Table of Contents

** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **    ****x**                       | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.**  |
|---------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
| ** **                                              | ** **                                                                                          |
| **For the quarterly period ended March 31,  2009** |
| ** **                                              | ** **                                                                                          |
| **OR**                                                  |
| ** **                                              | ** **                                                                                          |
| **    ****o**                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**For the transition periodfrom                to         **

 

**Commission File Number - 001-32217**

 

**InfoSonicsCorporation**

(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)

 

**Not Applicable**

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

 

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.

 

| Large accelerated filer o                |   | Accelerated filer o    |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller reporting company x |
| (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 Exchange Act).Yes  o   No  x

 

As of May 7, 2009, theRegistrant had 14,724,205 shares outstanding of its $.001 par value commonstock.

 

 

 

----

Table of Contents

 

**InfoSonics Corporation and Subsidiaries**

 

**Quarterly Report on Form 10-Q For The Period Ended March 31,2009**

 

**Table of Contents**

 
|      | **PART I.  FINANCIAL INFORMATION**                                                                                   |   |
|-----------|---------------------------------------------------------------------------------------------------------------------------|--------|
|      |                                                                                                                      |   |
| Item 1.   | Financial  Statements                                                                                                     | 3      |
|      |                                                                                                                      |   |
| ·    | Consolidated  Balance Sheets as of March 31, 2009 (unaudited) and December 31,  2008                            | 3      |
|      |                                                                                                                      |   |
| ·    | Consolidated  Statements of Operations for the three months ended March 31, 2009 and  2008 (unaudited)               | 4      |
|      |                                                                                                                      |   |
| ·    | Consolidated  Statements of Comprehensive Operations for the three months ended  March 31, 2009 and 2008 (unaudited) | 5      |
|      |                                                                                                                      |   |
| ·    | Consolidated  Statements of Cash Flows for the three months ended March 31, 2009 and  2008 (unaudited)               | 6      |
|      |                                                                                                                      |   |
| ·    | Condensed  Notes to Consolidated Financial Statements (unaudited)                                                         | 7      |
|      |                                                                                                                      |   |
| Item 2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               | 14     |
|      |                                                                                                                      |   |
| Item 3.   | Quantitative  and Qualitative Disclosures About Market Risk                                                               | 22     |
|      |                                                                                                                      |   |
| Item 4T.  | Controls and  Procedures                                                                                                  | 22     |
|      |                                                                                                                      |   |
|      | **PART II. OTHER  INFORMATION**                                                                                      |   |
|      |                                                                                                                      |   |
| Item  1.  | Legal  Proceedings                                                                                                        | 23     |
|      |                                                                                                                      |   |
| Item  1A. | Risk  Factors                                                                                                             | 24     |
|      |                                                                                                                      |   |
| Item 2.   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                              | 26     |
|      |                                                                                                                      |   |
| Item 3.   | Defaults  Upon Senior Securities                                                                                          | 27     |
|      |                                                                                                                      |   |
| Item 4.   | Submission  of Matters to a Vote of Security Holders                                                                      | 27     |
|      |                                                                                                                      |   |
| Item  5.  | Other  Information                                                                                                        | 27     |
|      |                                                                                                                      |   |
| Item 6.   | Exhibits                                                                                                                  | 27     |

 

2

----

Table of Contents

 

**Part I.  FINANCIAL INFORMATION**

 

Item1.  Financial Statements

 

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                            | ** ** | **March 31,  2009** | ** **     | **December 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|----------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                            | ** ** | **(unaudited)**          | ** **     | **(audited)**               | ** ** |
| **ASSETS**                                                                                                                                                                                                            |       |                     |           |                        |       |
| **Current assets:**                                                                                                                                                                                                   |       |                     |           |                        |       |
| Cash and cash equivalents                                                                                                                                                                                             |       | $                        | 11,856,495     |                        | $          | 24,714,753 |   |
| Trade accounts receivable, net of allowance  for doubtful accounts of $424,047 (unaudited) and $429,126                                                                                                               |       | 36,746,976               |           | 22,727,738                  |       |
| Other receivables (Note #13)                                                                                                                                                                                          |       | 1,341,745                |           | 4,209,658                   |       |
| Inventory, net of reserves of $161,556  (unaudited) and $161,556                                                                                                                                                      |       | 3,998,742                |           | 4,375,334                   |       |
| Prepaids                                                                                                                                                                                                              |       | 608,914                  |           | 244,103                     |       |
| Assets of discontinued operations                                                                                                                                                                                     |       | 3,104,981                |           | 3,264,817                   |       |
|                                                                                                                                                                                                                  |       |                     |           |                        |       |
| Total current assets                                                                                                                                                                                                  |       | 57,657,853               |           | 59,536,403                  |       |
|                                                                                                                                                                                                                  |       |                     |           |                        |       |
| Property and equipment, net                                                                                                                                                                                           |       | 536,739                  |           | 498,079                     |       |
| Intangible assets                                                                                                                                                                                                     |       | 504,000                  |           | 504,000                     |       |
| Other assets                                                                                                                                                                                                          |       | 110,174                  |           | 115,900                     |       |
|                                                                                                                                                                                                                  |       |                     |           |                        |       |
| **Total assets**                                                                                                                                                                                                      | ** ** | **$**                    | **58,808,766** | ** **                  | **$**      | **60,654,382** | ** ** |
|                                                                                                                                                                                                                  |       |                     |           |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                        | ** ** | ** **               | ** **     | ** **                  | ** ** |
|                                                                                                                                                                                                                  |       |                     |           |                        |       |
| **Current liabilities:**                                                                                                                                                                                              |       |                     |           |                        |       |
| Accounts payable                                                                                                                                                                                                      |       | $                        | 2,678,537      |                        | $          | 10,982,306 |   |
| Accrued expenses                                                                                                                                                                                                      |       | 6,259,137                |           | 7,304,090                   |       |
| Line of credit                                                                                                                                                                                                        |       | 21,524,501               |           | 14,273,978                  |       |
| Income taxes payable                                                                                                                                                                                                  |       | 32,130                   |           | 24,100                      |       |
| Liabilities of discontinued operations                                                                                                                                                                                |       | 1,314,100                |           | 1,310,434                   |       |
|                                                                                                                                                                                                                  |       |                     |           |                        |       |
| Total current liabilities                                                                                                                                                                                             |       | 31,808,405               |           | 33,894,908                  |       |
| ** **                                                                                                                                                                                                            | ** ** | ** **               | ** **     | ** **                  | ** ** |
| **Total liabilities**                                                                                                                                                                                                 |       | 31,808,405               |           | 33,894,908                  |       |
|                                                                                                                                                                                                                  |       |                     |           |                        |       |
| **Commitments and contingencies (Note #13)**                                                                                                                                                                          |       |                     |           |                        |       |
|                                                                                                                                                                                                                  |       |                     |           |                        |       |
| **Stockholders’ equity:**                                                                                                                                                                                        |       |                     |           |                        |       |
| Preferred stock, $0.001 par value  10,000,000 shares authorized (no shares issued and outstanding as of  applicable period end)                                                                                       |       | —                   |           | —                      |       |
| Common stock, $0.001 par value 40,000,000  shares authorized 15,010,807 and 15,010,807 shares issued and 14,789,772 and  14,956,270 shares outstanding as of March 31, 2009 and December 31, 2008,  respectively |       | 14,790                   |           | 14,956                      |       |
| Treasury stock, at cost, 221,035 and 54,537  shares as of March 31, 2009 and December 31, 2008, respectively                                                                                                |       | (53,398                  | )              | (16,900                     | )          |
| Additional paid-in capital                                                                                                                                                                                            |       | 31,679,980               |           | 31,666,434                  |       |
| Accumulated other comprehensive loss                                                                                                                                                                                  |       | (8,258                   | )              | (25,211                     | )          |
| Accumulated deficit                                                                                                                                                                                                   |       | (4,632,753               | )              | (4,879,805                  | )          |
|                                                                                                                                                                                                                  |       |                     |           |                        |       |
| Total stockholders’ equity                                                                                                                                                                                       |       | 27,000,361               |           | 26,759,474                  |       |
|                                                                                                                                                                                                                  |       |                     |           |                        |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                   | ** ** | **$**                    | **58,808,766** | ** **                  | **$**      | **60,654,382** | ** ** |

 

*Accompanying notes are an integral part ofthese financial statements.*

 

3

----

 

**Table of Contents**

** **

**InfoSonics Corporation and Subsidiaries**

**ConsolidatedStatements of Operations**

**(unaudited)**

 
| ** **                                                                    | ** ** | **For the Three Months  Ended March 31,** | ** **  |
|-------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                    | ** ** | **2009**                                  | ** **  | **2008** | ** ** |
| ** **                                                                    | ** ** | ** **                                | ** **  | ** ** | ** ** |
| **Net sales**                                                                 |       | $                                         | 42,625,118  |   | $ | 67,933,267 |   |
| **Cost of sales**                                                             |       | 39,270,497                                |        | 64,344,481 |   |
|                                                                          |       |                                      |        |   |   |
| **Gross profit**                                                              |       | 3,354,621                                 |        | 3,588,786 |   |
| **Operating expenses**                                                        |       | 2,876,972                                 |        | 3,697,468 |   |
|                                                                          |       |                                      |        |   |   |
| **Operating income (loss) from continuing  operations**                       |       | 477,649                                   |        | (108,682 | ) |
|                                                                          |       |                                      |        |   |   |
| **Other income (expense)**                                                    |       |                                      |        |   |   |
| Other income                                                                  |       | 42                                        |        | 442 |   |
| Interest (expense)                                                            |       | (27,878                                   | )           | (189,501 | ) |
|                                                                          |       |                                      |        |   |   |
| **Income (loss) from continuing operations  before benefit for income taxes** |       | 449,813                                   |        | (297,741 | ) |
| **Provision for income taxes**                                                |       | 9,700                                     |        | 32,172 |   |
|                                                                          |       |                                      |        |   |   |
| **Income (loss) from continuing operations**                                  |       | 440,113                                   |        | (329,913 | ) |
| **Loss from discontinued operations, net of  tax (Note #11)**                 |       | (193,061                                  | )           | (83,268 | ) |
| ** **                                                                    | ** ** | ** **                                | ** **  | ** ** | ** ** |
| **Net income (loss)**                                                         | ** ** | **$**                                     | **247,052** | ** ** | **$** | **(413,181** | **)** |
|                                                                          |       |                                      |        |   |   |
| **Basic earnings (loss) per share**                                           |       |                                      |        |   |   |
| From continuing operations                                                    | ** ** | **$**                                     | **0.03**    | ** ** | **$** | **(0.02** | **)** |
| From discontinued operations                                                  | ** ** | **$**                                     | **(0.01**   | **)** | **$** | **(0.01** | **)** |
| Net income (loss)                                                             | ** ** | **$**                                     | **0.02**    | ** ** | **$** | **(0.03** | **)** |
| **Diluted earnings (loss) per share**                                         | ** ** | ** **                                | ** **  | ** ** | ** ** |
| From continuing operations                                                    | ** ** | **$**                                     | **0.03**    | ** ** | **$** | **(0.02** | **)** |
| From discontinued operations                                                  | ** ** | **$**                                     | **(0.01**   | **)** | **$** | **(0.01** | **)** |
| Net income (loss)                                                             | ** ** | **$**                                     | **0.02**    | ** ** | **$** | **(0.03** | **)** |
|                                                                          |       |                                      |        |   |   |
| **Basic weighted-average number of common  shares outstanding**               | ** ** | **14,881,774**                            | ** **  | **14,758,413** | ** ** |
| ** **                                                                    | ** ** | ** **                                | ** **  | ** ** | ** ** |
| **Diluted weighted-average number of common  shares outstanding**             | ** ** | **14,881,774**                            | ** **  | **14,758,413** | ** ** |

 

*Accompanying notes are an integral part of these financialstatements*.

