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 September 30,2009**

 

**OR**

 

| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|------------|-----------------------------------------------------------------------------------------------------|

 

**Forthe transition periodfrom                to                **

 

**CommissionFile Number - 001-32217**

 

**InfoSonicsCorporation**

(Exact name of registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices including zip code)

 

**(858)373-1600**

(Registrant’s telephone number, includingarea code)

 

**Not Applicable**

(Former Name or Former Address, if Changed Since Last Report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  x   No  o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporatewebsite, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes  o No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratedfiler or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x

 

As of November 10, 2009, the Registrant had 14,184,147shares outstanding of its $.001 par value common stock.

 

 

 

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Table of Contents

 

**InfoSonicsCorporation and Subsidiaries**

 

**QuarterlyReport on Form 10-Q For The Three and Nine Months Ended September 30,2009**

 

**Tableof Contents**

 
| **PART I. FINANCIAL INFORMATION** | **2**                                                                                                                                  |
|----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|
|                                   |                                                                                                                                   |   |
| Item 1.                                | Financial Statements                                                                                                                   | 2 |
|                                   |                                                                                                                                   |   |
| ·                                 | Consolidated Balance Sheets at September 30,  2009 (unaudited) and December 31, 2008                                         | 2 |
|                                   |                                                                                                                                   |   |
| ·                                 | Consolidated Statements of  Operations for the three and nine months ended September 30, 2009 and  2008 (unaudited)               | 3 |
|                                   |                                                                                                                                   |   |
| ·                                 | Consolidated Statements of  Comprehensive Operations for the three and nine months ended  September 30, 2009 and 2008 (unaudited) | 4 |
|                                   |                                                                                                                                   |   |
| ·                                 | Consolidated Statements of  Cash Flows for the nine months ended September 30, 2009 and 2008  (unaudited)                         | 5 |
|                                   |                                                                                                                                   |   |
| ·                                 | Condensed  Notes to Consolidated Financial Statements (unaudited)                                                                      | 6 |
|                                   |                                                                                                                                   |   |
| Item 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                            | 14 |
|                                   |                                                                                                                                   |   |
| Item 3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                                                            | 24 |
|                                   |                                                                                                                                   |   |
| Item 4T.                               | Controls and Procedures                                                                                                                | 25 |
| ** **                             | ** **                                                                                                                             | ** ** |
| **PART II.  OTHER INFORMATION**   | **25**                                                                                                                                 |
|                                   |                                                                                                                                   |   |
| Item 1.                                | Legal Proceedings                                                                                                                      | 25 |
|                                   |                                                                                                                                   |   |
| Item 1A.                               | Risk Factors                                                                                                                           | 26 |
|                                   |                                                                                                                                   |   |
| Item 2.                                | Unregistered Sales  of Equity Securities and Use of Proceeds                                                                           | 29 |
|                                   |                                                                                                                                   |   |
| Item 3.                                | Defaults Upon  Senior Securities                                                                                                       | 29 |
|                                   |                                                                                                                                   |   |
| Item 4.                                | Submission of  Matters to a Vote of Security Holders                                                                                   | 29 |
|                                   |                                                                                                                                   |   |
| Item 5.                                | Other Information                                                                                                                      | 29 |
|                                   |                                                                                                                                   |   |
| Item 6.                                | Exhibits                                                                                                                               | 29 |

 

1

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Table of Contents

 

**Part I.  FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                       | ** ** | **September 30,  2009** | ** **     | **December 31,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|----------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                       | ** ** | **(unaudited)**              | ** **     | **(audited)**               | ** ** |
| **ASSETS**                                                                                                                                                                                                                       |       |                         |           |                        |       |
| **Current assets:**                                                                                                                                                                                                              |       |                         |           |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                        |       | $                            | 14,711,099     |                        | $          | 24,714,753 |   |
| Accounts receivable, net of allowance for doubtful accounts of  $582,046 (unaudited) and $429,126                                                                                                                                |       | 54,692,864                   |           | 22,727,738                  |       |
| Other receivables                                                                                                                                                                                                                |       | 610,166                      |           | 4,209,658                   |       |
| Inventory, net of reserves of $119,556 (unaudited) and $161,556                                                                                                                                                                  |       | 3,839,635                    |           | 4,375,334                   |       |
| Prepaids                                                                                                                                                                                                                         |       | 562,290                      |           | 244,103                     |       |
| Assets of discontinued operations                                                                                                                                                                                                |       | 3,014,776                    |           | 3,264,817                   |       |
|                                                                                                                                                                                                                             |       |                         |           |                        |       |
| Total current assets                                                                                                                                                                                                             |       | 77,430,830                   |           | 59,536,403                  |       |
|                                                                                                                                                                                                                             |       |                         |           |                        |       |
| Property and equipment, net                                                                                                                                                                                                      |       | 410,175                      |           | 498,079                     |       |
| Intangible assets                                                                                                                                                                                                                |       | 504,000                      |           | 504,000                     |       |
| Other assets                                                                                                                                                                                                                     |       | 205,268                      |           | 115,900                     |       |
|                                                                                                                                                                                                                             |       |                         |           |                        |       |
| **Total assets**                                                                                                                                                                                                                 | ** ** | **$**                        | **78,550,273** | ** **                  | **$**      | **60,654,382** | ** ** |
|                                                                                                                                                                                                                             |       |                         |           |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                   | ** ** | ** **                   | ** **     | ** **                  | ** ** |
|                                                                                                                                                                                                                             |       |                         |           |                        |       |
| **Current liabilities:**                                                                                                                                                                                                         |       |                         |           |                        |       |
| Accounts payable                                                                                                                                                                                                                 |       | $                            | 10,824,366     |                        | $          | 10,982,306 |   |
| Accrued expenses                                                                                                                                                                                                                 |       | 9,240,740                    |           | 7,304,090                   |       |
| Line of credit                                                                                                                                                                                                                   |       | 30,066,060                   |           | 14,273,978                  |       |
| Income taxes payable                                                                                                                                                                                                             |       | 46,021                       |           | 24,100                      |       |
| Liabilities of discontinued operations                                                                                                                                                                                           |       | 1,365,226                    |           | 1,310,434                   |       |
|                                                                                                                                                                                                                             |       |                         |           |                        |       |
| Total current liabilities                                                                                                                                                                                                        |       | 51,542,413                   |           | 33,894,908                  |       |
| ** **                                                                                                                                                                                                                       | ** ** | ** **                   |           | ** **                  |       |
| **Total liabilities**                                                                                                                                                                                                            |       | 51,542,413                   |           | 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;  14,745,755 and 15,010,807 shares issued and 14,184,147 and 14,956,270 shares  outstanding as of September 30, 2009 and December 31, 2008,  respectively |       | 14,184                       |           | 14,956                      |       |
| Treasury stock, at cost, 561,608 and 54,537 shares as of  September 30, 2009 and December 31, 2008, respectively                                                                                                       |       | (434,381                     | )              | (16,900                     | )          |
| Additional paid-in capital                                                                                                                                                                                                       |       | 31,715,535                   |           | 31,666,434                  |       |
| Accumulated other comprehensive loss                                                                                                                                                                                             |       | (5,632                       | )              | (25,211                     | )          |
| Accumulated deficit                                                                                                                                                                                                              |       | (4,281,846                   | )              | (4,879,805                  | )          |
|                                                                                                                                                                                                                             |       |                         |           |                        |       |
| Total stockholders’ equity                                                                                                                                                                                                  |       | 27,007,860                   |           | 26,759,474                  |       |
|                                                                                                                                                                                                                             |       |                         |           |                        |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                              | ** ** | **$**                        | **78,550,273** | ** **                  | **$**      | **60,654,382** | ** ** |

 

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

 

2

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Table of Contents

 

**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements ofOperations**

**(unaudited)**

 
| ** **                                                                      | ** ** | **For the Three Months  Ended September 30,** | ** **  | **For the Nine  Months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|-------------|-------------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2009**                                                               | ** **  | **2008**                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                      | ** ** | ** **                                                             | ** **  | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales**                                                                   |       | $                                                                      | 65,261,978  |                                                              | $          | 52,883,848 |   | $ | 169,593,200 |   | $ | 179,857,086 |   |
| **Cost of sales**                                                               |       | 60,928,056                                                             |        | 49,982,339                                                        |       | 157,832,519 |   | 170,141,235 |   |
|                                                                            |       |                                                                   |        |                                                              |       |   |   |   |   |
| **Gross profit**                                                                |       | 4,333,922                                                              |        | 2,901,509                                                         |       | 11,760,681 |   | 9,715,851 |   |
| **Operating expenses**                                                          |       | 4,023,129                                                              |        | 3,210,515                                                         |       | 10,459,022 |   | 10,127,587 |   |
|                                                                            |       |                                                                   |        |                                                              |       |   |   |   |   |
| **Operating income (loss) from continuing  operations**                         |       | 310,793                                                                |        | (309,006                                                          | )          | 1,301,659 |   | (411,736 | ) |
|                                                                            |       |                                                                   |        |                                                              |       |   |   |   |   |
| **Other income (expense)**                                                      |       |                                                                   |        |                                                              |       |   |   |   |   |
| Other income                                                                    |       | 7,322                                                                  |        | 653,181                                                           |       | 7,575 |   | 582,700 |   |
| Interest expense, net                                                           |       | (79,828                                                                | )           | (33,735                                                           | )          | (217,005 | ) | (477,456 | ) |
|                                                                            |       |                                                                   |        |                                                              |       |   |   |   |   |
| **Income (loss) from continuing operations before  provision for income taxes** |       | 238,287                                                                |        | 310,440                                                           |       | 1,092,229 |   | (306,492 | ) |
| **Provision for income taxes**                                                  |       | (6,300                                                                 | )           | (128,410                                                          | )          | (23,100 | ) | (1,054 | ) |
|                                                                            |       |                                                                   |        |                                                              |       |   |   |   |   |
| **Income (loss) from continuing operations**                                    |       | 231,987                                                                |        | 182,030                                                           |       | 1,069,129 |   | (307,546 | ) |
| **Loss from discontinued operations, net of tax  (Note #11)**                   |       | (46,755                                                                | )           | (80,633                                                           | )          | (406,384 | ) | (2,237,452 | ) |
| ** **                                                                      | ** ** | ** **                                                             | ** **  | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income (loss)**                                                           | ** ** | **$**                                                                  | **185,232** | ** **                                                        | **$**      | **101,397** | ** ** | **$** | **662,745** | ** ** | **$** | **(2,544,998** | **)** |
|                                                                            |       |                                                                   |        |                                                              |       |   |   |   |   |
| **Basic earnings (loss) per share**                                             |       |                                                                   |        |                                                              |       |   |   |   |   |
| From continuing operations                                                      | ** ** | **$**                                                                  | **0.02**    | ** **                                                        | **$**      | **0.01** | ** ** | **$** | **0.07** | ** ** | **$** | **(0.02** | **)** |
| From discontinued operations                                                    | ** ** | **$**                                                                  | **(0.01**   | **)**                                                             | **$**      | **(0.01** | **)** | **$** | **(0.02** | **)** | **$** | **(0.15** | **)** |
| Net income (loss)                                                               | ** ** | **$**                                                                  | **0.01**    | ** **                                                        | **$**      | **0.01** | ** ** | **$** | **0.05** | ** ** | **$** | **(0.17** | **)** |
| **Diluted earnings (loss) per share**                                           | ** ** | ** **                                                             | ** **  | ** **                                                        | ** ** | ** ** | ** ** |   | ** ** |
| From continuing operations                                                      | ** ** | **$**                                                                  | **0.02**    | ** **                                                        | **$**      | **0.01** | ** ** | **$** | **0.07** | ** ** | **$** | **(0.02** | **)** |
| From discontinued operations                                                    | ** ** | **$**                                                                  | **(0.01**   | **)**                                                             | **$**      | **(0.01** | **)** | **$** | **(0.03** | **)** | **$** | **(0.15** | **)** |
| Net income (loss)                                                               | ** ** | **$**                                                                  | **0.01**    | ** **                                                        | **$**      | **0.01** | ** ** | **$** | **0.04** | ** ** | **$** | **(0.17** | **)** |
|                                                                            |       |                                                                   |        |                                                              |       |   |   |   |   |
| **Basic weighted-average number of common shares  outstanding**                 | ** ** | **14,184,147**                                                         | ** **  | **14,910,808**                                                    | ** ** | **14,550,416** | ** ** | **14,850,469** | ** ** |
| ** **                                                                      | ** ** | ** **                                                             | ** **  | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Diluted weighted-average number of common shares  outstanding**               | ** ** | **14,932,300**                                                         | ** **  | **15,298,685**                                                    | ** ** | **14,874,702** | ** ** | **14,850,469** | ** ** |

