. We areunable to quantify these effects, as it is difficult to predict future supplyconditions and demand patterns that affect our ability to meet customer demandor sell handsets at an acceptable gross profit.

 

Althoughwe began to experience a small increase in the demand for handsets in certainmarkets in the third quarter of 2009, we have also begun to observe a decreasein some subsidies offered by operators in the region, which increases thehandset price to the consumer, reducing overall handset volumes.  We also see more low-cost manufacturersgaining traction with entry-level products, which is negatively affecting bothour OEM and *verykool®*sales in the entry-level segment.

 

Mostsignificantly, Argentina passed a new tariff in November 2009affecting certain imported electronics, including wirelesshandsets.  This tariff often increases the pricing at the point ofsale of wireless handsets imported into Argentina by more than 30%, therebyrendering them non-competitive with similar products produced within thecountry.  This is particularlychallenging for us because our sales are largely concentrated in Argentina,which country represented 87% of our sales in 2009.  This barrier has resulted in a significanterosion of our sales for the first half of 2010, and we expect that it will continueto have a material adverse impact on our sales, results of operations andprospects in Argentina in the second half of 2010.  During the first three months of 2010, salesto customers in Argentina comprised 88% of our sales, but declined to 68% of salesin the second quarter of 2010.

 

Asindicated above, our new long-term strategy is to open new markets inAsia-Pacific and to leverage our *verykool®*proprietary line of products in these new markets, as well as our existingLatin American markets.

 

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**Resultsof Operations**

 

The following table sets forthcertain financial data as a percentage of net sales:

 
| ** **                                                         | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                         | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                         | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                                          |       | 100.0                  | %          | 100.0                | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                                      |       | 93.0                   | %          | 93.4                 | %          | 94.0 | % | 92.9 | % |
| Gross profit                                                       |       | 7.0                    | %          | 6.6                  | %          | 6.0 | % | 7.1 | % |
|                                                               |       |                   |       |                 |       |   |   |   |   |
| Operating expenses:                                                |       |                   |       |                 |       |   |   |   |   |
| Selling, general and administrative                                |       | 9.5                    | %          | 5.8                  | %          | 8.2 | % | 6.2 | % |
| Research and development                                           |       | 1.0                    | %          | 0.0                  | %          | 0.5 | % | 0.0 | % |
|                                                               |       | 10.5                   | %          | 5.8                  | %          | 8.7 | % | 6.2 | % |
| **Operating income (loss) from  continuing operations**            |       | -3.5                   | %          | 0.8                  | %          | -2.7 | % | 0.9 | % |
|                                                               |       |                   |       |                 |       |   |   |   |   |
| Other income (expense):                                            |       |                   |       |                 |       |   |   |   |   |
| Interest expense (net)                                             |       | 0.0                    | %          | -0.2                 | %          | 0.0 | % | -0.1 | % |
| Other income (expense), net                                        |       | 0.0                    | %          | 0.0                  | %          | 0.0 | % | 0.0 | % |
| **Income (loss) from continuing  operations before income taxes.** |       | -3.5                   | %          | 0.6                  | %          | -2.7 | % | 0.8 | % |
| Benefit (provision) for income taxes                               |       | 1.8                    | %          | 0.0                  | %          | 0.8 | % | 0.0 | % |
| Income (loss) from continuing operations                           |       | -1.7                   | %          | 0.6                  | %          | -1.9 | % | 0.8 | % |
| Loss from discontinued operation, net of tax                       |       | 0.3                    | %          | -0.2                 | %          | 0.1 | % | -0.3 | % |
| **Net income (loss)**                                              |       | -1.4                   | %          | 0.4                  | %          | -1.8 | % | 0.5 | % |

 

***Three months ended June 30, 2010 compared with three months ended June 30,2009***

 

**NetSales**

 

For the three months ended June 30,2010, our net sales from continuing operations amounted to $22.4 million, adecrease of 64% from $61.7 million in the same period last year.  The principal reason for the decline was thenegative impact of the recently enacted import tariff in Argentina, where oursales fell 72% in the second quarter compared to the prior year. As a result,the geographic mix of net sales shifted significantly in the current yearquarter as sales in South America fell from 91% last year to 84% thisyear.  Conversely, our net sales inCentral America rose from 9% last year to 16% this year.  We expect the pressure in Argentina to continuein the second half of 2010.