 

4

----

Table of Contents

 

**InfoSonics Corporation and Subsidiaries**

**ConsolidatedStatements of Comprehensive Operations**

**(unaudited)**

 
| ** **                               | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
|                                     |       |                                      |       |   |   |
| Net profit income (loss)                 |       | $                                         | 247,052    |   | $ | (413,181 | ) |
| Other comprehensive loss:                |       |                                      |       |   |   |
| Foreign currency translation adjustments |       | 16,954                                    |       | (2,209 | ) |
| Comprehensive income (loss)              |       | $                                         | 264,006    |   | $ | (415,390 | ) |

 

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

 

5

----

Table of Contents

 

**InfoSonics Corporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

**(unaudited)**

 
| ** **                                                                                         | ** ** | **For the Three Months Ended  March 31,** | ** **     |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------|----------------|
| ** **                                                                                         | ** ** | **2009**                                  | ** **     | **2008** | ** ** |
| **Cash flows from operating activities:**                                                          | ** ** | ** **                                | ** **     | ** ** | ** ** |
| Net income (loss)                                                                                  |       | $                                         | 247,052        |   | $ | (413,181 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities |       |                                      |           |   |   |
| Depreciation                                                                                       |       | 74,097                                    |           | 161,305 |   |
| Provision for bad debt                                                                             |       | (5,079                                    | )              | 167,973 |   |
| Impairment on fixed assets                                                                         |       | —                                    |           | 17,084 |   |
| Provision for obsolete inventory                                                                   |       | —                                    |           | (82,882 | ) |
| Stock option expense                                                                               |       | 13,445                                    |           | 20,392 |   |
| (Increase) decrease in                                                                             |       |                                      |           |   |   |
| Trade accounts receivable                                                                          |       | (11,146,246                               | )              | (20,307,053 | ) |
| Inventory                                                                                          |       | 376,592                                   |           | 1,674,763 |   |
| Prepaids                                                                                           |       | (364,814                                  | )              | (2,250,025 | ) |
| Other assets                                                                                       |       | 5,726                                     |           | (7,887 | ) |
| Deferred tax asset current                                                                         |       | —                                    |           | (67,340 | ) |
| Deferred tax asset non current                                                                     |       | —                                    |           | (405,479 | ) |
| Increase (decrease) in                                                                             |       |                                      |           |   |   |
| Accounts payable                                                                                   |       | (8,303,771                                | )              | (1,132,489 | ) |
| Accrued expenses                                                                                   |       | (1,044,953                                | )              | 1,686,609 |   |
| Income tax liabilities                                                                             |       | 8,030                                     |           | (39,560 | ) |
| Cash used in continuing operations                                                                 |       | (20,139,921                               | )              | (20,977,770 | ) |
| Cash provided by discontinued operations                                                           |       | 163,504                                   |           | 3,382,781 |   |
| Net cash used in operating activities                                                              |       | (19,976,417                               | )              | (17,594,989 | ) |
|                                                                                               |       |                                      |           |   |   |
| **Cash flows from investing activities:**                                                          | ** ** | ** **                                | ** **     | ** ** | ** ** |
| Purchase of property and equipment                                                                 |       | (111,839                                  | )              | (4,899 | ) |
| Cash provided by (used in) discontinued  operations                                                |       | —                                    |           | — |   |
| Net cash used in investing activities                                                              |       | (111,839                                  | )              | (4,899 | ) |
|                                                                                               |       |                                      |           |   |   |
| **Cash flows from financing activities:**                                                          | ** ** | ** **                                | ** **     | ** ** | ** ** |
| Borrowings from line of credit                                                                     |       | 50,713,251                                |           | 36,322,720 |   |
| Payments on line of credit                                                                         |       | (43,462,728                               | )              | (36,611,470 | ) |
| Cash received from stock and options                                                               |       | —                                    |           | 22,453 |   |
| Cash paid for treasury stock                                                                       |       | (36,557                                   | )              | — |   |
| Cash provided by (used in) discontinued  operations                                                |       | —                                    |           | — |   |
|                                                                                               |       |                                      |           |   |   |
| Net cash provided by (used in) financing  activities                                               |       | 7,213,966                                 |           | (266,297 | ) |
|                                                                                               |       |                                      |           |   |   |
| Effect of exchange rate changes on cash                                                            |       | 16,032                                    |           | (2,208 | ) |
|                                                                                               |       |                                      |           |   |   |
| Net decrease in cash and cash equivalents                                                          |       | (12,858,258                               | )              | (17,868,393 | ) |
|                                                                                               |       |                                      |           |   |   |
| **Cash and cash equivalents, beginning of  period**                                                |       | 24,714,753                                |           | 20,652,154 |   |
|                                                                                               |       |                                      |           |   |   |
| **Cash and cash equivalents, end of period**                                                       | ** ** | **$**                                     | **11,856,495** | ** ** | **$** | **2,783,761** | ** ** |
| **Non-Cash Supplemental Disclosure:**                                                              | ** ** | ** **                                | ** **     | ** ** | ** ** | ** ** | ** ** |
| **Cash paid for interest**                                                                         | ** ** | **27,885**                                | ** **     | **202,804** | ** ** |
| **Cash paid for taxes**                                                                            | ** ** | **—**                                | ** **     | **—** | ** ** |

 

*Non-Cash OperatingActivities*

* *

*During thequarter ended March 31, 2009, $3.8 million of the accrued legal settlementwas paid by the insurance carrier and the corresponding receivable andliability have been reduced. (see Note 7)*

* *

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

 

6

----

Table of Contents

** **

**InfoSonics Corporation**

**Condensed Notes to Consolidated FinancialStatements**

**(unaudited)**

 

**NOTE 1. Basisof 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, 2008 included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2008. These unaudited consolidated financial statements reflect all adjustmentsconsidered, in the opinion of the Company’s management, necessary to fairlypresent the results for the periods covered herein and such adjustments areconsidered of a normal recurring nature.

 

The unaudited consolidated financial statements include theaccounts of the Company and its subsidiaries, Axcess Mobile LLC, InfoSonicsLatin America, Inc., InfoSonics de Mexico S.A. de C.V., InfoSonics deGuatemala S.A., InfoSonics El Salvador S.A. de C.V., InfoSonics S.A.,InfoSonics Corporation Chile y Compania Limitada, InfoSonics Colombia S.A. andverykool USA, Inc., all of which are wholly owned. Significantintercompany accounts and transactions have been eliminated in consolidation ofthese consolidated financial statements.

 

The unaudited consolidatedbalance sheet, the unaudited consolidated statements of operations and theunaudited consolidated statements of comprehensive operations as of or for thethree months ended March 31, 2009 and the unaudited consolidated statementof cash flows for the three months ended March 31, 2009 are notnecessarily indicative of the financial condition, operating results or cashflows that may be expected for the full fiscal year of 2009 or for any futureperiod.

 

**NOTE 2.****Stock-BasedCompensation**

 

The Company has three equity incentive plans, the 2006 Equity IncentivePlan (“2006 Plan”), the 2003 Stock Option Plan (“2003 Plan”) and the 1998 StockOption Plan (“1998 Plan”). Each of the plans has been approved by ourstockholders. The 2006 Plan authorizes the grant of up to 1,000,000 shares forequity incentives. As of March 31, 2009, options to purchase 146,000shares were outstanding under the 2006 Plan and 72,000 have been exercised orforfeited. The Company is also a party to non-plan option agreements withseveral non-employee directors and several institutions.

 

On December 28,2007, the Securities and Exchange Commission (“SEC”) staff published StaffAccounting Bulletin No. 110 (SAB 110), which updates SAB 107 and providesthe SEC staff’s views on a variety of matters relating to stock-based payments.SAB 110 requires stock-based compensation to be classified in the same expenseline items as cash compensation.  Informationabout stock-based compensation included in the unaudited results of operationsfor the three months ended March 31, 2009 and 2008 is as follows:

 
| ** **                                                       | ** ** | **For The Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2009**                                                 | ** ** | **2008** | ** ** |
| ** **                                                       | ** ** | **(unaudited)**                                          | ** ** | **(unaudited)** | ** ** |
| Officer compensation                                             |       | $                                                        | —     |   | $ | — |   |
| Non-employee directors                                           |       | —                                                   |       | 3,451 |   |
| Sales, general and administrative                                |       | 13,445                                                   |       | 16,941 |   |
| Total stock option expense, included in total operating expenses |       | $                                                        | 13,445     |   | $ | 20,392 |   |

 

7

----

Table of Contents

 

Our stock options vest on an annual or a monthly basis. The Company recognizes stock-basedcompensation costs on a straight-line basis over the requisite service periodof the award, which is generally the option vesting term.   Such amounts may change as aresult of additional grants, forfeitures, modifications in assumptions andother factors. SFAS 123R provides that income tax effects of share-basedpayments are recognized in the financial statements for those awards which willnormally result in tax deductions under existing tax law. During the threemonths ended March 31, 2009, we recorded an expense of $13,445 related tooptions previously granted and granted during the first three months of 2009.During the three months ended March 31, 2008, we recorded an expense of$20,392 related to options previously granted and granted during the first threemonths of 2008. Under current U.S. federal tax law, we receive a compensationexpense deduction related to non-qualified stock options only when thoseoptions are exercised and vested shares are received. Accordingly, thefinancial statement recognition of compensation cost for non-qualified stockoptions creates a deductible temporary difference which results in a deferredtax asset and a corresponding deferred tax benefit in our consolidatedstatements of operations.

 

The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option pricing model with the followingweighted-average assumptions used for grants in 2008 (there have been no grantsduring 2009): risk-free interest rate of 1.47% in 2008, based on the U.S.Treasury yields in effect at the time of grant; expected dividend yields of 0%as the Company has not, and does not intend to, issue dividends; and expectedlives of 3 to 6 years based upon the historical life of options. For grants in2008, the expected volatility used ranged from 88% to 89%, based on the Company’shistorical stock price fluctuations for a period matching the expected life ofthe options. As of March 31, 2009, there was $86,000 of total unrecognizedcompensation costs related to the non-vested stock options. That cost isexpected to be recognized over the remaining weighted-average period of 2.75years.

 

Asummary of option activity under all of the above plans as of March 31,2009 and changes during the three months then ended is presented in the tablebelow:

 
| ** **                            | ** ** | **Shares** | ** ** | **Wtd. Avg.  Exercise Price** | ** ** | **Wtd. Avg.  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at December 31, 2008 |       | 1,575,944  |       | $                                       | 1.46       |                                             | 2.98       |                            | —     |   |
| Granted                               |       | —     |       | $                                       | —     |                                             | —     |                            | —     |   |
| Exercised                             |       | —     |       | $                                       | —     |                                             |       |                            | —     |   |
| Forfeited                             |       | 62,500     |       | $                                       | 1.60       |                                             |       |                            | —     |   |
| Outstanding at March 31, 2009    |       | 1,513,444  |       | $                                       | 1.45       |                                             | 2.77       |                            | —     |   |
| Vested and expected to vest           |       | 1,513,444  |       | $                                       | 1.45       |                                             | 2.77       |                            | —     |   |
| Exercisable at March 31, 2009    |       | 1,417,828  |       | $                                       | 1.46       |                                             | 2.63       |                            | —     |   |

 

A summary of the status of the Company’s non-vested options at March 31,2009 and changes during the three months ended March 31, 2009 is presentedbelow:

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted-average  grant-date fair value** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| Non-vested at December 31, 2008 |       | 146,660    |       | $                                                     | 1.27       |   |
| Granted                              |       | —     |       | $                                                     | —     |   |
| Vested                               |       | 21,044     |       | $                                                     | 1.36       |   |
| Forfeited                            |       | 30,000     |       | $                                                     | 1.04       |   |
| Non-vested at March 31, 2009    |       | 95,616     |       | $                                                     | 1.33       |   |

 

**NOTE 3. Earnings Per Share**

 

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

 

Common shares from exercise of certain options and warrantshave been excluded from the computation of diluted earnings per share becausetheir exercise prices are greater than the Company’s weighted-average stockprice for the period. For the three months ended March 31, 2009and 2008, the number of shares excluded was 1,600,944 and 2,916,254,respectively.