 

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

 

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**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements ofComprehensive Operations**

**(unaudited)**

 
| ** **                                | ** ** | **For  the Three Months********Ended September 30,** | ** ** | **For  the Nine Months********Ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                                       | ** ** | **2008**                                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                      |       |                                                           |       |                                                          |       |   |   |   |   |
| Net  profit income (loss)                 |       | $                                                              | 185,232    |                                                          | $          | 101,397 |   | $ | 662,745 |   | $ | (2,544,998 | ) |
| Other  comprehensive income (loss):       |       |                                                           |       |                                                          |       |   |   |   |   |
| Foreign  currency translation adjustments |       | 4,691                                                          |       | (3,504                                                        | )          | 19,580 |   | (7,407 | ) |
| Comprehensive  income (loss)              |       | $                                                              | 189,923    |                                                          | $          | 97,893 |   | $ | 682,325 |   | $ | (2,552,405 | ) |

 

*Accompanying notes are an integral part of these financial statements.*

 

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**InfoSonicsCorporation and Subsidiaries**

**Consolidated Statements of CashFlows**

**(unaudited)**

 
| ** **                                                                                         | ** ** | **For the Nine Months Ended  September 30,** | ** **     |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|----------------|
| ** **                                                                                         | ** ** | **2009**                                                    | ** **     | **2008** | ** ** |
| **Cash flows from operating activities:**                                                          | ** ** | ** **                                                  | ** **     | ** ** | ** ** |
| Net income (loss)                                                                                  |       | $                                                           | 662,745        |   | $ | (2,544,998 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  (used in) operating activities |       |                                                        |           |   |   |
| Depreciation                                                                                       |       | 223,364                                                     |           | 498,782 |   |
| Provision for bad debt                                                                             |       | 152,920                                                     |           | (131,016 | ) |
| Impairment on fixed assets                                                                         |       | —                                                      |           | (13,126 | ) |
| Provision for obsolete inventory                                                                   |       | (42,000                                                     | )              | (322,882 | ) |
| Stock option and stock grant expense                                                               |       | 49,101                                                      |           | 67,481 |   |
| (Increase) decrease in                                                                             |       |                                                        |           |   |   |
| Accounts receivable                                                                                |       | (32,118,046                                                 | )              | 133,197 |   |
| Other receivable                                                                                   |       | 3,599,492                                                   |           | (3,434,937 | ) |
| Inventory                                                                                          |       | 577,699                                                     |           | 5,497,980 |   |
| Prepaids                                                                                           |       | (318,187                                                    | )              | 313,548 |   |
| Other assets                                                                                       |       | (89,368                                                     | )              | (7,412 | ) |
| Deferred tax asset current                                                                         |       | —                                                      |           | (67,340 | ) |
| Deferred tax asset non current                                                                     |       | —                                                      |           | (53,118 | ) |
| Increase (decrease) in                                                                             |       |                                                        |           |   |   |
| Accounts payable                                                                                   |       | (157,940                                                    | )              | (8,961,021 | ) |
| Accrued expenses                                                                                   |       | 1,936,650                                                   |           | 6,445,564 |   |
| Income tax liabilities                                                                             |       | 21,921                                                      |           | (39,560 | ) |
| Cash used in continuing operations                                                                 |       | (25,501,649                                                 | )              | (2,618,858 | ) |
| Cash provided by discontinued operations                                                           |       | 304,833                                                     |           | 5,042,304 |   |
| Net cash provided by (used in) operating activities                                                |       | (25,196,816                                                 | )              | 2,423,446 |   |
|                                                                                               |       |                                                        |           |   |   |
| **Cash flows from investing activities:**                                                          | ** ** | ** **                                                  | ** **     | ** ** | ** ** |
| Purchase of property and equipment                                                                 |       | (136,891                                                    | )              | 125,038 |   |
| Cash used in discontinued operations                                                               |       | —                                                      |           | (192,142 | ) |
| Net cash used in investing activities                                                              |       | (136,891                                                    | )              | (67,104 | ) |
|                                                                                               |       |                                                        |           |   |   |
| **Cash flows from financing activities:**                                                          | ** ** | ** **                                                  | ** **     | ** ** | ** ** |
| Borrowings from line of credit                                                                     |       | 192,070,828                                                 |           | 186,370,107 |   |
| Payments on line of credit                                                                         |       | (176,278,746                                                | )              | (199,215,710 | ) |
| Cash received from stock options                                                                   |       | —                                                      |           | 34,286 |   |
| Cash paid for treasury stock                                                                       |       | (483,040                                                    | )              | — |   |
| Cash provided by (used in) discontinued operations                                                 |       | —                                                      |           | — |   |
|                                                                                               |       |                                                        |           |   |   |
| Net cash provided by (used in) financing activities                                                |       | 15,309,042                                                  |           | (12,811,317 | ) |
|                                                                                               |       |                                                        |           |   |   |
| Effect of exchange rate changes on cash                                                            |       | 21,011                                                      |           | (7,405 | ) |
|                                                                                               |       |                                                        |           |   |   |
| Net decrease in cash and cash equivalents                                                          |       | (10,003,654                                                 | )              | (10,462,380 | ) |
|                                                                                               |       |                                                        |           |   |   |
| **Cash and cash equivalents, beginning of period**                                                 |       | 24,714,753                                                  |           | 20,652,154 |   |
|                                                                                               |       |                                                        |           |   |   |
| **Cash and cash equivalents, end of period**                                                       | ** ** | **$**                                                       | **14,711,099** | ** ** | **$** | **10,189,774** | ** ** |
| **Cash paid for interest**                                                                         | ** ** | **217,013**                                                 | ** **     | **513,999** | ** ** |
| **Cash paid for taxes**                                                                            |       | —                                                      |           | — |   |

 

***Non-Cash SupplementalDisclosure:***

 

*During thenine months ended September 30, 2009, $4.15 million of the accrued legalsettlement was paid by the insurance carrier and the corresponding receivableand liability have been reduced. (see Note #7 to the Company’s’ financialstatements)*

 

*During thenine months ended September 30, 2009, the Company retired 265,053 shares ofits treasury stock.  The retirementreduced treasury stock and increased accumulated deficit by $65,559.*

 

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

 

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**InfoSonicsCorporation**

**Condensed Notes to ConsolidatedFinancial Statements**

**(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 consolidatedfinancial statements reflect all adjustments considered, in the opinion of theCompany’s management, necessary to fairly present the results for the periodscovered herein and such adjustments are considered of a normal recurringnature.

 

The unaudited consolidated financial 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 as of September 30, 2009, the unaudited consolidated statementsof operations and the unaudited consolidated statements of comprehensiveoperations for the three and nine months ended September 30, 2009 and theunaudited consolidated statement of cash flows for the nine months ended September 30,2009 are not necessarily indicative of the financial condition, operatingresults or cash flows that may be expected for the full fiscal year of 2009 orfor any future period.

 

**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 theplans has been approved by our stockholders. The 2006 Plan authorizes the grantof up to 1,000,000 shares for equity incentives.  As of September 30, 2009, options topurchase 388,500 shares were outstanding under the 2006 Plan and options topurchase 112,000 shares have been exercised or forfeited under the 2006 Plan.The Company is also a party to non-plan option agreements with severalnon-employee directors and several institutions.

 

The Company’s stock-basedcompensation is classified in the same expense line items as cashcompensation.   Information aboutstock-based compensation included in the unaudited results of operations forthe three and nine months ended September 30, 2009 and 2008 is as follows:

 
| ** **                                                        | ** ** | **For  the Three Months Ended********September 30,** | ** ** | **For  the Nine Months Ended********September 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                                                            | ** ** | **2008**                                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                              |       |                                                                |       |                                                               |       |   |   |   |   |
| Officer  compensation                                             |       | $                                                                   | 3,145      |                                                               | $          | — |   | $ | 6,765 |   | $ | — |   |
| Non-employee  directors                                           |       | 1,425                                                               |       | 3,451                                                              |       | 2,376 |   | 10,353 |   |
| Sales,  general and administrative                                |       | 12,970                                                              |       | 34,809                                                             |       | 39,960 |   | 57,128 |   |
| Total  stock option expense, included in total operating expenses |       | $                                                                   | 17,540     |                                                               | $          | 38,260 |   | $ | 49,101 |   | $ | 67,481 |   |

 

Our stock options vest on an annual or a monthly basis.  TheCompany recognizes stock-based compensation costs on a straight-line basis overthe requisite service period of the award, which is generally the optionvesting term.   Such amounts maychange as a result of additional grants, forfeitures, modifications inassumptions and other factors. Income tax effects of share-based payments are 

 

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recognized in the financial statements for those awards which willnormally result in tax deductions under existing tax law. During the three andnine months ended September 30, 2009, we recorded an expense of $17,540and $49,101, respectively, related to options previously granted and optionsgranted during the three and nine months ended September 30, 2009. Duringthe three and nine months ended September 30, 2008, we recorded an expenseof $38,260 and $67,481, respectively, related to options previously granted andoptions granted during the three and nine months ended September 30, 2008.Under current U.S. federal tax law, we receive a compensation expense deductionrelated to non-qualified stock options only when those options are exercisedand vested shares are received. Accordingly, the financial statementrecognition of compensation cost for non-qualified stock options creates adeductible temporary difference which results in a deferred tax asset and acorresponding deferred tax benefit in our consolidated statements ofoperations.

 

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 and 2009: risk-free interestrate of 1.47% in 2008 and 0.91% in 2009, based on the U.S. Treasury yields ineffect at the time of grant; expected dividend yields of 0% as the Company hasnot, and does not intend to, issue dividends; and expected lives of 3 to 6years based upon the historical life of options. For grants in 2008 and 2009,the expected volatility used ranged from 88% to 108%, based on the Company’shistorical stock price fluctuations for a period matching the expected life ofthe options.  As of September 30,2009, there was $151,000 of total unrecognized compensation costs related tothe non-vested stock options.  That costis expected to be recognized over the remaining weighted-average period of 4.25years.