 

We also saw a decrease inthe average selling price of wireless handsets sold in the three months ended June 30,2010.  In comparison to the prior year,we sold 46% fewer units and the average selling price declined 33%.  This reflects a combination of continuedprice pressure, due primarily to the slower global economy, which continues toresult in increased volumes of lower-priced handsets, including some of our *verykool®* and OEM products.

 

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

 

Forthe three months ended June 30, 2010, our gross profit margin increasedfrom 6.6% of net sales in the prior year to 7.0% of net sales in the currentyear quarter.  The improvement in ourgross margin was the result of a shift in product mix, including increasedsales of our proprietary *verykool®*productsand declining sales of our distribution business.

 

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**OperatingExpense**

 

Forthe three months ended June 30, 2010, operating expense amounted to $2.4million, a decrease of 34% compared to $3.6 million in the same periodlast year.  However, as a percentage ofnet sales from continuing operations, operating expense increased to 10.6% inthe three months ended June 30, 2010, compared with 5.8% for the sameperiod last year.  The dollar decrease intotal operating expense reflects continued efforts by management to reducefixed operational costs to match current revenue levels.  Such actions are expected to continue in thesecond half of 2010.  These expensereductions were partially offset by an increase of $227,000 in research anddevelopment costs from our new China development center.  We believe that the investment in the Chinaoperation will ultimately result in improved products at lower costs, whichwill contribute to increased sales and gross profit in future periods.

 

**Other Expense**

 

Forthe three months ended June 30, 2010, we incurred no interest expense,compared with $109,000 for the same period last year.  This year we had no borrowings during thesecond quarter on our line of credit, resulting from, among other things,positive cash flow from the contraction of our business as described below in “Liquidityand Capital Resources.”

 

**Provision for Income Taxes**

 

For the three months ended June 30,2010, we recorded a $400,000 benefit from federal income taxes as a result of acarry back of net operating losses in 2007 and 2008 to prior tax years in whichwe reported profitability.  The relatedreceivable is shown on the balance sheet in “Accounts Receivable Other.”  After a small provision for local taxes, ournet tax benefit for the quarter was $399,000. For the three months ended June 30, 2009, we recorded a smallprovision for local taxes of $7,000.

 

**Income (Loss) from DiscontinuedOperations (net of tax)**

 

Thediscontinuance and closure of our operations in the U.S. and Mexico that beganin the second quarter of 2008 is substantially complete.  During the three months ended June 30,2010, we reported net income from discontinued operations of $76,000 from thesale of obsolete inventory above our carrying value.  In the same period last year, we reported aloss of $167,000 from discontinued operations as the closure was in process.  We expect to continue to record adjustmentsand expenses through discontinued operations as necessary until all relatedassets and liabilities are liquidated.

 

***Six months ended June 30, 2010 compared with six months ended June 30,2009***

 

**NetSales**

 

For the six months ended June 30,2010, our net sales from continuing operations amounted to $49.9 million, adecrease of 52% from $104.3 million in the same period last year.  The principal reason for the decline was thenegative impact of the recently enacted import tariff in Argentina, where oursales fell 57% in the first half of 2010 compared to the prior year.  We expect the pressure in Argentina tocontinue in the second half of 2010.

 

We also saw a decrease inthe average selling price of wireless handsets sold in the six months ended June 30,2010.  In comparison to the prior year,we sold 30% fewer units and the average selling price declined 31%.  This reflects a combination of continuedprice pressure, due primarily to the slower global economy, which continues toresult in increased volumes of lower-priced handsets, including some of our *verykool®* and OEM products.