 

8

----

Table of Contents

 

Since their effect would have been anti-dilutive, forthe three months ended March 31, 2008, the number of shares excludedwas 3,588,922, from the computation of net loss per share.

 

**NOTE 4. IncomeTaxes**

 

The Company adopted the Financial Accounting Standards Board’s Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”) effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. At the date of adoption, and as of December 31, 2008 and March 31, 2009, the Company does not have a liability for unrecognized tax benefits. The Company concluded that at this time there are no uncertain tax positions. As a result of applying the provisions of FIN 48, there was no cumulative effect on retained earnings.

 

The Company is subject to USfederal income tax as well as income tax in multiple states and foreignjurisdictions. For all major taxing jurisdictions, the tax years 2003 through2008 remain open to examination. As of March 31, 2009, the Company doesnot expect any material changes to unrecognized tax positions within the nexttwelve months.

 

SFAS No. 109, “*Accounting for IncomeTaxes,*” establishes financial accounting and reporting standards forthe effect of income taxes. The objectives of accounting for income taxes areto recognize the amount of taxes payable or refundable for the current year anddeferred tax liabilities and assets for the future tax consequences of eventsthat have been recognized in an entity’s financial statements or tax returns.Judgment is required in assessing the future tax consequences of events thathave been recognized in our financial statements or tax returns. Fluctuationsin the actual outcome of these future tax consequences could materially impactour financial position or our results of operations. For the three months endedMarch 31, 2009, deferred income tax assets and the corresponding valuationallowance increased by $671,000.

 

**NOTE 5.Inventory**

 

Inventoryis stated at the lower of cost (first-in, first-out) or market and consistsprimarily of cellular phones and cellular phone accessories. The Companyprovides for the possible inability to sell its inventory by recording areserve. As of March 31, 2009 and December 31, 2008, the inventoryreserve was $161,556. From time to time, the Company has prepaid inventory as aresult of payments for products which have not been received by the balancesheet date. As of March 31, 2009 and December 31, 2008, the prepaidinventory balances were $394,890 and $170, respectively. Included in Assets forDiscontinued Operations as of March 31, 2009 and December 31, 2008are inventory balances of $1,148,127 and $1,307,463, respectively. Inventoryconsists of the following:

 
| ** **           | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **           | ** ** | **(unaudited)**          | ** ** | **(audited)**               | ** ** |
| Finished goods       |       | $                        | 4,160,298  |                        | $          | 4,536,890 |   |
| Inventory in-transit |       | —                   |       | —                      |       |
| Inventory reserve    |       | (161,556                 | )          | (161,556                    | )          |
| Net inventory        |       | $                        | 3,998,742  |                        | $          | 4,375,334 |   |

 

9

----

Table of Contents

 

**NOTE 6.Property and Equipment**

 

Property and equipmentare primarily located in the United States, with the exception of certaintooling and product molds which are located in Asia, and consisted of thefollowing as of the dates presented:

 
| ** **                    | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **(unaudited)**          | ** ** | **(audited)**               | ** ** |
| Machinery and equipment       |       | $                        | 467,507    |                        | $          | 469,411 |   |
| Furniture and fixtures        |       | 106,314                  |       | 106,314                     |       |
| Tooling and molds             |       | 445,489                  |       | 330,828                     |       |
| Subtotal                      |       | 1,019,310                |       | 906,553                     |       |
| Less accumulated depreciation |       | 482,571                  |       | 408,474                     |       |
| Total                         |       | $                        | 536,739    |                        | $          | 498,079 |   |

 

Depreciation expense was $74,097 and $161,305 for the threemonths ended March 31, 2009 and 2008, respectively.

 

**NOTE 7. Accrued Expenses**

 

As of March 31, 2009 and December 31, 2008,accrued expenses consisted of the following:

 
| ** **                       | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **(unaudited)**          | ** ** | **(audited)**               | ** ** |
| Accrued product costs            |       | $                        | 3,236,604  |                        | $          | 3,070,058 |   |
| Accrued legal settlement*        |       | 350,000                  |       | 4,150,000                   |       |
| Other accruals (including taxes) |       | 2,672,533                |       | 84,032                      |       |
| Total                            |       | $                        | 6,259,137  |                        | $          | 7,304,090 |   |

 

----

*As of March 31, 2009,$3.8 million of the accrued legal settlement was paid by the insurance carrierand is being held in an escrow account for the plaintiffs benefit of the Class Actionlawsuit, and thus has been removed from the balance sheet at March 31,2009. The remaining balance of $350,000 relates to legal fees for thederivative suit lawyers, and is offset by an equivalent receivable from ourinsurance carrier at March 31, 2009.

 

**NOTE 8. Borrowings**

 

On April 30, 2008, the Company entered into a Loan, Security and Bulk Purchase Agreement and a Letterof Credit and Security Agreement (collectively, the “Agreement”) with WellsFargo Century, Inc. (“Lender”), replacing the then existingasset-based secured credit facility withWells Fargo HSBC Trade Bank, N.A. Pursuant to the Agreement, the Lender mayadvance up to $45,000,000 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 notexceed the lesser of (i) $45,000,000 or (ii) the sum of the value ofthe eligible receivables and eligible inventory multiplied by their respectiveadvance rates as set forth in the Agreement ($27.8 million as of March 31,2009).At March 31, 2009, the majority of our debt was basedon foreign accounts receivable. This credit facility has atwo-year term ending April 2010 and is secured by all of the assets of theCompany. The interest rate for each borrowing under the credit facility is, atthe option of the Company, either the Wells Fargo Bank N.A. prime rate minus0.50% (3.25% less 0.50% at March 31, 2009) or the LIBORrate plus 2.00% (1.27% plus 2.00% at March 31,2009). At March 31, 2009, the amount drawn against the lineof credit was $21,524,501, and additionally available at March 31, 2009was $6,283,912. As of March 31, 2009, the Company was in compliance withthe covenants of the credit facility. If any adverse events occur or we areunable to renew our new credit facility or enter into an adequate credit relationshipas needed, our business’ financial condition or operating results could benegatively affected.

 

TheCompany has no other notes payable.

 

**NOTE 9.Stockholders’ Equity**

 

Common Stock

 

On May 15, 2008, the Company agreed to issue 100,000 unregisteredshares of common stock in connection with an amendment to a then existingagreement with an unrelated partner. The shares were issued October 20,2008. The amendment modifies a profit sharing agreement to increase the portionof profit sharing the Company earns. The increase in the portion of the profitsharing to the Company is retroactive to January 1, 2008 and continued to December 31,2008.

 

10

----

Table of Contents

 

StockOptions

 

Effective March 18, 2008 and May 13, 2008, the Companygranted options to purchase an aggregate of 180,500 and 2,500 shares,respectively, of its common stock to certain non-executive employees (the “Employee Options”).One-fourth of the total shares subject to these option grants becameexercisable one year from the date of grant, and 1/48th of the total optionsbecome exercisable each month thereafter until fully vested. These options haveexercise prices of $1.04 per share, which was the closing price per share ofthe Company’s common stock on each of March 18, 2008 and May 13,2008, and expire six years from the date of grant. See Note 2 forStock-Based Compensation discussion.

 

TreasuryStock

 

On December 15,2008, the Company announced a share buyback program, authorizing up to $500,000to be used for stock repurchases. As of March 31, 2009 and December 31,2008, we had purchased 221,035 and 54,537 shares, respectively, at a total costof $53,619 and $16,955, respectively.

 

**NOTE 10.Recent Accounting Pronouncements**

 

Recentlyadopted:

 

In September 2006,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 157, Fair Value Measurements (SFAS No. 157).SFAS No. 157 defines fair value, establishes a framework for measuringfair value, and expands disclosures about fair value measurement. SFAS No. 157also emphasizes that fair value is a market-based measurement, not anentity-specific measurement, and sets out a fair value hierarchy with thehighest priority being quoted prices in active markets. Under SFAS No. 157,fair value measurements are disclosed by level within that hierarchy. In February 2008,the FASB issued FASB Staff Position No. 157-2, Effective Date of FASBStatement No. 157, which permitted a one-year deferral for theimplementation of SFAS No. 157 with regard to nonfinancial assets andliabilities that are not recognized or disclosed at fair value in the financialstatements on a recurring basis. The Company adopted SFAS No. 157 for thefiscal year beginning January 1, 2008, except for nonfinancial assets andnonfinancial liabilities that are recognized or disclosed at fair value in thefinancial statements on a nonrecurring basis, which was adopted in the firstquarter of 2009. The adoption of the remaining provisions of SFAS No. 157did not have a material impact on the Company’s condensed consolidatedfinancial statements.

 

The Financial AccountingStandards Board (FASB) has issued FASB Statements No. 141 (revised 2007) (“SFAS141R”), *Business Combinations,*and No. 160 (“SFAS 160”), *NoncontrollingInterests in Consolidated Financial Statements.* These new standardsrepresent the completion of the FASB’s first major joint project with theInternational Accounting Standards Board (IASB)*.*The FASB and the IASB first initiated the joint project that resulted in thenew standards because U.S. generally accepted accounting principles andInternational Financial Reporting Standards (IFRS) differed widely in theirapproach to accounting for business combinations. The IASB plans to issue itscounterpart standards IFRS 3 (revised), *BusinessCombinations,* and International Accounting Standard 27 (as revisedin 2007), *Consolidated and SeparateFinancial Statements,* early next year. The new standards to beissued by the IASB are expected to contain the same fundamental principles asthose of the FASB, but will diverge with respect to certain issues.

 

In SFAS 141(R), the FASBretained the fundamental requirements of SFAS 141 to account for all businesscombinations using the acquisition method (formerly the purchase method) andfor an acquiring entity to be identified in all business combinations. However,the fair value principles in the revised Statement are a major change from SFAS141’s cost allocation process, together with other revisions from pastpractice. Among numerous changes, SFAS 141(R) requires the acquiringentity in a business combination to:

 

·                  Recognize theassets acquired, the liabilities assumed, and any noncontrolling interest inthe acquiree at the acquisition date, measured at their fair values as of thatdate, with limited exceptions

·                  Recognize andmeasure the goodwill acquired in the business combination or a gain from abargain purchase

·                  Expenseacquisition-related costs, such as legal and due diligence costs, when incurred

 

11

----

Table of Contents

 

·                  Recognize anyrestructuring costs that the acquiring entity expects to incur with respect tothe acquired business as an expense, rather than capitalize as part of theacquisition

·                  Disclose toinvestors and other users all of the information they need to evaluate andunderstand the nature and financial effect of the business combination.

 

SFAS 160 amends AccountingResearch Bulletin No. 51, *ConsolidatedFinancial Statements,* and requires all entities to report noncontrolling(minority) interests in subsidiaries within equity in the consolidatedfinancial statements, but separate from the parent shareholders’ equity. SFAS160 also requires any acquisitions or dispositions of noncontrolling intereststhat do not result in a change of control to be accounted for as equitytransactions. Further, the Statement requires that a parent recognize a gain orloss in net income when a subsidiary is deconsolidated.

 

Thefinal business combinations and noncontrolling interest statements areeffective for annual periods beginning on or after December 15, 2008. TheStatements should be applied on a prospective basis, except for thepresentation and disclosure requirements of SFAS 160, which must be appliedretrospectively. Entities are prohibitedfrom adopting the Statements before their effective dates. The adoption of SFAS141(R) and SFAS 160 did not have a material effect on the Company’sfinancial statements.