 

Asummary of option activity under all of the above plans as of September 30,2009 and changes during the nine 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       |                                             | 2.73       |                            | —     |   |
| Granted                                |       | 252,500    |       | $                                       | 0.51       |                                             | 6.64       |                            | —     |   |
| Exercised                              |       | —     |       | $                                       | —     |                                             |       |                            | —     |   |
| Forfeited                              |       | 72,500     |       | $                                       | 1.52       |                                             |       |                            | —     |   |
| Outstanding at September 30, 2009 |       | 1,755,944  |       | $                                       | 1.32       |                                             | 2.91       |                            | —     |   |
| Vested and expected to vest            |       | 1,755,944  |       | $                                       | 1.32       |                                             | 2.91       |                            | —     |   |
| Exercisable at September 30, 2009 |       | 1,434,763  |       | $                                       | 1.45       |                                             | 2.18       |                            | —     |   |

 

A summary of the status of the Company’s non-vested options at September 30,2009 and changes during the nine months ended September 30, 2009 ispresented below:

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted-average  grant-date fair value** | ** ** |
|---------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| Non-vested at December 31, 2008  |       | 146,660    |       | $                                                     | 1.27       |   |
| Granted                               |       | 252,500    |       | $                                                     | 0.51       |   |
| Vested                                |       | 37,979     |       | $                                                     | 1.14       |   |
| Forfeited                             |       | 40,000     |       | $                                                     | 1.04       |   |
| Non-vested at September 30, 2009 |       | 321,181    |       | $                                                     | 0.72       |   |

 

**NOTE 3. Earnings Per Share**

 

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

 

Common shares from the potential exercise of certainoptions and warrants have been excluded from the computation of dilutedearnings per share because their exercise prices are greater than the Company’sweighted-average stock price for the period.  For the three andnine months ended September 30, 2009, the number of shares excludedwas 1,007,791 and 1,431,657, respectively. For the three months ended September 30, 2008 the number of sharesexcluded was 2,957,628.

 

Since their effect would have been anti-dilutive for thenine months ended September 30, 2008, 3,150,644 common shares from thepotential exercise of certain options and warrants have been excluded from thecomputation of net loss per share for the nine months ended September 30,2008.

 

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**NOTE 4. IncomeTaxes**

 

The Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established for certain tax positions. 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 September 30, 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. There was no cumulative effect on retained earnings.

 

The Company is subject toU.S. federal 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 September 30, 2009, the Companydoes not expect any material changes to unrecognized tax positions within thenext twelve months.

 

The Company recognizes theamount of taxes payable or refundable for the current year and deferred taxliabilities and assets for the future tax consequences of events that have beenrecognized in an entity’s financial statements or tax returns. Judgment is requiredin assessing the future tax consequences of events that have been recognized inour financial statements or tax returns. Fluctuations in the actual outcome ofthese future tax consequences could materially impact our financial position orour results of operations.  For the ninemonths ended September 30, 2009, deferred income tax assets and thecorresponding valuation allowance increased by $1,638,612.

 

**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 Company provides for the possibleinability to sell its inventory by recording a reserve.  As of September 30, 2009 and December 31,2008, the inventory reserve was $119,556 and $161,556, respectively.  From time to time, the Company has prepaidinventory as a result of payments for products which have not been received bythe balance sheet date.  As of September 30,2009 and December 31, 2008, the prepaid inventory balances were $308,120and $170, respectively which are included in prepaids in the accompanyingconsolidated balance sheets.  Included inAssets of Discontinued Operations as of September 30, 2009 and December 31,2008 are inventory balances of $1,069,434 and $1,307,463, respectively.    Inventory consisted of the following:

 
| ** **           | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **           | ** ** | **(unaudited)**              | ** ** | **(audited)**               | ** ** |
| Finished goods       |       | $                            | 3,626,970  |                        | $          | 4,536,890 |   |
| Inventory in-transit |       | 332,221                      |       | —                      |       |
| Inventory reserve    |       | (119,556                     | )          | (161,556                    | )          |
| Net inventory        |       | $                            | 3,839,635  |                        | $          | 4,375,334 |   |

 

**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:

 
| ** **                    | ** ** | **September 30,  2009  (unaudited)** | ** ** | **December 31,  2008  (audited)** | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|
| Machinery and equipment       |       | $                                         | 453,030    |                                   | $          | 469,411 |   |
| Furniture and fixtures        |       | 106,314                                   |       | 106,314                                |       |
| Tooling and molds             |       | 482,668                                   |       | 330,828                                |       |
| Subtotal                      |       | 1,042,012                                 |       | 906,553                                |       |
| Less accumulated depreciation |       | 631,837                                   |       | 408,474                                |       |
| Total                         |       | $                                         | 410,175    |                                   | $          | 498,079 |   |

 

Depreciationexpense was $102,156 and $223,364 for the three and nine months ended September 30,2009, respectively, and $161,725 and $498,782 for the three and nine monthsended September 30, 2008, respectively.

 

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**NOTE 7. Accrued Expenses**

 

As of September 30, 2009 and December 31, 2008,accrued expenses consisted of the following:

 
| ** **                         | ** ** | **September 30,  2009  (unaudited)** | ** ** | **December 31,  2008  (audited)** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|
| Accrued product costs              |       | $                                         | 6,092,978  |                                   | $          | 3,070,058 |   |
| Accrued legal settlement*          |       | —                                    |       | 4,150,000                              |       |
| Other accruals (including taxes)** |       | 3,147,762                                 |       | 84,032                                 |       |
| Total                              |       | $                                         | 9,240,740  |                                   | $          | 7,304,090 |   |

 

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*  Asof September 30, 2009, $4.15 million of the accrued legal settlement waspaid by our insurance carrier and is being held in an escrow account for thebenefit of the plaintiffs of the class action lawsuit and derivative suit, andthus has been removed from the balance sheet at September 30, 2009.

 

**This amount includes general accruals,amounts held on behalf of our vendor partners, and potential amounts owed tooperational partners.

 

**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 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.  At September 30,2009, the majority of our debt was based on foreign accounts receivable, amajority of which is insured.  This creditfacility has a two-year term ending April 2010 and is secured by all ofthe assets of the Company. The interest rate for each borrowing under thecredit facility is, at the option of the Company, either the Wells Fargo BankN.A. prime rate minus 0.50% (3.25% less 0.50%  at September 30, 2009) or the LIBORrate plus 2.00% (0.298% plus 2.00% at September 30,2009).  At September 30,2009, the amount drawn against the Lender line of credit was $30,066,060 andthe total amount available at September 30, 2009 was $41,156,101. As of September 30, 2009, the Company was in compliance with thecovenants of the credit facility.  If anyadverse events occur or we are unable to renew our credit facility or enterinto an adequate credit relationship as needed, our business’ financialcondition or operating results could be negatively affected.

 

TheCompany has no other notes payable.

 

**NOTE 9. Stockholders’Equity**

 

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 options became exercisable oneyear from the date of grant, and 1/48th of the total shares subject to theseoptions become exercisable each month thereafter until fully vested.  These options have exercise prices of $1.04per share, which was the closing price per share of the Company’s common stockon each of March 18, 2008 and May 13, 2008, and expire sixyears from the date of grant. See Note 2 for Stock-Based Compensationdiscussion.

 

Effective May 19, 2009, the Company granted options to purchase anaggregate of 252,500 shares, of its common stock to certain executive andnon-executive employees and the members of the Board of Directors (the “Employee Options”).One-fourth of the total shares subject to these options become exercisable oneyear from the date of grant, and 1/48th of the total shares subject to theoptions become exercisable each month thereafter until fully vested.  These options have exercise prices of $0.51per share, which was the closing price per share of the Company’s common stockon May 19, 2009, and expire six years from the date of grant. SeeNote 2 for Stock-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 September 30,2009 and December 31, 2008, we had purchased 826,661 and 54,537 shares,respectively, at a total cost of $499,994 and $16,955, respectively.  During the nine months ended September 30,2009, the Company retired 265,053 shares of stock.  The retirement reduced treasury stock andincreased the accumulated deficit by $65,559.

 

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**NOTE 10.Recent Accounting Pronouncements**

 

Recently Adopted:

 

In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, FairValue Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework formeasuring fair value, and expands disclosures about fair valuemeasurement.  SFAS No. 157 alsoemphasizes 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 valuemeasurements are disclosed by level within that hierarchy.  In February 2008, the FASB issued FASBStaff Position No. 157-2, Effective Date of FASB Statement No. 157,which permitted a one-year deferral for the implementation of SFAS No. 157with regard to nonfinancial assets and liabilities that are not recognized ordisclosed at fair value in the financial statements 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 theremaining provisions of SFAS No. 157 did not have a material impact on theCompany’s condensed consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements — an amendmentof ARB No. 51,” (SFAS 160).  SFAS160 amends Accounting Research Bulletin 51, “Consolidated Financial Statementsto establish accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary.” This standarddefines a noncontrolling interest, sometimes called a minority interest, as theportion of equity in a subsidiary not attributable, directly or indirectly, toa parent. SFAS 160 requires, among other items, that a noncontrolling interestbe included in the consolidated statement of financial position within equityseparate from the parent’s equity; consolidated net income to be reported atamounts inclusive of both the parent’s and noncontrolling interest’s sharesand, separately, the amounts of consolidated net income attributable to theparent and noncontrolling interest all on the consolidated statement of income;and if a subsidiary is deconsolidated, any retained noncontrolling equityinvestment in the former subsidiary be measured at fair value and a gain orloss be recognized in net income based on such fair value. SFAS 160 becameeffective for the Company on January 1, 2009. The adoption of SFAS 160 didnot have a material impact to our condensed consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures and Derivative Instruments and Hedging Activities — an amendmentof FASB Statement No. 133, (“SFAS No. 161”), which requiresadditional disclosures about objectives and strategies for using derivativeinstruments, how the derivative instruments and related hedged items areaccounted for under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” and related interpretations, and how the derivativeinstruments and related hedged items affect our financial statements. SFAS No. 161also requires disclosures about credit risk-related contingent features inderivative agreements. The adoption of SFAS No. 161 did not have amaterial impact to our condensed consolidated financial statements as theCompany does not have derivative instruments for purposes of hedgingactivities.

 

In May 2008, the FASB issued FASB Staff Position(“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May beSettled in Cash upon Conversion (Including Partial Cash Settlement).” FSP No. APB14-1 nullifies EITF Issues No. 90-19 and No. 03-7 and amends No. 98-5,No. 99-1, No. 00-27, No. 04-8, No. 05-1 and No. 06-7.This FSP applies to convertible debt instruments that, by their stated terms,may be settled in cash (or other assets) upon conversion, including partialcash settlement, unless the embedded conversion option is required to beseparately accounted for as a derivative under FASB No. 133, “Accountingfor Derivative Instruments and Hedging Activities.” Under this FSP, companiesare required to separately account for the liability and equity components ofconvertible debt by first determining the carrying amount of the liability componentby measuring the fair value of a similar liability that does not have anassociated equity component and then determining the carrying amount of theequity component embedded in the instrument by deducting the fair value of theliability component from the initial proceeds ascribed to the convertible debtinstrument as a whole. The carrying amount of the equity component will then beamortized over the expected life of the debt to interest expense. The Companyadopted the FSP during the first quarter of 2009, which did not have a materialimpact to the condensed consolidated financial statements as the Company doesnot have convertible notes outstanding which can be converted in whole or inpart, to cash.

 

In December 2007, the FASB issued SFAS No. 141(R),“Business Combinations,” (SFAS 141(R)). SFAS 141(R) replaces SFAS No. 141,“Business Combinations,” (SFAS 141) and retains the fundamental requirements inSFAS 141, including that the purchase method be used for all businesscombinations and for an acquirer to be identified for each businesscombination. This standard defines the acquirer as the entity that obtainscontrol of one or more businesses in the business combination and establishesthe acquisition date as the date that the acquirer achieves control instead ofthe date that the consideration is transferred. SFAS 141(R) requires anacquirer in a business combination, including business combinations achieved instates (step acquisition), to recognize the assets acquired, liabilitiesassumed, and any noncontrolling interest in the acquire at the acquisitiondate, measured at their fair values of that date, with limited exceptions. Italso requires the recognition of assets acquired and liabilities assumedarising from certain contractual contingencies as of the acquisition date,measured at their acquisition-date fair values. SFAS 141(R) becameeffective for the Company on January 1, 2009. The adoption of SFAS No. 141(R) didnot have a material impact to our consolidated financial statements as theCompany did not make any acquisitions in the first three quarters of 2009.