 

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

 

Forthe six months ended June 30, 2010, net sales declined 52% compared to thesame period last year, and gross profit declined 60%.  As a result, our gross profit margindecreased from 7.1% of net sales in the prior year to 6% of net sales in thecurrent year first half.  The decline ingross margin was the result of a shift in product mix during the first quarterof 2010 that resulted in a higher level of sales of lower-margin products.

 

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**OperatingExpense**

 

Forthe six months ended June 30, 2010, operating expense amounted to $4.3million, a decrease of 33.0% compared to $6.4 million in the same periodlast year.  However, as a percentage ofnet sales from continuing operations, operating expense increased to 8.7% inthe six months ended June 30, 2010, compared with 6.2% for the same periodlast year.  The decrease in totaloperating expense from the prior year reflects continued efforts by managementto reduce fixed operational costs to match declining revenue levels.  Such actions are expected to continue in thesecond half of 2010.  These expensereductions were partially offset by an increase of $227,000 in research anddevelopment costs from our new China development center.

 

**Other Expense**

 

Forthe six months ended June 30, 2010, we incurred interest expense of$23,000, compared with $137,000 for the same period last year.  This year we had no borrowings during thesecond quarter of 2010 on our line of credit, resulting from, among otherthings, positive cash flow from the contraction of our business.

 

**Provision for Income Taxes**

 

For the six months ended June 30,2010, we reported a net tax benefit of $395,000, including a $400,000 federaltax benefit in the second quarter of 2010 as a result of a carry back of netoperating losses in 2007 and 2008 to prior tax years in which we reportedprofitability.  The $400,000 receivableis shown on the June 30, 2010 balance sheet in “Accounts Receivable Other.”  For the six months ended June 30, 2009,we recorded a small provision for local taxes of $17,000.

 

**Income (Loss) from DiscontinuedOperations (net of tax)**

 

Duringthe six months ended June 30, 2010, we reported net income fromdiscontinued operations of $70,000, including $76,000 from the sale of obsoleteinventory in the second quarter of 2010 above our carrying value.  In the same period last year, we reported aloss of $360,000 from discontinued operations as the closure was in process.

 

***Liquidity and CapitalResources***

 

Historically, our primary sourcesof liquidity have been cash generated from operations, lines of credit (bankand vendor) and, from time to time, sale and exercise of securities to providecapital needed to support our business. However, we have incurred losses for the last three fiscal years andnegative cash flow from operations for two of those years.  In the six months ended June 30, 2010,the contraction in our business has allowed us to reduce our working capitalneeds, decrease balances in accounts receivable by $24.1 million andinventories by $1.1 million, reduce accounts payable and accrued expenses by$3.4 million and generate $19.7 million in cash flow from operationsduring the period.  This cash flow,together with our existing cash balances, enabled us to retire all $25.5million outstanding under our bank line of credit, and at June 30, 2010 wehad $12.5 million in cash and no outstanding debt.

 

Duringthe six months ended June 30, 2010, we spent $141,000 on capitalexpenditures, compared to $51,000 in the prior-year period.  The spending this year includes the set-up ofour new development operation in China. Because we outsource all the manufacturing of our proprietary *verykool®* products, our business is not capitalintensive.  We expect that continuedminor investments will be made in the form of tooling and molds for newproducts.