 

InMarch 2008, the FASB issued Statement of Financial AccountingStandards No. 161 (SFAS 161) “Disclosures about DerivativeInstruments and Hedging Activities—an amendment of FASB Statement No. 133”. SFAS 161 amends and expands the disclosure requirements for derivativeinstruments and hedging activities. Entities are required to provide enhanceddisclosures about (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for under SFAS133 and its related interpretations, and (c) how derivative instrumentsand related hedged items affect an entity’s financial position, financialperformance, and cash flows. SFAS 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008, with early application encouraged. This statement encourages, but doesnot require, comparative disclosures for earlier periods at initial adoption.The adoption of SFAS 161 did not have a material effect on the Company’sfinancial statements.

 

In May 2008, the FASB issued Statement of Financial AccountingStandards No. 163 (SFAS 163), “Accounting for Financial GuaranteeInsurance Contracts, an interpretation of FASB Statement No. 60,” whichrequires that an insurance enterprise recognize a claim liability prior to anevent of default (insured event) when there is evidence that creditdeterioration has occurred in an insured financial obligation, and clarifieshow FASB Statement 60 applies to financial guarantee insurance contracts,including the recognition and measurement to be used to account for premiumrevenue and claim liabilities, and requires expanded disclosures aboutfinancial guarantee insurance contracts. SFAS 163 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andall interim periods within those fiscal years.  The adoption of SFAS 163did not have a material effect on the Company’s financial statements.

 

**NOTE11.  Discontinued Operations**

 

During the quarter ended June 30,2008, the Company assessed opportunities in the United States and Mexico, andthe Company began to implement actions necessary to close sales operations inboth of those countries, which actions continue, although were substantiallycompleted by end of 2009. These two areas accounted for less than 1% of our netsales in the first three months of 2009 and 2008.Due to the changing environment and consolidation inthe United States of the regional cellular carriers, along with the challengesof opening sales relations with the cellular carriers in Mexico, management determinedthat it was necessary to take decisive actions to mitigate further losses.The results of the unaudited discontinuedoperations are as follows:

 
| ** **                    | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------|------------|--------------------------------|------------|
| ** **                    | ** ** | **March 31,**             | ** ** |
| ** **                    | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| ** **                    | ** ** | **(unaudited)**                | ** ** | **(unaudited)** | ** ** |
| Net Sales                     |       | $                              | 246,946    |   | $ | 374,352 |   |
| Gross profit                  |       | (155,304                       | )          | (68,202 | ) |
| Operating loss                |       | $                              | (192,040   | ) | $ | (627,409 | ) |
| Identifiable assets           |       | $                              | 3,104,980  |   | $ | 7,501,514 |   |
| Capital expenditures          |       | $                              | —     |   | $ | — |   |
| Depreciation and amortization |       | $                              | —     |   | $ | 8,083 |   |

 

12

----

Table ofContents

 

Liabilities ofdiscontinued operations consist primarily of accounts payable. Assets ofdiscontinued operations are as follows:

 
| ** **          | ** ** | **March 31,   2009** | ** ** | **December 31,   2008** | ** ** |
|---------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **          | ** ** | **(unaudited)**           | ** ** | **(audited)**                | ** ** |
| Accounts Receivable |       | $                         | 1,045,047  |                         | $          | 1,307,463 |   |
| Inventory           |       | 1,148,127                 |       | 1,050,758                    |       |
| Prepaid Taxes       |       | 898,401                   |       | 897,955                      |       |
| Other Assets        |       | 13,406                    |       | 8,641                        |       |
| Total               |       | $                         | 3,104,981  |                         | $          | 3,264,817 |   |

 

As of March 31, 2009,the plans for the discontinued operations were substantially complete; however,the Company expects to continue to record adjustments and expenses throughdiscontinued operations as necessary.

 

**NOTE 12. Geographic Information**

 

TheCompany currently operates in one business segment. All fixed assets arelocated in Company or third party facilities in the United States, Asia andMexico. The unaudited net sales by geographical area for the three months endedMarch 31, 2009 and 2008 were:

 
| ** **      | ** ** | **For the Three  Months Ended March 31,** | ** ** |
|-----------------|------------|-----------------------------------------------------|------------|
| ** **      | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| ** **      | ** ** | **(unaudited)**                                     | ** ** | **(unaudited)** | ** ** |
| Central America |       | $                                                   | 3,114,597  |   | $ | 21,166,224 |   |
| South America   |       | 39,510,521                                          |       | 46,767,043 |   |
| Total           |       | $                                                   | 42,625,118 |   | $ | 67,933,267 |   |

 

Theunaudited net sales for the Discontinued Operations for the quarters ended March 31,2009 and 2008 were $246,946 and $374,353, respectively.

 

**NOTE 13. Commitmentsand Contingencies**

 

*Securities Class Actions*

 

In the securities classaction, captioned *In Re: InfoSonicsCorporation Securities Litigation*, Lead Case No. 06 CV 1231,pending before Judge Sammartino in the United States District Court for theSouthern District of California, Plaintiffs filed a third amended consolidatedcomplaint on May 23, 2008 against the Company and certain of its officersand directors. This complaint alleges violations of Section 10(b) ofthe Exchange Act and associated Rule 10b-5, Section 20(a) and Section 20Ain connection with the announcement of the Company’s restatement of firstquarter 2006 earnings and in connection with allegedly false and/or misleadingstatements related to the Company’s distribution of the VK Mobile phone. Plaintiffsseek a declaration that their action is a proper class action pursuant to Rule 23(a) and(b)(3), unspecified damages, prejudgment and post-judgment interest, attorneys’fees, expert witness fees, other costs, and other unspecified relief. Theplaintiffs purport to represent a class of purchasers of the Company’s stockduring the period February 6, 2006 to August 9, 2006.

 

On August 8, 2008, theparties entered into a Memorandum of Understanding to resolve the case. On October 17,2008, the parties entered a Stipulation and Agreement of Settlement (the “SecuritiesSettlement”) of the case, which provides the securities class action settlementis contingent on preliminary and final Court approval, as well as settlement ofthe derivative action noted below, among other contingencies, and provides for,among other things, a dismissal with prejudice of the lawsuit, releases of thedefendants, and a payment by the Company or its insurer of $3.8 million toplaintiffs (inclusive of any plaintiffs’ attorneys fees, to be determined bythe Court). The Securities Settlement further provides that defendants deny anyliability or responsibility for the claims made and make no admission of anywrongdoing.

 

13

----

Table of Contents

 

On January 20, 2009,the Court entered an order certifying the class, preliminarily approving thesettlement and providing for notice to the class. On February 10, 2009,the Company’s insurer funded the full settlement payment. On April 23,2009, the Court held the hearing for final approval of the SecuritiesSettlement. On May 5, 2009, the Court entered an order approving theSecurities Settlement as fair and reasonable, directing the clerk to enterfinal judgment and dismissing the action with prejudice.  The Securities Settlement is contingent uponfinal court approval of the derivative action, which is still under submissionwith the Court.

 

*Derivative Action*

 

In the derivative action,captioned In Re InfoSonics Corporation Derivative Litigation, Lead Case No. 06CV 1336, pending before Judge Sammartino in the United States District Courtfor the Southern District of California, plaintiffs filed a consolidatedcomplaint on November 6, 2006 purportedly on behalf of the Company againstcertain of its officers and directors, and the Company as a nominal defendant. Theconsolidated complaint alleges claims for violations of Section 14(a) ofthe Exchange Act, Sections 25402 and 25403 of the California Corporations Code,disgorgement under the Sarbanes-Oxley Act of 2002, breach of fiduciary duty,abuse of control, gross mismanagement, waste of corporate assets, unjustenrichment, rescission, a constructive trust, and an accounting, in connectionwith the Company’s restatement of first quarter 2006 earnings and in connectionwith allegations of wrongdoing with respect to granting, exercising, accountingand reporting of the stock options that the Company granted in December 2005.Plaintiffs seek unspecified damages, declaratory relief regarding theSarbanes-Oxley Act of 2002, Section 14(a) of the Exchange Act, andthe legality of stock options, a constructive trust, restitution, disgorgement,modification of certain corporate governance and internal procedures,extraordinary equitable and/or injunctive relief, costs, and such other reliefas is just and proper. On September 4, 2007, the Court granted defendants’motion to dismiss for failure to make a demand on the board, and also grantedwith prejudice the motion to dismiss the Sarbanes-Oxley claim.

 

On August 6, 2008 theparties entered into a Memorandum of Understanding to resolve the derivativecase. On October 17, 2008, the parties entered into a Stipulation andAgreement of Settlement (the “Derivative Settlement”), which provides theDerivative Settlement is contingent on preliminary and final Court approval ofthis settlement and the securities settlement noted above, among othercontingencies, and provides for, among other things, a dismissal with prejudiceof the lawsuit, releases of the defendants, corporate governance changes and apayment by the Company or its insurer of plaintiffs’ attorneys fees to beordered by the Court up to a maximum of $350,000. It is anticipated that thesettlement payment will be funded entirely by the Company’s insurer. TheDerivative Settlement further provides that defendants deny any liability orresponsibility for the claims made and make no admission of any wrongdoing. On January 20,2009, the Court entered an order preliminarily approving the DerivativeSettlement. On April 23, 2009, the Court held the hearing for finalapproval of the Derivative Settlement and took the matter under submission.

 

We maybecome involved in certain other legal proceedings and claims which arise inthe normal course of business. Other than as described above, as of March 31,2009, we did not have any significant litigation outstanding.

 

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

 

**Forward-LookingStatements and Other General Information**

 

This discussion and analysisof financial 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 AnnualReport on Form 10-K for the year ended December 31, 2008 (includingour 2008 audited consolidated financial statements and related notes theretoand other information). InfoSonics Corporation’s (“InfoSonics” or the “Company”)discussion and analysis of financial condition and results of operations arebased upon, among other things, our unaudited consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States (“GAAP”). The preparation of financialstatements in conformity with GAAP requires us to, among other things, makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosures of contingent liabilities as of and at thefinancial statement date, and the reported amounts of revenues and expensesduring the reporting periods. On an ongoing basis, we review our estimates andassumptions. Our estimates are based on our historical experience and otherassumptions that we believe to be reasonable under the circumstances. Actualresults are likely to differ from these estimates under different assumptionsor conditions, but we do not believe such differences will materially affectour financial position or results of operations, although they may. Ourcritical accounting policies, the policies we believe are most important to thepresentation of our financial statements and require the most difficult,subjective and complex judgments are outlined below in “Critical AccountingPolicies.” All references to results of operations in this discussion generallyare to results from continuing operations, unless otherwise noted.

 

14

----

Table of Contents

 

The decision during thesecond quarter of 2008 to discontinue our operations in Mexico and the U.S.,which we continue to implement (although we substantially completed by the endof 2008) and record adjustments required in the financial statements, affectedcertain amounts of our results of operations and the classifications on thebalance sheet, statement of operations and statement of cash flows for priorperiods, and as of prior dates, as well as our disclosure in this report,including management’s discussion and analysis.

 

**Safe HarborStatement**

 

The matters in thisreport that are forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995, including, without limitation,statements about future revenues, sales levels, operating income and margins,wireless handset sales, stock-based compensation expense, gain/loss in value ofderivatives, cost synergies, operating efficiencies, profitability, marketshare, and rates of return, are based on current management expectations thatinvolve certain risks and uncertainties. These risks and uncertainties, inwhole or in part, could cause such expectations to fail to be achieved and havea material adverse effect on InfoSonics’ business, financial condition andresults of operations, and include, without limitation: (1) intense competitioninternationally, including competition from alternative business models, suchas manufacturer-to-carrier sales, which may lead to reduced prices, lowersales, lower gross margins, extended payment terms with customers, increasedcapital investment and interest costs, bad debt risks and product supplyshortages; (2) dependency on Latin American sales; (3) extendedgeneral economic downturn; (4) inability to secure adequate supply ofcompetitive products on a timely basis and on commercially reasonable terms; (5) foreignexchange rate fluctuations, devaluation of a foreign currency, adversegovernmental controls or actions, political or economic instability, ordisruption of a foreign market, and other related risks of our internationaloperations; (6) the ability to attract new sources of profitable businessfrom expansion of products or services or risks associated with entry into newmarkets, including geographies, products and services; (7) an interruptionor failure of our information systems or subversion of access or other systemcontrols may result in a significant loss of business, assets, or competitiveinformation; (8) significant changes in supplier terms and relationships; (9) terminationof a supply or services agreement with a major supplier or product supplyshortages; (10) continued consolidation in the wireless handset carriermarket; (11) loss of business from one or more significant customers; (12)customer and geographical accounts receivable concentration risk and otherrelated risks; (13) rapid product improvement and technological changeresulting in inventory obsolescence; (14) terrorist or military actions; (15)the loss of a key executive officer or other key employees; (16) changes inconsumer demand for multimedia wireless handset products and features; (17) ourfailure to adequately adapt to industry changes and to manage potential growthand/or contractions; (18) seasonal buying patterns; (19) uncertain politicaland economic conditions internationally; (20) the resolution of any litigationfor or against the Company; (21) the ability of the Company to successfullyintroduce and sell its *verykool*®products and the related inventory risk of such products; and (22) the abilityof the Company to generate taxable income in future periods in order to utilizeand realize any quarterly tax benefits recorded. Our actual results andcondition could differ materially from those anticipated in our forward lookingstatements.