 

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In June 2008, the FASB ratified EITF 07-5, “DeterminingWhether an Instrument (or Embedded Feature) Is Indexed to an Entity’s OwnStock,” (“EITF 07-5”). Paragraph 11(a) of SFAS No. 133, “Accountingfor Derivatives and Hedging Activities, (“SFAS 133”) specifies that a contractthat would otherwise meet the definition of a derivative but is both (a) indexedto the Company’s own stock and (b) classified in stockholders’ equity inthe statement of financial position would not be considered a derivativefinancial instrument. EITF 07-5 provides a new two-step model to be applied indetermining whether a financial instrument or an embedded feature is indexed toan issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scopeexception. EITF 07-5 became effective for the Company beginning January 1,2009. The ratification of EITF 07-5 did not have a material impact on theCompany’s condensed consolidated financial statements.

 

On June 30, 2009, weadopted Statement of Financial Accounting Standards (SFAS) No. 165, “SubsequentEvents,” (SFAS 165). SFAS 165 establishes general standards of accounting forand disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued. Specifically,SFAS 165 sets forth the period after the balance sheet date during whichmanagement of a reporting entity should evaluate events or transactions thatmay occur for potential recognition or disclosure in the financial statements,the circumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements, and thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date. The adoption of SFAS 165 did not have amaterial impact on the Company’s condensed consolidated financial statements.

 

On June 30, 2009, weadopted FASB Staff Position (FSP) No. FAS 157-4, “Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly,”(FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fairvalue in accordance with SFAS 157 when the volume and level of activity for theasset or liability have significantly decreased and includes guidance foridentifying circumstances that indicate a transaction is not orderly. Thisguidance is necessary to maintain the overall objective of fair valuemeasurements, which is that fair value is the price that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date under current market conditions.The adoption of FSP FAS 157-4 had no impact on the condensed consolidatedfinancial statements.

 

On June 30, 2009, weadopted FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation ofOther-Than-Temporary Impairments,” (FSP FAS 115-2/124-2). FSP FAS 115-2/124-2amends existing other-than-temporary impairment guidance for debt securities tomake the guidance more operational and to improve the presentation anddisclosure of other-than-temporary impairments on debt and equity securities.The adoption of FSP FAS 115-2/124-2 had no impact on the condensed consolidatedfinancial statements.

 

On June 30, 2009, weadopted FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about FairValue of Financial Instruments,” (FSP FAS 107-1/APB 28-1). FSP FAS 107-1/APB28-1 requires a publicly traded company to include disclosures about the fairvalue of its financial instruments whenever it issues summarized financialinformation for interim reporting periods. Such disclosures include the fairvalue of all financial instruments, for which it is practicable to estimatethat value, whether recognized or not recognized in the statement of financialposition; the related carrying amount of these financial instruments; and themethod(s) and significant assumptions used to estimate the fair value. Theadoption of FSP FAS 107-1/APB 28-1 had no impact on the condensed consolidatedfinancial statements.

 

Effective January 1,2009, we adopted FSP No. FAS 141(R)-1, “Accounting for Assets Acquired andLiabilities Assumed in a Business Combination That Arise from Contingencies,”(FSP FAS 141(R)-1), which was issued on April 1, 2009. FSP FAS 141(R)-1applies to all assets acquired and liabilities assumed in a businesscombination that arise from certain contingencies as defined in this FSP andrequires (i) an acquirer to recognize at fair value, at the acquisitiondate, an asset acquired or liability assumed in a business combination thatarises from a contingency if the acquisition-date fair value of that asset orliability can be determined during the measurement period otherwise the assetor liability should be recognized at the acquisition date if certain definedcriteria are met; (ii) contingent consideration arrangements of anacquiree assumed by the acquirer in a business combination be recognizedinitially at fair value; (iii) subsequent measurements of assets and liabilitiesarising from contingencies be based on a systematic and rational methoddepending on their nature and contingent consideration arrangements be measuredsubsequently in accordance with the provisions of SFAS 141(R); and (iv) disclosuresof the amounts and measurement basis of such assets and liabilities and thenature of the contingencies. The provisions of FSP FAS 141(R)-1 did not have amaterial impact to our condensed consolidated financial Statements, as theCompany did not make any acquisitions in the first three quarters of 2009.

 

On January 1, 2009,we adopted FSP No. FAS 142-3, “Determination of the Useful Life ofIntangible Assets,” (FSP FAS 142-3). FSP FAS 142-3 amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under FASB StatementNo. 142, “Goodwill and Other Intangible Assets,” (SFAS 142) in order toimprove the consistency between the useful life of a recognized intangibleasset under SFAS 142 and the period of expected cash flows used to measure thefair value of the asset under SFAS 141(R) and other GAAP. The adoption ofFSP FAS 142-3 did not have a material impact to our condensed consolidatedfinancial statements.

 

In June 2009, theFinancial Accounting Standards Board (FASB) issued SFAS No. 168, “The FASBAccounting Standards CodificationTM and the Hierarchy of Generally AcceptedAccounting Principles—a replacement of FASB Statement No. 162,” (SFAS168). SFAS 168 replaces SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles,” and establishes the FASB

 

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Accounting StandardsCodificationTM (Codification) as the source of authoritativeaccounting principles recognized by the FASB to be applied by nongovernmentalentities in the preparation of financial statements in conformity with GAAP. Rules andinterpretive releases of the Securities and Exchange Commission (SEC) underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants. The FASB will no longer issue new standards in the form ofStatements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;instead the FASB will issue Accounting Standards Updates. Accounting StandardsUpdates will not be authoritative in their own right as they will only serve toupdate the Codification. The issuance of SFAS 168 and the Codification does notchange GAAP. SFAS 168 became effective for us for the period ended September 30,2009. Management has determined that the adoption of SFAS 168 did not have amaterial impact on the condensed consolidated financial statements.

 

ISSUED (Not adopted yet):

 

In June 2009, Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 166, “Accounting for Transfersof Financial Assets an amendment of FASB Statement No. 140” (“SFAS 166”).The objective of this statement is to improve the relevance, representationalfaithfulness, and comparability of the information that a reporting entityprovides in its financial statements about a transfer of financial assets, theeffects of a transfer on its financial position, financial performance, andcash flows; and a transferor’s continuing involvement, if any, in transferredfinancial assets. SFAS 166 is effective for fiscal years and interim periodsbeginning after November 15, 2009. Management does not expect the adoption of SFAS 166 to have a materialimpact on the Company’s financial statements.

 

In June 2009, Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 167, “Amendments to FASBInterpretation No. 46(R)” (“SFAS 167”). This Statement amends Interpretation 46(R) to require ongoingreassessments of whether an enterprise is the primary beneficiary of a variableinterest entity. Before SFAS 167, Interpretation 46(R) requiredreconsideration of whether an enterprise is the primary beneficiary of avariable interest entity only when specific events occurred.  ThisStatement amends Interpretation 46(R) to add an additional reconsiderationevent for determining whether an entity is a variable interest entity when anychanges in facts and circumstances occur such that the holders of the equityinvestment at risk, as a group, lose the power from voting rights or similar rightsof those investments to direct the activities of the entity that mostsignificantly impact the entity’s economic performance.  SFAS 167 is effective as of the beginning ofeach reporting period that begins after November 15, 2009. Management doesnot expect the adoption of SFAS 167 to have a material impact on the Company’sfinancial statements.

 

In September 2009,the FASB issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements—aconsensus of the FASB Emerging Issues Task Force (ASU 2009-13). Itupdates the existing multiple element revenuearrangements guidance currently included under ASC 605-25, which originatedprimarily from the guidance inEITF Issue No. 00-21, RevenueArrangements with Multiple Deliverables (EITF 00-21). The revised guidance primarily provides twosignificant changes: 1) eliminates the need for objective and reliable evidenceof the fair value for theundelivered element in order for a delivered item to be treated as a separateunit of accounting, and 2) eliminatesthe residual method to allocate the arrangement consideration. In addition, theguidance also expands the disclosure requirements for revenue recognition. ASU2009-13 will be effective for the first annual reporting period beginning on orafter June 15, 2010, with early adoption permitted provided that therevised guidance is retroactively applied to the beginning of the year ofadoption. The Company is currently assessing the future impact of this newaccounting update to its consolidated financial statements.

 

In September 2009,the FASB ratified final EITF Issue 08-01, *RevenueArrangements with Multiple Deliverables*(EITF 08-01). EITF 08-01supersedes EITF 00-21, primarily codified into Accounting Standards Update(“ASU”) No. 2009-13, and was issued in response to practice concernsrelated to the accounting for revenue arrangements with multiple deliverablesunder EITF 00-21. EITF 08-1 applies to all deliverables in contractualarrangements in all industries in which a vendor will perform multiplerevenue-generating activities, except when some or all deliverables in amultiple deliverable arrangement are within the scope of other revenuerecognition guidance. EITF 08-1 is effective for fiscal years beginning after June 15,2010. The effects of the adoption, if any, of EITF 08-1 on our consolidatedfinancial position, results of operations and cash flows have not beendetermined.

 

In September 2009,the FASB ratified final EITF 09-3, *SoftwareRevenue Recognition*. Entities that sell tangible productscontaining both hardware elements and software elements that are currentlywithin the scope of AICPA Statement of Position (“SOP”) Number 97-2, *Revenue Recognition for Software Products withMultiple Deliverables*, (“SOP 97-2”), primarily codified into ASU2009-14. This Issue would amend EITF 03-05, *Applicability of AICPAStatement of Position 97-2 to Non-Software Deliverables in an ArrangementContaining More-Than-Incidental Software*, primarily codified intoASC 985-605, to exclude from their scope all tangible products containing bothsoftware and no software components that function together to deliver theproduct’s essential functionality. EITF 09-3 is effective for fiscal yearsbeginning after June 15, 2010. The effects of the adoption, if any, ofEITF 09-3 on our consolidated financial position, results of operations andcash flows have not been determined.

 

**NOTE11.  Discontinued Operations**

 

During the quarter ended September 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 the end of 2008. These two areas accounted for less than 1% of ournet sales in the first three and nine 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, managementdetermined that it was necessary to take decisive actions to mitigate furtherlosses.  The results of the unaudited discontinued operationsare as follows:

 
| ** **                     | ** ** | **For  the Three Months Ended** | ** ** | **For  the Nine Months Ended** | ** ** |
|--------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **September 30,**          | ** ** | **September 30,**         | ** ** |
| ** **                     | ** ** | **2009**                        | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  Sales                     |       | $                               | 6,210      |                           | $          | 113,876 |   | $ | 489,558 |   | $ | 847,312 |   |
| Gross  profit                  |       | (2,210                          | )          | (4,568                         | )          | (313,778 | ) | (1,328,603 | ) |
| Operating  income (loss)       |       | (46,755                         | )          | (257,571                       | )          | (406,384 | ) | (3,569,356 | ) |
| Identifiable  assets           |       | 3,014,776                       |       | 4,733,849                      |       | 3,014,776 |   | 4,733,849 |   |
| Capital  expenditures          |       | —                          |       | —                         |       | — |   | — |   |
| Depreciation  and amortization |       | —                          |       | 5,420                          |       | — |   | 20,787 |   |
|                                |            |                                 |            |                                |            |  |  |  |  |  |  |  |  |

 

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Liabilities ofdiscontinued operations consist primarily of accounts payable.  Assets of discontinued operations are asfollows:

 
| ** **           | ** ** | **September 30,  2009********(unaudited)** | ** ** | **December 31,2008********(audited)** | ** ** |
|----------------------|------------|-------------------------------------------------|------------|--------------------------------------------|------------|
| Accounts  Receivable |       | $                                               | 1,038,613  |                                       | $          | 1,050,758 |   |
| Inventory            |       | 1,069,434                                       |       | 1,307,463                                  |       |
| Prepaid  Taxes       |       | 890,958                                         |       | 897,955                                    |       |
| Other  Assets        |       | 15,771                                          |       | 8,641                                      |       |
| Total                |       | $                                               | 3,014,776  |                                       | $          | 3,264,817 |   |

 

As of September 30,2009, the plans for the discontinued operations, although continuing to beimplemented, were largely completed. However, the Company expects to continue to record potentiallysignificant adjustments and expenses through discontinued operations asnecessary.