 

As described in Notes 9 and 15 toour financial statements, the Company is party to a Loan,Security and Bulk Purchase Agreement and a Letter of Credit and SecurityAgreement (collectively, the “Agreement”) with Wells Fargo Trade Capital LLC (“Lender”).  Section 6.2 of theAgreement provides that the Agreement may be terminated for convenience byeither party with 60 days’ written notice. Although the Company is currently in compliance with all of itscovenants under the Agreement, on July 22, 2010, it received a notice fromthe Lender of its election to terminate the Agreement on September 22,2010, the end of the 60-day notice period. It is the Company’s belief that the principal reasons for the Lender’sactions are the decreased utilization of the facility by the Company, the highlevel of capital reserves required by the Lender to support the facility andthe Company’s lack of profitability.  TheCompany believes that its current cash resources and working capital aresufficient to fund its operations for the foreseeable future.  In addition, the Company is considering otheralternatives, including replacing the facility with another lender.

 

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**Critical Accounting Policies**

 

Therehave been no material changes to our critical accounting policies and estimatesaffecting the application of those accounting policies since our Annual Reporton Form 10-K for the year ended December 31, 2009.

 

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

 

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

 

**InterestRate Risk**

 

Historicallywe have been exposed to market risk from changes in interest rates onoutstanding balances under our revolving line of credit. However, at June 30,2010, we had no balances outstanding under the line.

 

**Market Risk**

 

Almostall of our sales and expenses are transacted in markets outside the UnitedStates.  However, all sales transactionsand accounts receivable are denominated in U.S. dollars. As a result of ourinternational sales, our future operating results could be adversely affectedby a variety of factors, including changes in specific countries’ political,economic or regulatory conditions, and trade protection measures.  Our market risk management includes anaccounts receivable insurance policy for our sales.  However, there can be no assurance that ourinsurance policy will substantially offset the impact of fluctuations incurrency exchange rates, political, economic or regulatory conditions on ourresults of operations and financial position. We do not believe that foreigncurrency fluctuations had a material impact on our financial results during thethree and six month periods ended June 30, 2010.   See “Consolidated Statements ofComprehensive Operations” in our financial statements included in this report.

 

**Item 4. Controls and Procedures**

 

**Disclosure Controls**

 

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

 

**Changes in Internal Control over Financial Reporting**

 

Therewas no change in our internal control over financial reporting (as defined inExchange Act Rules 13a-15(f) and 15d-15(f) of the Exchange Act)during our second quarter ended June 30, 2010, that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

*LG Electronics Litigation*

 

On July 1, 2009, the Company filed suit in theSuperior Court of the State of California, County of San Diego (Case No. 37-2009-00092797-CU-BT-CTL)against defendants LG Electronics, Inc., LG Electronics USA, Inc., LGElectronics Panama S.A., LG Electronics Inc. Chile LTDA, LG ElectronicsGuatemala S.A. de C.V. and DOES 1-10. The complaint alleges claims for interference with contractual relations/inducingbreach of contract, intentional interference with prospective economicrelations, negligent interference with prospective economic relations, breachof contract, breach of implied covenant of good faith and fair dealing, unjustenrichment, fraud, promissory estoppel and violation of California Business andProfessions Code §§ 17200, et seq.    TheCompany is seeking in excess of $5 million in damages.  On July 31, 2009, the defendants removedthe case to federal court in San Diego, CA. On April 23, 2010, the Company filed an amended complaint.

 

We may become involved in certainother legal proceedings and claims which arise in the normal course ofbusiness. Other than as described above, as of June 30, 2010, we did nothave any significant litigation outstanding.

 

**Item 1A.  Risk Factors**

 

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

 

***A recently passedArgentina tariff has substantially increased the cost at the point of sale forcertain imported electronics, including the products we sell, and this has hada material adverse impact on our sales in Argentina.***

 

Argentina,one of the countries where we have historically and continue to sell asignificant amount of OEM products and where we generated 68% of our netsales in the three months ended June 30, 2010, passed a newtariff in November 2009 affecting certain importedelectronics, including wireless handsets.  This new tariff  impactsthe pricing at the point of sale in excess of 30% and has reducedsignificantly our overall OEM salesvolume in Argentina. This tariff had a material adverse impacton our sales, results of operations and prospects for our OEM products inArgentina in the first six months of 2010. We believe that this tariff will continueto have a material adverse impact on our sales, results of operations andprospects for our OEM products in Argentina on an ongoing basis.