 

InfoSonics has institutedin the past and continues to institute changes to our strategies, operationsand processes to address risks and uncertainties and to mitigate impact onInfoSonics’ results of operations and financial condition. However, noassurances can be given that InfoSonics will be successful in these efforts.For a further discussion of significant factors to consider concerningInfoSonics, see “Risk Factors” below in this report and “Item 1A. Risk Factors”of InfoSonics’ Annual Report on Form 10-K for the year ended December 31,2008. In addition, other risks or uncertainties may be detailed from time totime in InfoSonics’ future SEC filings.

 

**Overview**

 

We are one of thepremier distributors and providers of wireless handsets and accessories inLatin America. We provide end-to-end handset and wireless terminal solutionsfor carriers in Latin America.  Wedistribute products of several key original equipment manufacturers (OEMs),including Samsung and others. We are also involved in the designing, sourcingand distribution of a proprietary line of products under our own *verykool®*brand, which includes entry level, mid-tier and high-end products.

 

Our distributionand solution services include product testing, approval and certification,warehousing, logistics services (packing, shipping and delivery), marketingcampaigns, warranty services and end-user support. These services are providedfor OEMs and our *verykool*® branded wirelesshandsets and accessories, in order to facilitate sales to network carriers,agents, resellers, distributors, independent dealers and retailers in Centraland South America. In addition, for our *verykool*®branded products, we design, test and contract with manufacturers to buildthese products.

 

15

----

Table of Contents

 

Due to seasonaland other factors, our interim financial condition or operating results may not beindicative of the entire fiscal year 2009 or other future financial conditionor operating results. Our financial condition and operating results areinfluenced by several seasonal, general economic and other factors, which maycause our financial condition and operating results to fluctuate on a quarterlybasis, including, but not limited to, inventory management and obsolescence,the timing and introduction of new products by our suppliers and competitors,promotions and subsidies by network operators, technical and certificationdelays by industry bodies as well as operators, purchasing and payment patternsof customers, the timing of holidays, the success of our proprietary *verykool®* products line and other events affectingour consumers.

 

**Areas ofManagement Focus and Performance Indicators**

 

We focus on the needs of our customers, developing andmaintaining close relationships with manufacturers, looking to expand incurrent and enter into new markets, and sourcing and developing new andinnovative products, while maintaining close attention to operationalefficiencies and costs. We are focused on increasing shipping volumes andimproving efficiencies to achieve higher levels of profitability and earningsgrowth, as well as monitoring and managing levels of accounts receivable andinventory.  We provide distribution and other services for OEMs, such asSamsung, and our own proprietary line of *verykool®*handsets.  Performance indicators that are important for the monitoringand management of our business include operating and net income, cost of salesand gross margin percentage, operating expenses as a percent of revenues, andoverall net sales growth, as well as balances of accounts receivable andinventory. We make extensive use of our customized information system toclosely monitor all aspects of our business, including customer relationshipmanagement, intelligent purchasing, inventory control, inventory flow, lineitem margin control for every order, and weighted average cost and statisticaldata for products, customers and suppliers, as deemed appropriate. We believe astrong focus on providing better service to customers leads to increasedcustomer satisfaction and retention and potential increases in sales.

 

Managementspends a significant amount of time traveling to Latin America and Asia withthe purpose of spending time with key customers, suppliers and employees. Webelieve that these relationships are vital to our success, and we will continueto dedicate a significant amount of time to this area.

 

**IndustryTrends and Risks**

 

According to a January 2009report by Deutsche Bank, overall worldwide wireless handset sales increased byapproximately 6% in 2008; however, they are forecasted to decrease in 2009 by10%, before returning to growth in 2010 and 2011, with growth estimated at 10%each year. This same report estimated Latin American sales (excluding Brazil)could decrease 17% in 2009, before returning to growth in 2010 and 2011 at arate of 10% each year. A rapid decline in wireless handset sales in the Centraland South American markets we serve has and could continue to negatively impactour net sales. Excess supply conditions and the current economic downturn haveand may continue to reduce demand for our products and reduce the market pricesof the products we sell and therefore affect our ability to generate net sales,margins and gross profit at expected levels and could continue to affect thevalue of our inventory, as well as customer payment trends. For example, thesecond half of 2008 and the first quarter of 2009 generally saw a decrease inhandset demand globally as well as in our sales regions and an increase incarrier inventory, which both had a negative impact on our financial resultsduring 2008 and the first quarter of 2009. Conversely, should manufacturers beunable to respond to an unanticipated increase in demand on a timely basis, we,along with others in our industry, could experience supply constraints thatwould affect our ability to deliver products. We are unable to quantify theseeffects, as it is difficult to predict future supply conditions and demandpatterns which affect our ability to meet customer demand or sell handsets atan acceptable gross profit.

 

During the second half of 2008 and the first quarter of 2009 inparticular, our industry was impacted by the economic slowdown impacting theUnited States and the rest of the world. We believe that some of the countriesin the regions we operate, particularly in Central America, have close economicrelations with the United States, and have been impacted by this economicsituation. We believe this impacted consumer demand for wireless handsets insome of the countries we operate, and therefore our overall operations,including net sales, during the first quarter of 2009 were adversely impacted.

 

**CompanySpecific Trends and Risks**

 

Our long-term strategy incorporates overall marketgrowth elements for our business, which we hope will result in future growth asglobal economic conditions recover. Our *verykool®*proprietary line of products, for which we had several models selling as of March 31,2009, continued to show orders and sales during the first three months of 2009and is expected to become an increasing part of our overall business in thefuture.

 

16

----

Table of Contents

 

Our *verykool®*products continue to increase product diversification in Central and SouthAmerica, which should continue to be beneficial as we move forward and worktowards continued profitability.  We havecontrol over the *verykool**®* line of products, whereas for OEM products weperform distribution and other services as needed.  On a sequential quarterly and year over yearbasis, we were able to increase our gross margins to 7.9% for the quarter endedMarch 31, 2009, compared to 5.3% for the quarter ended March 31, 2008and 1.0% for the quarter ended December 31, 2008  These results were primarily due to productmix shift, including increased sales of higher-margin products (including our *verykool®*products), better productsourcing for our *verykool®*lineof products and beneficial purchasing opportunities.

 

**Recent Events**

 

On July 10, 2008, wereceived a Nasdaq Staff Deficiency letter indicating that for the last thirtyconsecutive business days the bid price for our common stock had closed belowthe minimum $1.00 per share requirement for continued listing on The NasdaqStock Market under Nasdaq Marketplace Rule 4450(a)(5). In accordance withNasdaq Marketplace Rule 4450(e)(2), we were provided an initial period of180 calendar days, or until January 6, 2009, to regain compliance. TheNasdaq Stock Market has extended the compliance date several times, with thecurrent compliance date being on or about October 12, 2009.

 

        Duringthe compliance period on or about October 12, 2009, absent the occurrenceof any unexpected events, our common stock is expected to continue to trade onThe Nasdaq Global Market. If compliance with Nasdaq Marketplace Rule 4450(a)(5) cannotbe demonstrated on or about October 12, 2009, the staff of The NasdaqStock Market Listing Qualifications department is expected to deliver a writtennotification to us that our securities will be delisted from The Nasdaq GlobalMarket. If we receive a delisting notice, we may appeal the Nasdaq staff’sdetermination to a Listing Qualifications Panel. Alternatively, we may apply totransfer our securities to The Nasdaq Capital Market or another exchange ortrading market. We intend to monitor the bid price of our common stock andconsider available options if our common stock does not trade at a level likelyto result in our regaining compliance with Nasdaq’s minimum bid price rule.

 

**Resultsof Operations**

 

***ThreeMonths ended March 31, 2009 Compared with Three Months ended March 31,2008***

 

**Net Sales**

 

For the three months ended March 31, 2009, ournet sales from continuing operations of $42.6 million decreased 37% compared toour net sales from continuing operations of $67.9 million for the same periodof 2008.  Average selling price ofwireless handsets sold in the first quarter of 2009 increased 15%, as comparedto the first quarter of 2008, due primarily to increased volume ofhigher-priced handsets, including some of our *verykool®*and OEM products.  However, this increasewas more than offset by a 44% decrease in overall wireless handset salesvolume, primarily due to the impact of the worsening economic slowdown in themarkets we serve during the second half of 2008 and the first quarter 2009.  The geographic mix of net sales shifted inthe first quarter of 2009 as sales in South America increased to more than 92%of net sales, as compared to 69% of net sales for the first quarter of2008.  Sales in Central America decreasedto 8% of total net sales in the quarter ended March 31, 2009, as comparedto 31% in the quarter ended March 31, 2008.  These regional shifts in net sales were theresult of the factors discussed below.

 
| ** **                                                 | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2009**                                                           | ** ** | **2008** | ** ** |
| ** **                                                 | ** ** | **(Dollar amounts in thousands)  (unaudited)**      | ** ** |
| Net sales                                                  |       | $                                                                  | 42,625     |   | $ | 67,933 |   |
| Units sold, increase (decrease) over prior year            |       | (44                                                                | )%         | 92 | % |
| Average selling price, increase (decrease) over prior year |       | 15                                                                 | %          | (17 | )% |
|                                                            |            |                                                                    |            |  |  |  |  |

 

In South and Central America, we have continued towork to expand our customer base as well as our geographic presence by seekingadditional customers and further business with existing customers.  In addition, we continued efforts to marketand sell our proprietary *verykool*® lineof products in South and Central America. In South America, net sales were $39.5 million for the quarter ended March 31,2009, a 16% decrease from the same quarter in 2008.  This decrease was primarily due to decreasedsales in existing countries mostly due to the worldwide economic slowdown.  In Central America, net sales decreased 85%to $3.1 million for the quarter ended March 31, 2009, which was primarilydue to the continuing unusually low demand during the quarter, which we believewas related to the worsening worldwide economic downturn.

 

17

----

Table of Contents

 

**Net Salesby Geographic Region**

 
| ** **      | ** ** | **For the Three Months  Ended March 31,**           | ** ** | **Increase** | ** ** |
|-----------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **      | ** ** | **2009**                                                      | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Central America |       | $                                                             | 3,115      |         | $          | 21,166 |   | (85 | )% |
| South America   |       | 39,510                                                        |       | 46,767       |       | (16 | )% |
| Total           |       | $                                                             | 42,625     |         | $          | 67,933 |   | (37 | )% |

 

**Cost of Sales, Gross Profit and Gross Margin**

 

For the quarter ended March 31, 2009, cost ofsales was $39.3 million, or 92.1% of net sales, and gross margin was 7.9%, ascompared with $64.3 million, or 94.7% of net sales, and 5.3% for gross marginfor the quarter ended March 31, 2008. The decrease in our cost of sales asa percentage of net sales and increase in gross margin were due to product mixshift, including increased sales of higher-margin products (including our *verykool®*products), better productsourcing for our *verykool®*lineof products and beneficial purchasing opportunities.