 

The Company hasre-evaluated its discontinued operations as of September 30, 2009 inaccordance with FAS 144 due to the Company’s remaining discontinued operationsbeing outstanding for more than one year since the declaration to discontinue.

 

The remaining accountsreceivable and accounts payable are part of an ongoing arbitration currently inprocess, the timing of which is out of the Company’s control to settle.  The prepaid taxes are in the process of beingrecovered from a foreign government, also out of the Company’s control tosettle.  The remaining inventory has beenmarked to market and significantly discounted from the original cost to adjustfor the unforeseen changes in the current economic condition and the marketsfor which the Company sells.  The finalresolution of one or more of these items could result in a potentiallysignificant adjustment.  The Company hastaken action to reduce its prices to market and aggressively sell its remainingproduct. Pursuant to FAS 144, p.31, as these are out of the Company’s control,classification as discontinued operations is still deemed appropriate.

 

**NOTE 12. Geographic Information**

 

TheCompany currently operates in one business segment.  All fixed assets are located in Company orthird party facilities in the United States and Asia. The unaudited net salesby geographical area for the three and nine months ended September 30,2009 and 2008 were:

 
| ** **       | ** ** | **For  the Three Months Ended** | ** ** | **For  the Nine Months Ended** | ** ** |
|------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| ** **       | ** ** | **September 30, 2009**          | ** ** | **September 30, 2008**    | ** ** | **September 30, 2009** | ** ** | **September 30, 2008** | ** ** |
| Central  America |       | $                                         | 6,974,909  |                                | $          | 8,826,072 |   | $ | 15,713,223 |   | $ | 43,519,895 |   |
| South  America   |       | 58,287,069                                |       | 44,057,776                          |       | 153,879,977 |   | 136,337,191 |   |
| Total            |       | $                                         | 65,261,978 |                                | $          | 52,883,848 |   | $ | 169,593,200 |   | $ | 179,857,086 |   |

 

Theunaudited net sales for the Company’s discontinued operations in the UnitedStates and Mexico for the three months ended September 30, 2009 and 2008were $6,210 and $113,876, respectively. The unaudited net sales for the Company’s discontinued operations forthe nine months ended September 30, 2009 and 2008 were $489,558 and$847,312, respectively.

 

**NOTE 13.  Commitments and Contingencies**

 

*Securities Class Actions*

 

InfoSonics has settled the securities class action against the Companyand certain of its officers and directors, captioned *In Re: InfoSonics Corporation SecuritiesLitigation*, Lead Case No. 06 CV 1231, filed in the UnitedStates District Court for the Southern District of California.  Plaintiffs’ third amended consolidatedcomplaint had alleged violations of Section 10(b) of the Exchange Actand associated Rule 10b-5, Section 20(a) and Section 20A inconnection with the announcement of the Company’s restatement of first quarter2006 earnings and in connection with allegedly false and/or misleadingstatements related to the Company’s distribution of the VK Mobile phone.  On October 17, 2008, the parties entereda Stipulation and Agreement of Settlement (the “Securities Settlement”) of thecase, which provides for, among other things, a dismissal with prejudice of thelawsuit, releases of the defendants, and a payment by the Company or itsinsurer of $3.8 million to plaintiffs (inclusive of any plaintiffs’ attorneysfees, to be determined by the Court). The Securities Settlement further provides that defendants deny anyliability or responsibility for the claims made and make no admission of anywrongdoing.  On February 10, 2009,the Company’s insurer funded the full settlement payment.  On May 5, 2009, the Court entered anorder finally approving the Securities Settlement as fair and reasonable, anddirecting the clerk to enter final judgment and dismissing the action withprejudice. This settlement was fully funded and paid by the Company’s insurer.

 

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*Derivative Action*

 

InfoSonics has settled the derivative action purportedly on behalf ofthe Company against certain of its officers and directors, and the Company as anominal defendant, captioned *In ReInfoSonics Corporation Derivative Litigation*, Lead Case No. 06CV 1336, filed in the United States District Court for the Southern District ofCalifornia.  Plaintiffs’ consolidatedcomplaint had alleged claims for violations of Section 14(a) of theExchange 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.  On September 4, 2007, the Court granteddefendants’ motion to dismiss for failure to make a demand on the board, andalso granted with prejudice the motion to dismiss the Sarbanes-Oxleyclaim.  On October 17, 2008, theparties entered into a Stipulation and Agreement of Settlement (the “DerivativeSettlement”), which provides for, among other things, a dismissal withprejudice of the lawsuit, releases of the defendants, corporate governancechanges and a payment by the Company or its insurer of plaintiffs’ attorneysfees to be ordered by the Court up to a maximum of $350,000. The DerivativeSettlement further provides that defendants deny any liability orresponsibility for the claims made and make no admission of any wrongdoing. TheCompany’s insurer funded the full settlement payment.  On June 3, 2009, the Court approved thesettlement and entered the final judgment and order of dismissal with prejudiceof the case. This settlement was fully funded and paid by the Company’sinsurer.

 

*LGElectronics Litigation*

 

On July 1, 2009, theCompany filed suit in the Superior Court of the State of California, County ofSan Diego (the Superior Court) (Case No. 37-2009-00092797-CU-BT-CTL)against LG Electronics, Inc., LG Electronics USA, Inc., LGElectronics Panama S.A., LG Electronics Inc. Chile LTDA, LG Electronics GuatemalaS.A. de C.V. (collectively LG) and DOES 1-10 (and together with LG, theDefendants).  The complaint allegesclaims for interference with contractual relations/inducing breach of contract,intentional interference with prospective economic relations, negligentinterference with prospective economic relations, breach of contract, breach ofimplied covenant of good faith and fair dealing, unjust enrichment, fraud,promissory estoppel and violation of California Business and Professions Code§§ 17200, et seq.  The Company is seekingin excess of $5 million in damages    On July 31,2009, the Defendants removed the case to federal court in San Diego, CA.  The defendants have filed a motion to dismissbased on jurisdictional grounds.  Suchmotion is currently pending.

 

We maybecome involved in certain other legal proceedings and claims which arise inthe normal course of business. Other than as described above, as of September 30,2009, we did not have any significant litigation outstanding.

 

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

 

The Company’sfinancial instruments include cash and cash equivalents, accounts receivable,prepaid expenses, accounts payable and accrued expenses. The book value of allother financial instruments is representative of their fair values.

 

**NOTE 15.  Subsequent Events**

 

Management evaluated allactivity through November 16, 2009 (the issue date of the condensedconsolidated financial statements) and, except as noted below, concluded thatno subsequent events have occurred that would require recognition in thecondensed consolidated financial statements or disclosure in the Notes to thecondensed consolidated financial statements.

 

Effective October 6,2009, the Company entered a separation agreement with one of its executives.  Pursuant to the separation agreement, theCompany made a lump sum severance payment of $75,000 (less withholdings), andin consideration for such payment, the executive provided a full release of allclaims and the executive forfeited 463,500 (vested and unvested) options with aweighted average exercise price of $0.40.

 

**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). Our discussion and analysis of financial condition andresults of operations are based upon, among other things, our unauditedconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States (“GAAP”). Thepreparation of financial statements in conformity with GAAP requires us to,among other things, make estimates and assumptions that affect the reportedamounts of assets 

 

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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 affect ourfinancial position or results of operations, although they may. Our criticalaccounting policies, the policies we believe are most important to thepresentation of our financial statements and require the most difficult,subjective and complex judgments are outlined below in “Critical AccountingPolicies.”  All references to results ofoperations in this discussion generally are to results from continuingoperations, unless otherwise noted.

 

We decided during the secondquarter of 2008 to discontinue our operations in Mexico and the U.S.  Although we largely completed this process,we continue to implement and record potentially significant adjustmentsrequired in the financial statements, which affects certain amounts of ourresults of operations and the classifications on the balance sheet, statementof operations and statement of cash flows for prior periods, and as of priordates, as well as our disclosure in this report, including management’sdiscussion and analysis.  The amountsrelated to our discontinued operations are now shown separate from ourcontinuing operations in our consolidated financial statements.

 

**Safe HarborStatement**

 

The matters inthis report that are forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995, including, withoutlimitation, statements about future revenues, sales levels, operating incomeand margins, wireless handset sales, stock-based compensation expense,gain/loss in value of derivatives, cost synergies, operating efficiencies,profitability, market share, and rates of return, are based on currentmanagement expectations that involve certain risks and uncertainties.  These risks and uncertainties, in whole or inpart, could cause such expectations to fail to be achieved and have a materialadverse effect on our business, financial condition and results of operations,and include, without limitation: (1) intense competition internationally,including competition from alternative business models, such asmanufacturer-to-carrier sales, which may lead to reduced prices, lower sales,lower gross margins, extended payment terms with customers, increased capitalinvestment and interest costs, bad debt risks and product supply shortages; (2) dependencyon Latin American sales; (3) extended general economic downturn; (4) inabilityto secure adequate supply of competitive products on a timely basis and oncommercially reasonable terms; (5) foreign exchange rate fluctuations,devaluation of a foreign currency, adverse governmental controls or actions,political or economic instability, or disruption of a foreign market,including, without limitation, the imposition, creation, increase ormodification of tariffs, taxes, duties, levies and other charges and otherrelated risks of our international operations, such as the pending tax changein Argentina on certain electronics (including cellular phones) which couldsignificantly increase selling prices to our customers and end-users; (6) theability to attract new sources of profitable business from expansion ofproducts or services or risks associated with entry into new markets, includinggeographies, products and services; (7) an interruption or failure of ourinformation systems or subversion of access or other system controls may resultin a significant loss of business, assets, or competitive information; (8) significantchanges in supplier terms and relationships; (9) termination of a supplyor services agreement with a major supplier or product supply shortages; (10) continuedconsolidation in the wireless handset carrier market; (11) loss of businessfrom one or more significant customers; (12) customer and geographical accountsreceivable concentration risk and other related risks; (13) rapid productimprovement and technological change resulting in inventory obsolescence; (14)terrorist or military actions; (15) the loss of a key executive officer orother key employees; (16) changes in consumer demand for multimedia wirelesshandset products and features; (17) our failure to adequately adapt to industrychanges and to manage potential growth and/or contractions; (18) seasonalbuying patterns; (19) uncertain political and economic conditionsinternationally; (20) the resolution of any litigation for or against us; (21)our ability to successfully introduce and sell our *verykool*®products and the related inventory risk of such products; and (22) our abilityto generate taxable income in future periods in order to utilize and realizeany quarterly tax benefits recorded.  Ouractual results and condition could differ materially from those anticipated inour forward-looking statements.