 

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

 

Our three largest customersin the three months ended June 30, 2010, all carriers in South America,represented 36%, 18% and 15% of our net sales during that period.  In 2010, a customer accounting for 28% of ournet sales for 2009 began significantly reducing its purchases from us as aresult of the newly enacted Argentina tariff. Additional Argentina customers are expected to decrease or eliminatetheir purchases of imported wireless handsets in the coming fiscal quarters.

 

The markets we serve aresubject to significant price competition. Additionally, our customers are notcontractually obligated to purchase products from us. For these and otherreasons, such as competitive pricing and pressures, customers may seek toobtain products or services from us at lower prices than we have been able tocharge in the past, and they could terminate our relationship or reduce theirpurchases from us in favor of lower-priced alternatives. In addition, we haveexperienced losses of certain customer bases through industry consolidation, atrend that may increase in our markets, and in the ordinary course of business.The further loss of any of our principal customers, a reduction in the amountof product or services our principal customers order from us or the inabilityto maintain current terms, including price, with these or other customers couldhave an adverse effect on our financial condition, results of operations andliquidity and could cause our stock price to decline.

 

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

 

We purchase wirelesshandsets and accessories principally from wireless communications OEMs anddistributors. 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, as well as on these suppliers’ qualityproducts and services and financial stability. Forthe period ended June 30, 2010, one vendor, Samsung Electronics deAmazonia, S.A., accounted for 83% of our total cost of sales.  We currently have one exclusive and severalnon-exclusive agreements with our principal suppliers, which can be terminatedon short notice and provide for certain territorial restrictions. Our suppliersmay not offer us competitive products on favorable terms or with timelydelivery. The increased costs on importation of wireless handsets and otherproducts into Argentina resulting from the recently enacted tariff willsignificantly reduce our supply of competitive products for Argentina. Inaddition, new products from other manufacturers could impact the demand forproducts from manufacturers we represent. From time to time, we have beenunable to obtain sufficient product supplies. Any failure or delay by oursuppliers, particularly our single primary vendor, in supplying us withproducts on favorable terms may severely diminish our ability to obtain anddeliver products to our customers on a timely and competitive basis. If we loseany of our principal suppliers, or if these suppliers are unable to fulfill ourproduct needs, or if any principal supplier imposes substantial price increasesand alternative sources of supply are not readily available, it would have amaterial adverse effect on our results of operations and financial condition.

 

***The termination of our secured credit facility may affect ourliquidity.***

 

Historically,one of our primary sources of liquidity has been borrowing from bank lines ofcredit.  Our secured bank credit facilitywith Wells Fargo Trade Capital LLC will terminate on September 22,2010.  While we presently have noborrowings under this facility, and we believe that our current cash resourcesand working capital are sufficient to fund our operations for the foreseeablefuture, we had $2.1 million of outstanding letters of credit at June 30, 2010 supportedby this facility that will need to be refinanced or otherwisecollateralized.  Any failure to secure areplacement bank credit facility on acceptable terms could adversely affect ourbusiness’ liquidity, financial condition or operating results.

 

***We haverecently experienced net losses and net losses may continue in the future. Ifwe continue to operate at a loss, our business may not be financially viable.***

 

We experienced losses forthe six months ended June 30, 2010 and the year ended December 31,2009. Given the impact of the recently passed Argentina tariff, the extendedeffects of the economic slowdown and contraction in the Central and SouthAmerican markets that we serve, and general economic instability globally, wecannot adequately evaluate the financial viability of our business or ourlong-term prospects.

 

To achieve profitability, wemust, among other things:

 

·              increase grossprofits while controlling operational expenses;

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

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

 

If we do not succeed inthese objectives, our business, among other things, will continue to experiencelosses and may not be sustainable in the future.