 

For the quarter ended March 31, 2009, our grossprofit decreased to $3.4 million from $3.6 million, as compared with the samequarter last year, a decrease of 7%. This decrease in gross profit wasprimarily the result of the decreased net sales which was offset by the factorswhich increased our gross margin as described above.

 
| ** **    | ** ** | **For the Three Months  Ended March 31,** | ** ** | **Increase** | ** ** |
|---------------|------------|--------------------------------------------------------------------|------------|--------------|------------|
| ** **    | ** ** | **2009**                                                           | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)**      | ** ** | ** **   | ** ** |
| Net sales     |       | $                                                                  | 42,625     |         | $          | 67,933 |   | (37 | )% |
| Cost of sales |       | 39,270                                                             |       | 64,344       |       | (39 | )% |
| Gross profit  |       | $                                                                  | 3,355      |         | $          | 3,589 |   | (7 | )% |
| Gross margin  |       | 7.9                                                                | %          | 5.3          | %          | 49 | % |

 

**Operating Expense and Operating Income (Loss) fromContinuing Operations**

 

For the quarter ended March 31, 2009, operatingexpense decreased 22%, as compared with the same quarter last year.  As a percentage of net sales from continuingoperations, operating expense increased to 6.7% in the quarter ended March 31,2009, as compared with 5.4% for the same quarter last year.  The increase in operating expense as apercentage of net sales was primarily due to the decrease in total net sales;however, management took action to reduce overall operational costs to matchcurrent market conditions.  Managementcontinues to review expenses in an effort to better match the operational costswith the future business opportunities.  We believe such measures will assist us as we strive to maintainprofitability in the current volatile market.

 

For the quarter ended March 31, 2009, ouroperating income from continuing operations was $478,000, as compared withoperating loss from continuing operations of $109,000 for the quarter ended March 31,2008. As a percentage of net sales, operating income from continuing operationswas 1.1% for the quarter ended March 31, 2009, compared to an operatingloss from continuing operations of 0.2% for the quarter ended March 31,2008. The increase in operating income from continuing operations was a resultof the increase in gross margin and gross profit as well as the decrease inoperating expense due to the factors discussed above.

 

18

----

Table of Contents

 

**OperatingExpense**

 
| ** **              | ** ** | **For the Three Months  Ended March 31,** | ** ** | **Increase** | ** ** |
|-------------------------|------------|--------------------------------------------------------------------|------------|--------------|------------|
| ** **              | ** ** | **2009**                                                           | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)**      | ** ** | ** **   | ** ** |
| Net sales               |       | $                                                                  | 42,625     |         | $          | 67,933 |   | (37 | )% |
| Operating expense       |       | $                                                                  | 2,877      |         | $          | 3,697 |   | (22 | )% |
| Percentage of net sales |       | 6.7                                                                | %          | 5.4          | %          | 24 | % |

 

**Operating Income (Loss) from ContinuingOperations**

 
| ** **                                         | ** ** | **For the Three Months  Ended March 31,** | ** ** | **Increase** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------|------------|
| ** **                                         | ** ** | **2009**                                                           | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| ** **                                         | ** ** | **(Dollar amounts in thousands)  (unaudited)**      | ** ** | ** **   | ** ** |
| Net sales                                          |       | $                                                                  | 42,625     |         | $          | 67,933 |   | (37 | )% |
| Operating income (loss) from continuing operations |       | $                                                                  | 478        |         | $          | (109 | ) | 540 | % |
| Percentage of net sales                            |       | 1.1                                                                | %          | (0.2         | )%         | 650 | % |

 

**OtherExpense**

 

Duringthe first quarter of 2009, we incurred $28,000 of interest expense, compared to$190,000 for the same period last year, primarily due to a lower averageoutstanding balance on our line of credit, resulting from, among other things,lower inventory levels as compared to the same period in the prior year.  We expect to continue to regularly utilizeamounts on our revolving line of credit, which will impact our interest expensein future periods depending on applicable interest rates, among other things.

 
| ** **                   | ** ** | **For the three Months  Ended March 31,** | ** ** | **Increase** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------|------------|--------------|------------|
| ** **                   | ** ** | **2009**                                                           | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| ** **                   | ** ** | **(Dollar amounts in thousands)  (unaudited)**      | ** ** | ** **   | ** ** |
| Other Income                 |       | $                                                                  | —     |         | $          | — |   | — | % |
| Interest income (expense)    |       | (28                                                                | )          | (190         | )          | (85 | )% |
| Total other income (expense) |       | $                                                                  | (28        | )            | $          | (190 | ) | (85 | )% |

 

**Income(Loss) from Continuing Operations**

 

Duringthe quarter ended March 31, 2009, our net income from continuingoperations was $440,000, as compared to a loss of $330,000 for the quarterended March 31, 2008.  This netincome from continuing operations was primarily due to the increased grossmargin and decreased operating expense discussed above.

 

**Loss from Discontinued Operations (Net of Tax)**

 

During the quarter ended June 30,2008, we assessed opportunities in the United States and Mexico, and began toimplement actions necessary to close sales operations in both of thosecountries, which we continued to execute in the first quarter of 2009. For the quarter ended March 31, 2009, we incurred a loss from discontinuedoperations of approximately $193,000, as compared to a loss of $83,000 fromdiscontinued operations for the quarter ended March 31, 2008.  Theloss from discontinued operations resulted as we continued to wind down ourbusiness in the United States and Mexico. As of March 31, 2009, our plansfor the discontinued operations were substantially complete; however, we expectto continue to record adjustments and expenses through the discontinuedoperations, as necessary.

 

**FinancialCondition, Liquidity and Capital Resources**

 

Wegenerally use cash from our sales of products, lines of credit (bank andvendor) and sale and exercise of securities (from time to time), to providecapital needed to support our business.

 

19

----

Table of Contents

 

**Cash Used inOperating Activities**

 

At March 31, 2009, we had $11.9 million in cash,a decrease of $12.9 million from December 31, 2008.  During the three months ended March 31, 2009, we usedcash and continued to leverage our bank line of credit to fund ouroperations.  The increase in our use ofthe bank line of credit was directly related to the decrease in our use ofvendor lines of credit, as well as significantly increased levels of accountsreceivable during the three months ended March 31, 2009.   The net cash used in operating activitieswas $20.0 million for the three months ended March 31, 2009, whichresulted primarily from increased accounts receivable and decreased accountspayable and accrued expenses partially offset by decreased inventorylevels.  The increase in accountsreceivable was primarily due to the sales activity towards the later part ofthe period and the standard payment terms of sales we provide ourcustomers.  Inventory decreased by $0.4million and prepaid inventory increased by $0.4 million, resulting in anegligible net impact.  Accounts payableat March 31, 2009 decreased $8.3 million, compared to December 31,2008, primarily due to a decrease in vendor provided lines of credit, whichresulted from  the economic environmentand our 2008 results, and beneficial purchasing terms offered by other vendorsand partners in the ordinary course during the period.

 

**Days of SalesOutstanding**

 

Days of sales outstanding (the average number of days ittakes to collect revenue after a sale is made) at March 31, 2009 was 63days, compared with 56 days at December 31, 2008.  This increase was due to a few customersmaking payments shortly after the close of the first quarter of 2009, as morethan 87% of our accounts receivable at March 31, 2009 were still withincurrent terms provided to our customers. Normal payment terms require our customers to pay on a net 30-day or net60-day basis depending on the customer. We are constantly working with ourcustomers to reduce our days of sales outstanding. The extension of net 60-dayterms is required to remain competitive in the regions we currently operate,Central and South America. In an effort to obtain new customers and penetratenew markets, we may offer terms beyond our normal terms.

 

**Cash Used inInvesting Activities**

 

The net cash used in investing activities was $112,000 forthe three months ended March 31, 2009, compared to net cash used of $5,000for the three months ended March 31, 2008. This use of cash continued tobe primarily the result of our investment related to geographic expansion,tooling and molds for our proprietary *verykool®*products.

 

**Cash Providedby Financing Activities**

 

The net cash provided by financing activities for the threemonths ended March 31, 2009 of $7.2 million was primarily the result ofborrowings on our bank line of credit. The net cash used by financing activities for the three months ended March 31,2008 of $266,000 was primarily used to make payments on our line of creditwhich was partially offset by cash received from exercise of stock options.

 

**WorkingCapital**

 

Our net working capital at March 31, 2009 was $25.8million, as compared with $25.6 million at December 31, 2008. This slightincrease was primarily due to the increase in accounts receivable and thedecreases in accounts payable and accrued expenses offset by a decrease in cashand cash equivalents and an increase in amounts drawn on our line of credit.

 

**Borrowings**

 

On April 30, 2008, the Company entered into a Loan, Security and Bulk Purchase Agreement and a Letterof Credit and Security Agreement (collectively, the “Agreement”) with WellsFargo Century, Inc. (“Lender”), replacing the then existingasset-based secured credit facility withWells Fargo HSBC Trade Bank, N.A. Pursuant to the Agreement, the Lender may advance up to $45,000,000 tothe Company based on the expected collections of eligible receivables as wellas value of the Company’s eligible inventory determined in accordance with theAgreement.  The outstanding advances maynot exceed the lesser of (i) $45,000,000 or (ii) the sum of the valueof the eligible receivables and eligible inventory multiplied by theirrespective advance rates as set forth in the Agreement ($27.8 million as of March 31,2009).  At March 31,2009, the majority of our debt was based on foreign accounts receivable.  This credit facility has atwo-year term ending April 2010 and is secured by all of the assets of theCompany. The interest rate for each borrowing under the credit facility is, atthe option of the Company, either the Wells Fargo Bank N.A. prime rate minus0.50% (3.25% less 0.50%  atMarch 31, 2009) or the LIBOR rate plus 2.00% (1.27%plus 2.00% at March 31, 2009).  At March 31,2009, the amount drawn against the line of credit was $21,524,501.  As of March 31, 2009, the Company was incompliance with the covenants of the credit facility.

 

20

----

Table of Contents

 

We have no other notes payable.

 

At March 31,2009 and December 31, 2008, the amount drawn against the Lender line ofcredit was $21.5 million and $14.3 million, respectively.  Credit lines have been an importantpart of operating and growing our business, and market changes affectingaccounts receivable have, and will in the future, diminish or increase theborrowing base of available funds under our current credit line. At March 31,2009 and December 31, 2008, advances were at 77% and 96% of the availableborrowing base.

 

***Critical Accounting Policies***

 

We believe the following critical accounting policiesare important to the presentation of our financial condition and operating results,and require management’s judgments to make assumptions and estimates about theeffects of matters that are inherently uncertain.

 

*RevenueRecognition and Allowance for Returns*

 

        Revenuesfor wireless handset and accessory sales are recognized when (i) shipmentof the products to customers has occurred and title has passed, (ii) whencollection of the outstanding receivables is probable and (iii) the finalprice of the products is determined, which occurs at the time of shipment.Sales are recorded net of discounts, rebates, cooperative arrangements(marketing, training and promotional funds), returns, and allowances.Consideration is given on select sales for cooperative arrangements related tomarket development, training and special promotions, usually agreed upon inadvance. The amount given is generally in the form of a credit memo, which isapplied as a reduction of the sale price and such amount is recorded as acurrent liability. Expenditures made pursuant to the agreed upon activity reducethis liability. To the extent that we incur costs in excess of the establishedcooperative fund, we recognize that amount as a selling or marketing expense.As part of the sales process, we may perform certain value added services suchas programming, software loading and quality assurance testing. These valueadded services are considered an ancillary component of the sales process andamounts attributable to these processes are included in the unit cost to thecustomer. Furthermore, these value added services are related to services priorto the shipment of the products, and no value added services are provided afterdelivery of the products. We recognize a reserve against the relatedreceivables estimates for product returns based on historical experience andother judgmental factors. We evaluate these estimates on an on-going basis andadjust the estimates each period based on actual product return activity. Werecognize freight costs billed to our customers in revenue and actual freightcosts incurred as a component of cost of sale.