 

We have institutedin the past and continue to institute changes to our strategies, operations andprocesses to address risks and uncertainties and to mitigate impacts on ourresults of operations and financial condition. However, no assurances can begiven that we will be successful in these efforts. For a further discussion ofsignificant factors to consider concerning InfoSonics, see “Risk Factors” belowin this report and “Item 1A. Risk Factors” of InfoSonics’ Annual Report on Form 10-Kfor the year ended December 31, 2008 and Quarterly Reports on Form 10-Qfiled thereafter. In addition, other risks or uncertainties may be detailedfrom time to time 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 arealso involved in the designing, sourcing and distribution of a proprietary lineof products under our own *verykool®* brand, which includes entry level, mid-tier andhigh-end products.

 

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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 contractwith manufacturers to build these products.

 

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.

 

Managementand employees spend a significant amount of time traveling to Latin America andAsia visiting with key customers, suppliers and employees. We believe thatthese relationships are vital to our success, and we will continue to dedicatea significant amount of time to this area.

 

**IndustryTrends and Risks**

 

According to a June 2009report by Cowen and Company, overall worldwide wireless handset sales increasedby approximately 6% in 2008.  However,according to the Cowen report, they are forecasted to decrease in 2009 by 8%,before returning to growth in 2010 and 2011, with growth estimated at 7% and4%, respectively. A rapid decline in wireless handset sales in the Central andSouth American markets we serve has negatively impacted and could continue tonegatively impact our net sales. Excess supply conditions and the currenteconomic downturn have reduced and may continue to reduce, demand for ourproducts and the market prices of the products we sell.  These reductions affect our ability togenerate net sales, margins and gross profit at expected levels and couldcontinue to affect the value of our inventory, as well as customer paymenttrends. For example, the second half of 2008 and the first quarter of 2009generally saw a decrease in handset demand globally including our salesregions, and an increase in carrier inventory, which both had a negative impacton our financial results during 2008 and during the first nine months of 2009created a more difficult sales environment requiring additional operatingexpenses to help maintain and increase our sales.  We saw these trends begin to ease in thesecond quarter of 2009 in the regions we serve.   Conversely, should manufacturers be unableto respond to an unanticipated increase in demand on a timely basis, we, alongwith others in our industry, could experience supply constraints that wouldaffect 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 continuing through the period ofthis report, in particular, our industry has been impacted by the worldwideeconomic slowdown.  We believe that someof the countries in the regions we operate, particularly in Central America,have close economic relations with the United States, and have been impacted bythis economic situation.  We believe thisimpacted consumer demand for wireless handsets in some of the countries weoperate, and therefore our overall operations, including net sales, during thefirst half of 2009 were adversely impacted. We began to see a small increase in the demand for handsets in the thirdquarter of 2009, which positively impacted our net sales for the quarter.  We have also begun to see a decrease in somesubsidies offered by operators in the region, which increases the handset priceto the consumer, and this is impacting overall handset volumes.  We are also beginning to see more low costmanufacturers gaining traction with entry level products, which is impactingboth our OEM and *verykoolTM* sales in the entrylevel segment.

 

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**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 September 30,2009, continued to show increased orders and sales during the first nine monthsof 2009 and is expected to become an increasing part of our overall business inthe future.

 

Our *verykool®*products continue to increase product diversification in Central and SouthAmerica, which we believe should continue to be beneficial as we move forwardand work towards continued profitability. We have more control over the production and supply of our *verykool**®* line of products than the OEM products wedistribute.  On a quarterly year-over-yearbasis, we were able to increase our gross margins to 6.6% for the quarter endedSeptember 30, 2009, compared to 5.5% for the quarter ended September 30,2008.  These results were primarily dueto product mix shift, including increased sales of higher-margin products(including our *verykool®*products),better product sourcing for our *verykool®*lineof products and beneficial purchasing opportunities.

 

Argentina,a country where we sell a significant amount of ourproducts, purportedly passed a new tariff in November 2009potentially impacting certain imported electronics, includingcellular handsets.   At this time we are unaware of thetiming and any necessary final approval of this tariff. However, from the preliminary information we have obtained, thisnew tariff could impact the pricing at the point of sale inexcess of 30%, and could have an impact on the overall consumer demand andthe sales volume in Argentina. For the year ended December 31, 2008 and thenine months ended September 30, 2009, sales of our products in Argentinarepresented approximately 66% and 87%, respectively of our total netsales.  We are unable to assess whenor if this tariff will be finally implemented, and if implemented, whatspecific impact it could have on our business and prospects in Argentina. However, if implemented, a significant increase in importation tariffs couldhave a material adverse impact on our sales and prospects for our products inArgentina.

 

**Recent Events**

 

Effective October 6,2009, we entered a separation agreement with one of our executives.  Pursuant to the separation agreement, we madea lump sum payment of $75,000 (less withholdings), and in consideration forsuch payment, the executive provided a full release of all claims and theexecutive forfeited 463,500 (vested and unvested) options, with a weightedaverage exercise price of $0.40.

 

**Results of Operations**

** **

***Three months endedSeptember 30, 2009 compared with three months ended September 30,2008***

*** ***

**Net Sales**

 

For the three months ended September 30, 2009,our net sales from continuing operations of $65.3 million increased 23%compared to our net sales from continuing operations of $52.9 million for thesame period last year.  The averageselling price of wireless handsets sold in the three months ended September 30,2009 increased 18%, as compared to the same period last year, due primarily toincreased volume of higher-priced handsets, including some of our *verykool®* and OEM products. This increase was in conjunction with a 10% increase in overall wirelesshandset sales volume.  The geographic mixof net sales shifted slightly in the three months ended September 30, 2009as sales in South America were more than 89% of net sales, as compared to 83%of net sales for the same period last year. Sales in Central America decreased to 11% of total net sales in thethree months ended September 30, 2009 as compared to 17% for the sameperiod last year.  Sales in CentralAmerica increased sequentially to 11% of total net sales in the three monthsended September 30, 2009, as compared to 9% in the prior quarter.  These regional shifts in net sales resultedfrom the factors discussed below.

 
| ** **                                      | ** ** | **For the Three Months  Ended September 30,**       | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2009**                                                      | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** |
| Net sales                                       |       | $                                                             | 65,262     |   | $ | 52,884 |   |
| Units sold, increase (decrease) over prior year |       | 10                                                            | %          | (22 | )% |
| Average selling price, increase over prior year |       | 18                                                            | %          | 2 | % |
|                                                 |            |                                                               |            |  |  |  |  |

 

**Net Salesby Geographic Region**

 

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 for both ourOEM and proprietary *verykool*®products.  In South America, net sales were $58.3million for the 

 

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three months ended September 30, 2009, a 32% increase from thesame period last year.  This increase wasprimarily due to increased sales in existing countries where we sell products,primarily Argentina.  In Central America,net sales decreased 21% to $7.0 million for the three months ended September 30,2009, which was primarily due to the continuing low demand during the quarter,which we believe was related to the worldwide and regional economicdownturn.  Despite the year-over-yeardeclines, we have seen sequential quarterly improvement in Central Americasince the first quarter of 2009.  Thethird quarter of 2009 increased 24% over the second quarter of 2009, and 124%over the first quarter of 2009.

 
| ** **      | ** ** | **For the Three Months  Ended September 30,**       | ** ** | **Increase** | ** ** |
|-----------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **      | ** ** | **2009**                                                      | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Central America |       | $                                                             | 6,975      |         | $          | 8,826 |   | (21 | )% |
| South America   |       | 58,287                                                        |       | 44,058       |       | 32 | % |
| Total           |       | $                                                             | 65,262     |         | $          | 52,884 |   | 23 | % |

 

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

 

For the three months ended September 30, 2009,cost of sales was $60.9 million, or 93.4% of net sales, and gross margin was6.6%, as compared with $50.0 million, or 94.5% of net sales, and gross marginat 5.5% for the same period last year. The increase in our cost of sales andincrease in gross margin were due to product mix shift, including increasedsales of higher-margin products (including our *verykool®*products), better product sourcing for our *verykool®*line of products and beneficialpurchasing opportunities.

 

For the three months ended September 30, 2009,our gross profit increased 49% to $4.3 million from $2.9 million for the sameperiod last year. This increase in gross profit was primarily the result of theincreased net sales and of the factors which increased our gross margin asdescribed above.

 
| ** **    | ** ** | **For the Three months  Ended September 30,**       | ** ** | ** ** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|------------|------------|
| ** **    | ** ** | **2009**                                                      | ** ** | **2008**   | ** ** | **Increase** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** ** | ** ** |
| Net sales     |       | $                                                             | 65,262     |       | $          | 52,884 |   | 23 | % |
| Cost of sales |       | 60,928                                                        |       | 49,982     |       | 22 | % |
| Gross profit  |       | $                                                             | 4,334      |       | $          | 2,902 |   | 49 | % |
| Gross margin  |       | 6.6                                                           | %          | 5.5        | %          | 20 | % |

 

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

 

For the three months ended September 30, 2009,operating expense increased 25%, as compared with the same period lastyear.  As a percentage of net sales,operating expense increased slightly to 6.2% in the three months ended September 30,2009, as compared with 6.1% for the same period last year.  The increase in operating expense was relatedto the opening of a new market in South America and other support required inadditional markets due to the global and regional economic downturn.  However, management took action to reducefixed operational costs to match current market conditions.  Management continues to review expenses in aneffort to better match the operational costs with the future businessopportunities, by shifting expenses from a fixed to a variable component.   We believe such measures will assist us aswe strive to maintain profitability in the current volatile market.

 

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**Operating Expense**

 
| ** **              | ** ** | **For the Three Months  Ended September 30,**            | ** ** | ** ** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|------------|------------|
| ** **              | ** ** | **2009**                                                      | ** ** | **2008**   | ** ** | **Increase** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** ** | ** ** |
| Net sales               |       | $                                                             | 65,262     |       | $          | 52,884 |   | 23 | % |
| Operating expense       |       | $                                                             | 4,023      |       | $          | 3,211 |   | 25 | % |
| Percentage of net sales |       | 6.2                                                           | %          | 6.1        | %          | 2 | % |

 

For the three months endedSeptember 30, 2009, our operating income from continuing operations was$311,000, as compared with operating loss from continuing operations of$309,000 for the same period last year. As a percentage of net sales, operatingincome from continuing operations was 0.5% for the three months ended September30, 2009, compared to a loss of 0.6% for the same period last year. The increasein operating income from continuing operations was a result of the increase ingross margin and gross profit due to the factors discussed above.

 

**Operating Income (Loss) fromContinuing Operations**

 
| ** **                                         | ** ** | **For the Three Months  Ended September 30,**            | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------------|------------|------------|------------|
| ** **                                         | ** ** | **2009**                                                      | ** ** | **2008**   | ** ** | **Increase** | ** ** |
| ** **                                         | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** ** | ** ** |
| Net sales                                          |       | $                                                             | 65,262     |       | $          | 52,884 |   | 23 | % |
| Operating income (loss) from continuing operations |       | $                                                             | 311        |       | $          | (309 | ) | 201 | % |
| Percentage of net sales                            |       | 0.5                                                           | %          | (0.6       | )%         | n/m |   |

 

**OtherIncome (Expense)**

 

For the three monthsended September 30, 2009, we incurred $80,000 of interest expense,compared with $34,000 for the same period last year.  This is primarily due to a higher averageoutstanding balance on our line of credit, resulting from, among other things,increased sales and increased accounts receivable levels as compared to thesame period in the prior year.  We expectto continue to regularly utilize amounts on our revolving line of credit, whichwill impact our interest expense in future periods depending on applicableinterest rates and outstanding balances, among other things.