 

***We may be delisted from The NASDAQ Stock Market if we do not satisfycontinued listing requirements.***

 

OnMay 4, 2010, we received a Nasdaq Staff Deficiency letter indicating thatfor the prior thirty consecutive business days the bid price for our commonstock had closed below the minimum $1.00 per share requirement for continuedlisting on The NASDAQ Global Market under Nasdaq Marketplace Rule 5450(a)(1).In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we were providedan initial period of 180 calendar days, or until November 1, 2010, toregain compliance.  The letter statedthat the Nasdaq staff would provide written notification that we had achievedcompliance with Rule 5450(a)(1) if at any time prior to November 1,2010, the bid price of our common stock closed at $1.00 per share or more for aminimum of ten consecutive business days.

 

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

 

***If our common stock were delisted from The NASDAQ Stock Market, you mayfind it difficult to dispose of your shares and our share price may beadversely affected.***

 

Ifour common stock were to be delisted from The NASDAQ Global Market and we couldnot satisfy the listing standards of The NASDAQ Capital Market, trading of ourcommon stock most likely would be conducted in the over-the-counter market onan electronic bulletin board established for unlisted securities such as theOTCQX marketplace or the OTC Bulletin Board. Such trading would reduce the market liquidity of our common stock.  As a result, an investor would find it moredifficult to dispose of, or obtain accurate quotations for the price of, ourcommon stock, thereby negatively impacting the share price of our common stock.

 

Ifour common stock is delisted from The NASDAQ Global Market and we could notsatisfy the listing standards of The NASDAQ Capital Market and the tradingprice remains below $5.00 per share, trading in our common stock might alsobecome subject to the requirements of certain rules promulgated under theSecurities Exchange Act of 1934, which require additional disclosure bybroker-dealers in connection with any trade involving a stock defined as a “pennystock” (generally, any equity security not listed on a national securitiesexchange or quoted on The NASDAQ Stock Market that has a market price of lessthan $5.00 per share, subject to certain exceptions). Many brokerage firms arereluctant to recommend low-priced stocks to their clients. Moreover, variousregulations and policies restrict the ability of shareholders to borrow againstor “margin” low-priced stocks, and declines in the stock price below certainlevels may trigger unexpected margin calls. Additionally, because brokers’commissions on low-priced stocks generally represent a higher percentage of thestock price than commissions on higher priced stocks, the current price of thecommon stock can result in an individual shareholder paying transaction coststhat represent a higher percentage of total share value than would be the caseif our share price were higher. This factor may also limit the willingness ofinstitutions to purchase our common stock. Finally, the additional burdensimposed upon broker-dealers by these requirements could discouragebroker-dealers from facilitating trades in our common stock, which couldseverely limit the market liquidity of the stock and the ability of investorsto trade our common stock, thereby negatively impacting the share price of ourcommon stock.

 

**Item 6.    Exhibits**

 
| **Exhibit   Number** | ** ** | **Description of Exhibit**                                                                   |
|---------------------------|------------|----------------------------------------------------------------------------------------------|
| 31.1                      |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer (+).            |
| 31.2                      |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer (+).            |
| 32.1                      |       | Section 1350  Certification of Chief Executive Officer and Chief Financial Officer (+). |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| ** ** | ** **           | **InfoSonics Corporation** |
|------------|----------------------|----------------------------|
|       |                 |                       |   |
|       |                 |                       |   |
| Date:      | August 16, 2010 | By:                        | /s/  Joseph Ram |
|       |                 |                       | Joseph Ram |
|       |                 |                       | President and Chief Executive  Officer |
|       |                 |                       |   |
|       |                 |                       |   |
| Date:      | August 16, 2010 | By:                        | /s/  Vernon A. LoForti |
|       |                 |                       | Vernon A. LoForti |
|       |                 |                       | Chief Financial Officer |

 

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