 

*Allowance for Doubtful Accounts*

* *

We recognize allowance for doubtful accounts based onthe length of time the receivables are past due, the current businessenvironment and our historical experience. Credit evaluations are undertaken for all major sales transactionsbefore shipment is authorized. Normal payment terms require payment on a net 30or 60-day basis depending on the customer. On an ongoing basis, we analyze thepayment history of customer accounts, including recent customer purchases. Weevaluate aged items in accounts receivable and provide reserves for doubtfulaccounts. Customer creditworthiness and economic conditions may change,including increasing the risk of collectability and sales returns, and may requireadditional provisions, which could negatively impact our operatingresults.  Such was the case during 2008,as we adjusted some of our inventory levels down.

 

*Inventory Write-Off and Effect on Gross Margin*

* *

We regularly monitor inventory quantities on hand andrecord a provision for excess and obsolete inventories based primarily onhistorical usage rates and our estimated forecast of product demand for aperiod of time, generally three months. Because of obsolescence, we willgenerally provide a full reserve for the costs of our inventories in excess ofour relevant demand forecast for the applicable period. We attempt to controlour inventory levels so that we limit inventories in excess of demand for thesucceeding several months. However, because we need to place non-cancelableorders with significant lead time and because it is difficult to estimateproduct demand, we sometimes build inventories in excess of demand for theapplicable future periods. If this occurs, we provide a reserve, which may havea negative impact on our reported results of operations and financialcondition.

 

21

----

Table of Contents

 

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

 

The primary objective of the following information is to provideforward-looking quantitative and qualitative information about our potentialexposure to market risks. The term “market risk” for us refers to the risk ofloss arising from adverse changes in interest rates and various foreigncurrencies. The disclosures are not meant to be precise indicators of expectedfuture losses, but rather indicators of reasonably possible losses. Thisforward-looking information provides indicators of how we view and manage ourongoing market risk exposures.

 

**InterestRate**

 

We are exposed to market risk from changes in interest rates on ouroutstanding revolving line of credit. At March 31, 2009, we had $21.5million outstanding under our line of credit, which could be affected bychanges in short-term interest rates. Under our current credit facility, theinterest rate for funds borrowed is, at our option, either the Wells Fargoprime rate minus 0.5% (3.25% minus 0.5% at March 31, 2009) or the LIBORrate plus 2.00% (1.27% plus 2.00% at March 31, 2009). For every 1%increase in Wells Fargo’s prime rate or the LIBOR rate, our interest expenseincreases by $215,000 annually assuming $21.5 million remained outstanding forthe entire year.

 

The above sensitivity analysis for interest-rate risk excludes accountsreceivable, accounts payable and accrued liabilities because of the short-termmaturity of such instruments. The analysis does not consider the effectinterest-rate movement may have on other variables relating to our business,including changes in sales volumes that could be indirectly attributed tochanges in interest rates. The actions that we would take in response to such achange are also not considered. If it were possible to quantify this impact,the results could differ from the sensitivity effects shown above.

 

**MarketRisk**

 

Almost all portions of our revenue and expenses are transacted inmarkets outside the United States; however, all sales transactions and accountsreceivable are denominated in U.S. dollars. As a result of our internationalsales (at this time, Latin America), our future operating results could beadversely affected by a variety of factors, including changes in specificcountries’ political, economic or regulatory conditions, and trade protectionmeasures.  Our market risk managementincludes an accounts 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 months ended March 31, 2009.   See “Consolidated Statement ofComprehensive Operations” in our financial statements included in this report.

 

**Item 4T.Controls and Procedures**

 

**Disclosure Controls**

 

An evaluation wasperformed under the supervision and with the participation of our management,including the Chief Executive Officer and President and the Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), asof the end of the period covered by this quarterly report pursuant to ExchangeAct Rule 13a-15(b).  Based on the evaluation, the Chief ExecutiveOfficer and President and the Chief Financial Officer concluded that as of theend of the period covered by this quarterly report, the Company’s disclosurecontrols and procedures were effective to ensure that information required tobe disclosed by an issuer in the reports that it files or submits under theExchange Act is (i) recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and (ii) 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.

 

**Changes in Internal Control over FinancialReporting**

 

There was no change inour internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f) of the Exchange Act) during our first fiscal quarter ended March 31,2009, that has materially affected or is reasonably likely to materially affectour internal control over financial reporting.

 

22

----

Table of Contents

 

**PART II.OTHER INFORMATION**

 

**Item 1. LegalProceedings**

 

*Securities Class Actions*

 

In the securities class action, captioned *In Re: InfoSonics Corporation SecuritiesLitigation*, Lead Case No. 06 CV 1231, pending before JudgeSammartino in the United States District Court for the Southern District ofCalifornia, Plaintiffs filed a third amended consolidated complaint on May 23,2008 against the Company and certain of its officers and directors.  This complaint alleges violations of Section 10(b) ofthe Exchange Act and associated Rule 10b-5, Section 20(a) and Section 20Ain connection with the announcement of the Company’s restatement of firstquarter 2006 earnings and in connection with allegedly false and/or misleadingstatements related to the Company’s distribution of the VK Mobile phone.  Plaintiffs seek a declaration that theiraction is a proper class action pursuant to Rule 23(a) and (b)(3),unspecified damages, prejudgment and post-judgment interest, attorneys’ fees,expert witness fees, other costs, and other unspecified relief.  The plaintiffs purport to represent a classof purchasers of the Company’s stock during the period February 6, 2006 toAugust 9, 2006.

 

On August 8, 2008, the parties entered into a Memorandum ofUnderstanding to resolve the case.  On October 17,2008, the parties entered a Stipulation and Agreement of Settlement (the “SecuritiesSettlement”) of the case, which provides the securities class action settlementis contingent on preliminary and final Court approval, as well as settlement ofthe derivative action noted below, among other contingencies**,** and provides for, among other things, a dismissal withprejudice of the lawsuit, releases of the defendants, and a payment by theCompany or its insurer of $3.8 million to plaintiffs (inclusive of anyplaintiffs’ attorneys fees, to be determined by the Court).  The Securities Settlement further provides thatdefendants deny any liability or responsibility for the claims made and make noadmission of any wrongdoing.

 

On January 20, 2009, the Court entered an order certifying theclass, preliminarily approving the settlement and providing for notice to theclass.  On February 10, 2009, theCompany’s insurer funded the full settlement payment.  On April 23, 2009, the Court held thehearing for final approval of the Securities Settlement.  On May 5, 2009, the Court entered anorder approving the Securities Settlement as fair and reasonable, directing theclerk to enter final judgment and dismissing the action with prejudice.   The Securities Settlement is contingent uponfinal court approval of the derivative action, which is still under submissionwith the Court.

 

*Derivative Action*

 

In the derivative action, captioned *InRe InfoSonics Corporation Derivative Litigation*, Lead Case No. 06CV 1336, pending before Judge Sammartino in the United States District Courtfor the Southern District of California, plaintiffs filed a consolidatedcomplaint on November 6, 2006 purportedly on behalf of the Company againstcertain of its officers and directors, and the Company as a nominaldefendant.  The consolidated complaintalleges claims for violations of Section 14(a) of the Exchange Act,Sections 25402 and 25403 of the California Corporations Code, disgorgementunder the Sarbanes-Oxley Act of 2002, breach of fiduciary duty, abuse ofcontrol, gross mismanagement, waste of corporate assets, unjust enrichment,rescission, a constructive trust, and an accounting, in connection with theCompany’s restatement of first quarter 2006 earnings and in connection withallegations of wrongdoing with respect to granting, exercising, accounting andreporting of the stock options that the Company granted in December 2005.  Plaintiffs seek unspecified damages,declaratory relief regarding the Sarbanes-Oxley Act of 2002, Section 14(a) ofthe Exchange Act, and the legality of stock options, a constructive trust,restitution, disgorgement, modification of certain corporate governance andinternal procedures, extraordinary equitable and/or injunctive relief, costs,and such other relief as is just and proper. On September 4, 2007, the Court granted defendants’ motion todismiss for failure to make a demand on the board, and also granted withprejudice the motion to dismiss the Sarbanes-Oxley claim.

 

On August 6, 2008, the parties entered into a Memorandum ofUnderstanding to resolve the derivative case. On October 17, 2008, the parties entered into a Stipulation andAgreement of Settlement (the “Derivative Settlement”), which provides theDerivative Settlement is contingent on preliminary and final Court approval ofthis  settlement and the securitiessettlement noted above, among other contingencies, and provides for, amongother things, a dismissal with prejudice of the lawsuit, releases of thedefendants, corporate governance changes and a payment by the Company or itsinsurer of plaintiffs’ attorneys fees to be ordered by the Court up to a maximumof $350,000.  It is anticipated that thesettlement payment will be funded entirely by the Company’s insurer.  The Derivative Settlement further providesthat defendants deny any liability or responsibility for the claims made andmake no admission of any wrongdoing.  On January 20,2009, the Court entered an order preliminarily approving the DerivativeSettlement.  On April 23, 2009, theCourt held the hearing for final approval of the Derivative Settlement and tookthe matter under submission.

 

23

----

Table of Contents

 

We maybecome involved in certain other legal proceedings and claims which arise inthe normal course of business. Other than as described above, as of March 31,2009, we did not have 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 31,2008, 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.

 

***Despite being profitable in the first quarter of2009, we have recently experienced net losses and net losses may reoccur in thenear future. If we operate at a loss, our business may not be financiallyviable.***

 

Although we had netincome for the first quarter of 2009, we experienced losses and negative cash flows for the year ended2008.  As of March 31, 2009, we hadworking capital of $25.9 million.  Giventhe economic slowdown and contraction in the wider markets, including theCentral and South American markets that we serve and generally globally, wecannot adequately evaluate the financial viability of our business or ourlong-term prospects.

 

Tomaintain profitability, we must, among other things:

 

·              Continue toincrease gross profits while controlling operational expenses;

·              Generate salesand consumer demand for our *verykool®*products; and

·              Continue towork with our OEM vendors for increased margin opportunities.

 

Ifwe do not succeed in these objectives, our business, among other things, mightexperience losses again and may not be sustainable in the future.

 

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

 

Asof March 31, 2009, we had outstanding debt in the amount of $21.5 millionunder a receivables-based credit facility. Under this credit facility,which expires in April 2010, Wells Fargo Century, Inc. may advance usup to $45,000,000 based on the expected collections of eligible receivables aswell as the value of our eligible inventory as determined in accordance withthe terms of the facility. Any significant decrease in our level of eligibleaccounts receivable or inventory will reduce our ability to borrow additionalfunds under the credit facility and may affect our ability to adequatelyfinance our operations and expansion strategies. Further, if we violate ourloan covenants, default on our obligations or become subject to a change of control,our indebtedness would become immediately due and payable. In addition, theterms of our credit facility restrict us from incurring certain additionalindebtedness, which could limit our ability to expand our operations. Some ofour loan covenants subject us to, among other things, limits on our ability tosell certain assets and make certain payments, including, but not limited to,dividends, repurchases of common stock and other payments outside the normalcourse of business, as well as prohibits us regarding merging or consolidatingwith another corporation or selling all or substantially all of ourassets.  As of March 31, 2009, the Company was in compliance with thecovenants of the credit facility.  If anyof these adverse events occur or we are unable to renew our new credit facilityor enter into an adequate credit relationship as needed, our business’financial condition or operating results could be negatively affected.