 

During the three monthsended September 30, 2008, we settled an outstanding claim against a formerservice provider in which we received a gross amount of $655,000, of which$87,000 represented reimbursement for legal fees, and also had a gain of$85,000 related to revenue sharing negotiations and an insurance settlement.

 
| ** **                   | ** ** | **For the Three Months  Ended September 30,** | ** ** | **Increase** | ** ** |
|------------------------------|------------|------------------------------------------------------------------------|------------|--------------|------------|
| ** **                   | ** ** | **2009**                                                               | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| ** **                   | ** ** | **(Dollar amounts in thousands)**                       | ** ** | ** **   | ** ** |
| ** **                   | ** ** | **(unaudited)**                                                        | ** ** | ** **   | ** ** |
| Other Income                 |       | $                                                                      | 7          |         | $          | 653 |   | (99 | )% |
| Interest income (expense)    |       | (80                                                                    | )          | (34          | )          | (135 | )% |
| Total other income (expense) |       | $                                                                      | (73        | )            | $          | 619 |   | (112 | )% |

 

**Income (Loss) from Continuing Operations (beforeprovision for income taxes)**

 

During the three monthsended September 30, 2009, our net income from continuing operations beforeincome taxes was $238,000, as compared to income of $310,000 for the sameperiod last year.  This net income fromcontinuing operations was primarily due to the increased gross margin and grossprofit discussed above.

 

**Loss from Discontinued Operations (net of tax)**

 

Duringthe three months ended June 30, 2008, we assessed opportunities in theUnited States and Mexico, and began to implement actions necessary to closesales operations in both of those countries, which actions, although largelycomplete we continued to execute in the third quarter of 2009.  For thethree months ended September 30, 2009, we incurred a loss fromdiscontinued operations of $47,000, as compared to a loss of $81,000 fromdiscontinued operations for the same period last year.  The loss from discontinued operations resultedas we continued to wind down our business in the United States and Mexico. Asof September 30, 2009, our plans for the discontinued operations weresubstantially complete.  However, weexpect to continue to record adjustments and expenses through the discontinuedoperations, as necessary.  One or more ofthese adjustments could be potentially significant.

 

**Net Income (Loss)**

 

During the three monthsended September 30, 2009, our net income was $185,000, $0.01 per dilutedshare as compared to net income of $101,000, $0.01 per diluted share for thesame period last year.  Our net income resultedprimarily from our increased gross margin and gross profit, which was offset bythe increased operating expenses as discussed above.

 

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***Nine months ended September 30,2009 Compared with nine months ended September 30, 2008***

 

**Net Sales**

 

For the nine months endedSeptember 30, 2009, our net sales from continuing operations of $169.6million decreased 6% compared to our net sales from continuing operations of $179.9million for the same period last year. The average selling price of wireless handsets sold in the nine monthsended September 30, 2009 increased 15%, as compared to the same periodlast year, due primarily to increased volume of higher-priced handsets,including some of our *verykool®* andOEM products.  This increase was offsetby a 14% decrease in overall wireless handset sales volume, primarily due tothe impact of the economic slowdown in the markets we serve during the secondhalf of 2008 and the first six months of 2009. The geographic mix of net sales shifted in the nine months ended September 30,2009 as sales in South America increased to approximately 91% of net sales, ascompared to approximately 76% of net sales for the same period last year.  Sales in Central America decreased toapproximately 9% of total net sales in the nine months ended September 30,2009, as compared to approximately 24% for the same period last year.  These regional shifts in net sales were theresult of the factors discussed both above and below.

 
|                                                        |   | **For the Nine Months  Ended September 30,**        |       |
|-------------------------------------------------------------|--------|---------------------------------------------------------------|------------|
|                                                        |   | **2009**                                                      | ** ** | **2008** |   |
|                                                        |   | **(Dollar amounts in thousands)  (unaudited)** |       |
| Net sales                                                   |   | $                                                             | 169,593    |   | $ | 179,857 |   |
| Units sold, increase (decrease) over prior year             |   | (13                                                           | )%         | 12 | % |
| Average selling price, increase (decrease) over  prior year |   | 15                                                            | %          | (2 | )% |
|                                                             |        |                                                               |            |  |  |  |  |

 

**Net Sales by Geographic Region**

 

In South and CentralAmerica, we have continued to work to expand our customer base as well as ourgeographic presence by seeking additional customers and increased penetrationwith existing customers for both our OEM and proprietary *verykool® *products.  InSouth America, net sales were $153.9 million for the nine months ended September 30,2009, a 13% increase from the same period last year.  This increase was primarily due to increasedsales in existing countries where we sell products, primarily Argentina.  In Central America, net sales decreased 64%to $15.7 million for the nine months ended September 30, 2009, which wasprimarily due to the continuing low demand during the period, which we believewas related to the worldwide and regional economic downturn.  Despite the year-over-year declines we haveseen sequential quarterly improvement in Central America since the firstquarter of 2009.

 
| ** **      | ** ** | **For the Nine Months  Ended September 30,**        | ** ** | **Increase** | ** ** |
|-----------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **      | ** ** | **2009**                                                      | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| ** **      | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Central America |       | $                                                             | 15,713     |         | $          | 43,520 |   | (64 | )% |
| South America   |       | 153,880                                                       |       | 136,337      |       | 13 | % |
| Total           |       | $                                                             | 169,593    |         | $          | 179,857 |   | (6 | )% |

 

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

 

For the nine months endedSeptember 30, 2009, cost of sales was $157.8 million, or 93.1% of netsales, and gross margin was 6.9%, as compared with $170.1 million, or 94.6% ofnet sales, and gross margin of 5.4% for the same period last year. The decreasein our cost of 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.

 

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For the nine months endedSeptember 30, 2009, our gross profit increased 21% to $11.8 million from$9.7 million for the same period last year. This increase in gross profit wasprimarily the result of our increased gross margin as described above.

 
| ** **    | ** ** | **For the Nine Months  Ended September 30,**        | ** ** | **Increase** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **    | ** ** | **2009**                                                      | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| ** **    | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales     |       | $                                                             | 169,593    |         | $          | 179,857 |   | (6 | )% |
| Cost of sales |       | 157,832                                                       |       | 170,141      |       | (7 | )% |
| Gross profit  |       | $                                                             | 11,761     |         | $          | 9,716 |   | 21 | % |
| Gross margin  |       | 6.9                                                           | %          | 5.4          | %          | 28 | % |

 

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

 

For the nine months endedSeptember 30, 2009, operating expense increased 3%, as compared with thesame period last year.  As a percentageof net sales, operating expense increased to 6.2% in the nine months ended September 30,2009, as compared with 5.6% for the same period last year.  The increase in operating expense as apercentage of net sales was primarily due to the decrease in total net sales,as well as increased variable operating expenses related to in-country brandefforts.  However, management took actionto reduce overall fixed operational costs to match current market conditions,by moving some fixed expenses to be variable, including a realignment of salesand marketing expenses.  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 nine months endedSeptember 30, 2009, our operating income from continuing operations was$1.3 million, as compared with operating loss from continuing operations of$412,000 for the same period last year. As a percentage of net sales, operatingincome from continuing operations was 0.8% for the nine months ended September 30,2009, compared to an operating loss from continuing operations of 0.2% for thesame period last year. The increase in operating income from continuingoperations was a result of the increase in gross margin and gross profit aswell as the factors discussed above.

 

**Operating Expense**

 
| ** **              | ** ** | **For the Nine Months  Ended September 30,**             | ** ** | **Increase** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **              | ** ** | **2009**                                                      | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| ** **              | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales               |       | $                                                             | 169,593    |         | $          | 179,857 |   | (6 | )% |
| Operating expense       |       | $                                                             | 10,459     |         | $          | 10,128 |   | 3 | % |
| Percentage of net sales |       | 6.2                                                           | %          | 5.6          | %          | 11 | % |

 

**Operating Income (Loss) fromContinuing Operations**

 
| ** **                                         | ** ** | **For the Nine Months  Ended September 30,**             | ** ** | **Increase** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|
| ** **                                         | ** ** | **2009**                                                      | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| ** **                                         | ** ** | **(Dollar amounts in thousands)  (unaudited)** | ** ** | ** **   | ** ** |
| Net sales                                          |       | $                                                             | 169,593    |         | $          | 179,857 |   | (6 | )% |
| Operating income (loss) from continuing operations |       | $                                                             | 1,302      |         | $          | (412 | ) | 416 | % |
| Percentage of net sales                            |       | 0.8                                                           | %          | (0.2         | )%         | n/m |   |

 

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**OtherIncome (Expense)**

 

During the nine monthsended September 30, 2009, we incurred $217,000 of interest expense,compared to $477,000 for the same period last year, primarily due to a loweraverage outstanding balance on our line of credit, resulting from, among otherthings, lower inventory levels as compared to the same period in the prioryear, offset by increased levels of accounts receivable in the currentperiod.  We expect to continue to regularlyutilize amounts on our revolving line of credit, which will impact our interestexpense in future periods depending on applicable interest rates andoutstanding balances, among other things.

 
| ** **                   | ** ** | **For the Nine Months  Ended September 30,** | ** ** | **Increase** | ** ** |
|------------------------------|------------|--------------------------------------------------------|------------|--------------|------------|
| ** **                   | ** ** | **2009**                                               | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| ** **                   | ** ** | **(Dollar amounts in thousands)**       | ** ** | ** **   | ** ** |
| ** **                   | ** ** | **(unaudited)**                                        | ** ** | ** **   | ** ** |
| Other Income                 |       | $                                                      | 8          |         | $          | 583 |   | (99 | )% |
| Interest expense             |       | (217                                                   | )          | (477         | )          | (55 | )% |
| Total other income (expense) |       | $                                                      | (209       | )            | $          | 106 |   | (297 | )% |

 

**Income (Loss) from Continuing Operations (beforeprovision for income taxes)**

 

During the nine monthsended September 30, 2009, our net income from continuing operations beforeincome taxes was $1.1 million, as compared to a loss of $306,000 for the sameperiod last year.  This net income fromcontinuing operations was primarily due to the increased gross margin and otherfactors as discussed above.

 

**Loss from Discontinued Operations (net of tax)**

 

Duringthe three months ended June 30, 2008, we assessed opportunities in theUnited States and Mexico, and began to implement actions necessary to closesales operations in both of those countries, which actions, although largelycomplete we continued to execute in the first nine months of 2009.  Forthe nine months ended September 30, 2009, we incurred a loss fromdiscontinued operations of approximately $406,000, as compared to a loss of$2.2 million from discontinued operations for the same period last year. The loss from discontinued operations resulted as we continued to wind down ourbusiness in the United States and Mexico. As of September 30, 2009, ourplans for the discontinued operations were substantially complete.  However, we expect to continue to recordadjustments and expenses through the discontinued operations, as necessary.  One or more of these adjustments could bepotentially significant.

 

**Net Income (Loss)**

 

During the nine monthsended September 30, 2009, our net income was $663,000, as compared to aloss of $2.5 million for the same period last year.  Our net income from continuing operations resultedprimarily from our increased gross margin and gross profit discussed above.

 

**FinancialCondition, Liquidity and Capital Resources**

 

We generally use cash from our sale of products, lines ofcredit (bank and vendor) and the sale of securities and exercise of stockoptions (from time to time) to provide the capital needed to support ourbusiness.  As of September 30, 2009,we did not have any material commitments for capital expenditures.  We believe that we have sufficient liquidity(cash and available borrowings) to continue our operations for the next 12months.