 

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

 

Wepurchase wireless handsets and accessories principally from wirelesscommunications OEMs and distributors. We depend on these suppliers to provideus with adequate inventories of currently popular brand name products on atimely basis and on favorable pricing and other terms, as well as on thesesuppliers’ quality products and services and financial stability. Forthe quarter ended March 31, 2009, one vendor, (Samsung Electronics deAmazonia, S.A.) accounted for 93%, of our total cost of sales. We currently have one exclusive and several non-exclusive agreementswith our principal suppliers, which can be terminated on short notice andprovide for certain territorial restrictions. Our suppliers may not offer uscompetitive products on favorable terms or with timely delivery. In additionnew products from other manufacturers could impact the demand for products frommanufacturers we represent. From time to time, we have been unable to obtain 

 

24

----

Table of Contents

 

sufficientproduct supplies. Any failure or delay by our suppliers, particularly our oneprimary vendor, in supplying us with products on favorable terms may severelydiminish our ability to obtain and deliver products to our customers on atimely and competitive basis. If we lose any of our principal suppliers, or if thesesuppliers are unable to fulfill our product needs, or if any principal supplierimposes substantial price increases and alternative sources of supply are notreadily available, it would have a material adverse effect on our results ofoperations and financial condition.

 

***The loss or reduction inorders from principal customers or a reduction in prices we are able to chargethese customers will have a negative impact upon our revenues and could causeour stock price to decline.***

 

Ourthree largest customers (carriers in South America) in the quarter ended March 31,2009 represented 37%, 23% and 21% of our net sales during that period.  These customers are carriers in LatinAmerica. The markets we serve are subject to significant price competition.Additionally, our customers are not contractually obligated to purchaseproducts from us. For these and other reasons, such as competitive pricing andcompetitive pressures, customers may seek to obtain products or services fromus at lower prices than we have been able to obtain from these customers in thepast. This could occur, for example, in the case of a customer purchasing largequantities of a product from us, who then terminates this relationship becausethe customer can obtain a lower price by buying directly from the manufactureror other supplier. The loss of any of our principal customers, a reduction inthe amount of product or services our principal customers order from us or theinability to maintain current terms, including price, with these or othercustomers could have an adverse effect on our financial condition, results ofoperations and liquidity. In addition, we have experienced losses of certaincustomer bases through industry consolidation and in the ordinary course ofbusiness.  Overall, there can be noassurance that any of our customers will continue to purchase products orservices from us or that their purchases will be at the same or greater levelsthan in prior periods, with any such customer decisions having the potential toadversely affect our business operations and profitability.

 

***Almost all of our revenues will be generated outsideof the United States in countries that may have volatile currencies or otherrisks in the foreseeable future.***

 

Wenow engage in all of our significant sales activities in territories andcountries outside of the United States, specifically in Latin Americancountries.  All our sales transactionsare completed in U.S. dollars and therefore may be impacted by changes in thestrength of the U.S. dollar. Further, the fact that we distribute a substantialamount of our products into a number of territories and countries other thanthe United States exposes us to, among other things, increased credit risks,customs duties, import quotas and other trade restrictions, potentially greaterand more unpredictable inflationary and currency pressures, and shippingdelays. Changes may occur in social, political, regulatory and economicconditions or in laws and policies governing foreign trade and investment inthe territories and countries where we currently distribute products. UnitedStates laws and regulations relating to investment and trade in foreigncountries could also change to our detriment. Any of these factors could havematerial adverse effects on our business and operations. Also, although wepurchase and sell products and services in U.S. dollars and do not engage inexchange swaps, futures or options contracts or other hedging techniques,fluctuations in currency exchange rates could reduce demand for products soldin U.S. dollars. We cannot predict the effect that future exchange ratefluctuations will have on our operating results or financial position. We mayin the future engage in currency hedging transactions, which could result inour incurring significant additional financial risks, including expenses andlosses.

 

***Our ability to maintain future profitability depends on our ability tomaintain and increase existing margins, including through increased net sales,which we may not be able to do.***

 

Thegross margins that we realize on sales of wireless handsets may not increase orcould be reduced due to, among other things, increased competition and agrowing industry and customer emphasis on cost containment, thereby negativelyaffecting our ability to remain profitable. Our ability to obtain future profitability will continue to depend onour ability to increase our margins through increased sales (either through ahigher volume of sales of wireless handset products or a higher average priceper wireless handset product) or lower our cost of sales. However, we may notbe able to increase existing margins for products or services we offer. Ourability to generate sales is based on demand for wireless handset products thatwe can deliver and our having an adequate supply of these products to coverdemand. Even if our sales rates increase, the gross margins that we receivefrom our sales may not be sufficient to make our future operations profitableas our cost of sales may increase at higher rates. For example, in 2008,although we had higher sales, we did not have operating income from continuingoperations due to lower gross margins, as well as, among other things, higheroperating expenses. We cannot guarantee that we will be able to improve grossmargins, including increasing sales, or do so in a profitable manner in thefuture.

 

25

----

Table of Contents

 

***Ifthe trading price of our common stock remains below $1.00 for an extendedperiod of time, our common stock may, among other things, be delisted from TheNasdaq Global Market or Nasdaq markets altogether adversely affecting the valueof our common stock.***

 

Between January 1, 2008and May 6, 2009, our common stock share price fluctuated between $1.85 and$0.10 per share, and on May 6, 2009 it closed at $0.25 per share. UnderNasdaq Market Rules, among other things, if our share price is under $1.00 pershare for an extended period of time, our stock could be delisted from TheNasdaq Global Market, be transferred to a listing on The Nasdaq Capital Market,or be delisted from the Nasdaq markets altogether.

 

        OnJuly 10, 2008, we received a Nasdaq Staff Deficiency letter indicatingthat for the last 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 Stock Market under Nasdaq Marketplace Rule 4450(a)(5).In accordance with Nasdaq Marketplace Rule 4450(e)(2), we were provided aninitial period of 180 calendar days, or until January 6, 2009, to regaincompliance. The Nasdaq Stock Market has extended the compliance date severaltimes with the current compliance date being on or about October 12, 2009.

 

Duringthe compliance period on or about October 12, 2009, absent any unexpectedevents, our common stock is expected to continue to trade on The Nasdaq GlobalMarket. If compliance with Nasdaq Marketplace Rule 4450(a)(5) cannotbe demonstrated on or about October 12, 2009, the staff of The NasdaqStock Market Listing Qualifications department is expected to deliver a writtennotification to us that our securities will be delisted from The Nasdaq GlobalMarket. If we receive a delisting notice, we may appeal the Nasdaq staff’sdetermination to a Listing Qualifications Panel. Alternatively, we may apply totransfer our securities to The Nasdaq Capital Market or another exchange ortrading market. We intend to monitor the bid price of our common stock andconsider available options if our common stock does not trade at a level likelyto result in our regaining compliance with Nasdaq’s minimum bid price rule.

 

        Ifour common stock were to be delisted from The Nasdaq Global Market or theNasdaq markets altogether, we may seek quotation on a regional stock exchangeor other exchange or market, if available. Such listing could reduce the marketliquidity for our common stock. If our common stock is not eligible forquotation on another exchange or market, trading of our common stock could beconducted in the over-the-counter market or on an electronic bulletin boardestablished for unlisted securities, such as the Pink Sheets or the OTCBulletin Board. As a result, an investor would find it more difficult todispose of, or obtain accurate quotations for the price of, our common stock,which would likely cause a decrease in the value of our common stock.

 

        Further,if our common stock were to be delisted from the Nasdaq markets, and ourtrading price remained below $5.00 per share, trading in our common stock mightalso become subject to the requirements of certain rules promulgated underthe Securities Exchange Act of 1934, as amended, or the Exchange Act, whichrequire additional disclosure by broker-dealers in connection with any tradeinvolving a “penny stock.” In addition, many brokerage firms are reluctant torecommend low-priced stocks to their clients. Further, various regulations andpolicies may restrict the ability of shareholders to borrow against or “margin”low-priced stocks, and declines in our stock price below certain levels maytrigger unexpected margin calls. Additionally, because brokers’ commissions onlow-priced stocks generally represent a higher percentage of the stock pricethan commissions on higher-priced stocks, the price of our common stock couldresult in an individual shareholder paying transaction costs that represent ahigher percentage of total share value than would be the case if our shareprice were higher. This factor may also limit the willingness of institutionsto purchase our common stock. Finally, the additional burdens imposed uponbroker-dealers by these requirements could discourage broker-dealers fromfacilitating trades in our common stock. All of these risks could severelylimit the market liquidity of our common stock and the ability of investors totrade our common stock, thereby negatively impacting share price.

 

**Item 2.****   ****Unregistered Sales of Equity Securities and Use of Proceeds**

 

## **Issuer Repurchasesof Equity Securities.**

 

During the first quarter of 2009, werepurchased 166,498 shares of our common stock at a total cost (includingbrokerage commissions) of $38,440, at an average price per share of $0.23.  Such shares were purchased by us in the openmarket in accordance with Commission Rule 10b-18.  We have authorized the repurchase of up to$500,000 worth of shares of our common stock under this previously announcedplan.

 

26

----

Table of Contents

 

Thefollowing table summarizes information regarding shares repurchased during thequarter ended March 31, 2009:

 
| ** **             | ** ** | **Total  Number  of Shares  Repurchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total  Number of  Shares  Purchased as  Part of the  Publicly  Announced  Repurchase  Programs** | ** ** | **Maximum  Approximate  Dollar Value  of Shares  That May  Yet be  Purchased  Under the  Programs** | ** ** |
|------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **             | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                                                                                             | ** ** | ** **                                                                                                                   | ** ** |
| 1/01/09 – 1/31/09 |       | 48,659                                         |       | $                                            | 0.29       |                                                                                                                   | 48,659     |                                                                                                                         |       |   |
| 2/01/09 – 2/28/09 |       | 40,779                                         |       | $                                            | 0.22       |                                                                                                                   | 40,779     |                                                                                                                         |       |   |
| 3/01/09 – 3/31/09 |       | 77,060                                         |       | $                                            | 0.16       |                                                                                                                   | 77,060     |                                                                                                                         | $          | 444,605 |   |
| Total                  |       | 166,498                                        |       |                                         |       |                                                                                                                   | 166,498    |                                                                                                                         |       |   |
|                        |            |                                                |            |                                              |            |                                                                                                                        |            |                                                                                                                              |            |  |  |

 

----

*      Theweighted average price per share, including commissions, during the quarterended March 31, 2009 was $0.23.

 

**    Theshare repurchase program was previously announced December 15, 2008.  Under the plan, the Company may repurchase upto $500,000 of its common stock until December 15, 2009, unless themaximum dollar amount authorized is repurchased or our of Board of Directorsdetermines to discontinue the plan earlier.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

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

 
| Exhibit  Number | ** ** | **Description of Exhibit** |
|-----------------|------------|--------------------------------------|
| 10.1            |       |                                 | Distribution Agreement by and between InfoSonics  Corporation and Samsung Electronics Argentina S.A., effective as of  January 22, 2009 (1). |
| 31.1            |       |                                 | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, implementing  Section 302 of Sarbanes-Oxley Act of 2002 (+). |
| 31.2            |       |                                 | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, implementing  Section 302 of Sarbanes-Oxley Act of 2002 (+). |
| 32.1            |       |                                 | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 (+). |
| 32.2            |       |                                 | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  Sarbanes-Oxley Act of 2002 (+). |

 

----

(1)  Incorporated byreference from the Company’s Current Report on Form 8-K, filed on January 26,2009.

(+)  Filed herewith.

 

27

----

Table of Contents

 

**SIGNATURE**

 

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

 
|        | ** **         | **InfoSonics  Corporation** |
|--------|--------------------|-----------------------------|
|   |               |                        |   |   |
|   |               |                        |   |   |
| Date:  | May 15,  2009 | By:                         | /s/  Joseph  Ram |
|   |               |                        | Joseph  Ram |
|   |               |                        | Chief  Executive Officer and President |
|   |               |                        |   |   |
|   |               |                        |   |   |
| Date:  | May 15,  2009 | By:                         | /s/  Jeffrey  Klausner |
|   |               |                        | Jeffrey  Klausner |
|   |               |                        | Chief  Financial Officer |

 

28

----