 

**Cash Used inOperating Activities**

 

At September 30,2009, we had $14.7 million in cash, a decrease of $10.0 million from December 31,2008, and we had $30.1 million outstanding under our bank line of credit, anincrease of $15.8 million from December 31, 2008.  During the nine months ended September 30, 2009, weused cash 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 significantly increasedlevels of accounts receivable and our taking advantage of beneficial purchasingterms during the nine months ended September 30, 2009.   The net cash used in operating activitieswas $25.2 million for the nine months ended September 30, 2009 compared tonet cash provided from operating activities of $2.4 million for the same periodlast year.  The change resulted primarilyfrom significantly increased accounts receivable and decreased otherreceivables and decreased inventory. Trade accounts receivable increased by $32.1 million and otherreceivables decreased by $3.6 million from December 31, 2008.  The increase in accounts receivable wasprimarily due to the sales activity towards the later part of the period andthe standard payment terms of sales we provide our customers.  The decrease in other receivables was due tothe settlement of our class action and derivative lawsuits, which werepaid by our insurance carrier.  Inventorydecreased by $0.6 million and prepaids increased by $0.3 million from December 31,2008.  Accounts payable at September 30,2009 decreased $0.2 million, compared to December 31, 2008, primarily dueto our taking advantage of beneficial purchasing terms offered by other vendorsand partners in the ordinary course during the period. Accrued expenses at September 30,2009 increased $1.9 million compared to December 31, 2008, primarily theresult of amounts due to partners in South America.

 

**Days of SalesOutstanding**

 

Days of sales outstanding (the average number of days ittakes to collect revenue after a sale is made) at September 30, 2009 was63 days, compared with 56 days at December 31, 2008.  This increase was due to several customersmaking payments shortly after the close of the third quarter of 2009, as morethan 80% of our accounts receivable at September 30, 2009 were stillwithin 

 

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currentterms provided to our customers.  Normalpayment terms require our customers to pay on a net 30-day or net 60-day basisdepending on the customer. We are constantly working with our customers toreduce our days of sales outstanding. The extension of net 60-day terms to somecustomers is necessary to remain competitive in the regions we currentlyoperate. In an effort to obtain new customers and penetrate new markets, we mayoffer terms beyond our normal terms.

 

**Cash Used inInvesting Activities**

 

The net cash used in investing activities was $137,000 forthe nine months ended September 30, 2009, compared to net cash used of$67,000 for the same period last year. This use of cash continued to beprimarily the result of our investment related to geographic expansion andtooling and molds for our proprietary *verykool®*products.

 

**Cash Providedby Financing Activities**

 

The net cash provided by financing activities for the ninemonths ended September 30, 2009 of $15.3 million was primarily the resultof borrowings on our bank line of credit, which was partially offset by the netrepurchase of $483,000 of outstanding common stock.  The net cash used in financing activities forthe nine months ended September 30, 2008 of $12.8 million was primarilyused to make payments on our line of credit, which was partially offset by cashreceived from the exercise of stock options.

 

**WorkingCapital**

 

Our net working capital at September 30, 2009 was$25.9 million, as compared with $25.6 million at December 31, 2008. Thisslight increase was primarily due to the significant increase in accountsreceivable and the increase in 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, we entered into a Loan, Security and Bulk Purchase Agreement and a Letterof Credit and Security Agreement (collectively, the “Agreement”) with WellsFargo Century, Inc. (the Lender), replacing the then existingasset-based secured credit facility withWells Fargo HSBC Trade Bank, N.A.  Pursuantto the Agreement, the Lender may advance up to $45,000,000 to us based on theexpected collections of eligible receivables as well as value of our eligibleinventory determined in accordance with the Agreement.  The outstanding advances may not exceed thelesser of (i) $45,000,000 or (ii) the sum of the value of theeligible receivables and eligible inventory multiplied by their respectiveadvance rates as set forth in the Agreement.  At September 30,2009, the majority of our debt was based on foreign accounts receivable, amajority of which is insured.  This creditfacility has a two-year term ending April 2010 and is secured by all ofour assets. The interest rate for each borrowing under the credit facility is,at our option, either the Wells Fargo Bank N.A. prime rate minus 0.50% (3.25%less 0.50%  at September 30, 2009) or the LIBORrate plus 2.00% (0.298% plus 2.00% at September 30,2009).  At September 30,2009, the amount drawn against the Lender line of credit was $30,066,060 of thetotal amount available at September 30, 2009 of $41,156,101. As of September 30, 2009, we were in compliance with the covenantsof the credit facility.

 

At December 31, 2008, the amount drawn against theLender line of credit was $14.3 million. Credit lines have been an important part of operating and growingour business, and market changes affecting accounts receivable have, and willin the future, diminish or increase the borrowing base of available funds underour current credit line. At September 30, 2009 and December 31, 2008,advances were at 73% and 96% of the available borrowing base.

 

We have no other notes payable.

 

***CriticalAccounting Policies***

*** ***

We believe the followingcritical accounting policies are important to the presentation of our financialcondition and operating results, and require management’s judgments to makeassumptions and estimates about the effects of matters that are inherentlyuncertain.

 

*Revenue Recognition 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. Salesare recorded net of discounts, rebates, cooperative arrangements (marketing,training and promotional funds), returns, and allowances. Consideration isgiven on select sales for cooperative arrangements related to marketdevelopment, training and special promotions, usually agreed upon in advance.The amount given is generally in the form of

 

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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 activityreduce this liability. To the extent that we incur costs in excess of theestablished cooperative fund, we recognize that amount as a selling ormarketing expense. As part of the sales process, we may perform certain valueadded services such as programming, software loading and quality assurancetesting. These value added services are considered an ancillary component ofthe sales process and amounts attributable to these processes are included inthe unit cost to the customer. Furthermore, these value added services arerelated to services prior to the shipment of the products, and no value addedservices are provided after delivery of the products. We recognize a reserveagainst the related receivables estimates for product returns based onhistorical experience and other judgmental factors. We evaluate these estimateson an on-going basis and adjust the estimates each period based on actualproduct return activity. We recognize freight costs billed to our customers inrevenue and actual freight costs incurred as a component of cost of sale.

 

*Allowance forDoubtful Accounts*

* *

We recognize allowancefor doubtful accounts based on the length of time the receivables are past due,the current business environment and our historical experience.  Credit evaluations are undertaken for allmajor sales transactions before shipment is authorized. Normal payment terms requirepayment on a net 30 or 60-day basis depending on the customer. On an ongoingbasis, we analyze the payment history of customer accounts, including recentcustomer purchases. We evaluate aged items in accounts receivable and providereserves for doubtful accounts. Customer creditworthiness and economicconditions may change, including increasing the risk of collectability andsales returns, and may require additional provisions, which could negativelyimpact our operating results.  Such wasthe case during 2008, as we adjusted some of our inventory levels down.

 

*InventoryWrite-Off and Effect on Gross Margin*

* *

We regularly monitorinventory quantities on hand and record a provision for excess and obsoleteinventories based primarily on historical usage rates and our estimatedforecast of product demand for a period of time, generally three months.Because of obsolescence, we will generally provide a full reserve for the costsof our inventories in excess of our relevant demand forecast for the applicableperiod. We attempt to control our inventory levels so that we limit inventoriesin excess of demand for the succeeding several months. However, because we needto place non-cancelable orders with significant lead time and because it isdifficult to estimate product demand, we sometimes build inventories in excessof demand for the applicable future periods. If this occurs, we provide areserve, which may have a negative impact on our reported results of operationsand financial condition.

 

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

 

The primary objective of the following information isto provide forward-looking quantitative and qualitative information about ourpotential exposure to market risks. The term “market risk” for us refers to therisk of loss 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.

 

**Interest Rate Risk**

 

We are exposed to market risk from changes in interestrates on our outstanding revolving line of credit. At September 30, 2009,we had $30,066,060 outstanding under our line of credit, which could beaffected by changes in short-term interest rates. Under our current creditfacility, the interest rate for funds borrowed is, at our option, of the WellsFargo prime rate minus 0.5% (3.25% minus 0.5% at September 30, 2009) orthe LIBOR rate plus 2.00% (0.298% plus 2.00% at September 30, 2009). Forevery 1% increase in Wells Fargo’s prime rate or the LIBOR rate, our interestexpense would increase by $300,660 annually assuming $30,066,060 remained outstandingfor the entire year.

 

The above sensitivity analysis for interest-rate riskexcludes accounts receivable, accounts payable and accrued liabilities becauseof the short-term maturity of such instruments. The analysis does not considerthe effect interest-rate movement may have on other variables relating to ourbusiness, including changes in sales volumes that could be indirectlyattributed to changes in interest rates. The actions that we would take inresponse to such a change are also not considered. If it were possible toquantify this impact, the results could differ from the sensitivity effectsshown above.

 

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**MarketRisk**

 

Almost all portions of our revenue and expenses are transacted inmarkets outside the United States. However, all sales transactions and accounts receivable are denominatedin U.S. dollars. As a result of our international sales (at this time, LatinAmerica), our future operating results could be adversely affected by a varietyof factors, including changes in specific countries’ political, economic orregulatory conditions, and trade protection measures.  Our market risk management includes anaccounts receivable insurance policy for our sales.  However, there can be no assurance that ourinsurance policy will substantially offset the impact of fluctuations incurrency exchange rates, political, economic or regulatory conditions on ourresults of operations and financial position. We do not believe that foreigncurrency fluctuations had a material impact on our financial results during thethree and nine months ended September 30, 2009.   See “ConsolidatedStatements of Comprehensive Operations” in our financial statements included inthis 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 our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of theperiod covered by this quarterly report pursuant to Exchange Act Rule 13a-15(b). Based on the evaluation, the Chief Executive Officer and President and theChief Financial Officer concluded that as of the end of the period covered bythis quarterly report, our disclosure controls and procedures were effective inensuring that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is (i) recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and (ii) accumulated and communicated to our management, includingour principal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.

 

**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 third fiscal quarter ended September 30,2009, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II.OTHER INFORMATION**

 

**Item 1. LegalProceedings**

 

*Securities Class Actions*

 

InfoSonics has settled the securities class actionagainst the Company and certain of its officers and directors, captioned *In Re: InfoSonicsCorporation Securities Litigation*, Lead Case No. 06 CV 1231,filed in the United States District Court for the Southern District ofCalifornia.  Plaintiffs’ third amendedconsolidated complaint had alleged violations of Section 10(b) of theExchange 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.  On October 17, 2008, the parties entereda Stipulation and Agreement of Settlement (the “Securities Settlement”) of thecase, which provides for, among other things, a dismissal with prejudice of thelawsuit, releases of the defendants, and a payment by the Company or its insurerof $3.8 million to plaintiffs (inclusive of any plaintiffs’ attorneys fees, tobe determined by the Court).  TheSecurities Settlement further provides that defendants deny any liability orresponsibility for the claims made and make no admission of any wrongdoing.  On February 10, 2009, the Company’sinsurer funded the full settlement payment. On May 5, 2009, the Court entered an order finally approving theSecurities Settlement as fair and reasonable, and directing the clerk to enterfinal judgment and dismissing the action with prejudice.

 

*Derivative Action*

 

InfoSonics has settled the derivative actionpurportedly on behalf of the Company against certain of its officers anddirectors, and the Company as a nominal defendant, captioned *In Re InfoSonics Corporation Derivative Litigation*,Lead Case No. 06 CV 1336, filed in the United States District Court forthe Southern District of California. Plaintiffs’ consolidated complaint had alleged 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

 

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stock options that the Company granted in December 2005.  On September 4, 2007, the Court granteddefendants’ motion to dismiss for failure to make a demand on the board, andalso granted with prejudice the motion to dismiss the Sarbanes-Oxleyclaim.  On October 17, 2008, theparties entered into a Stipulation and Agreement of Settlement (the “DerivativeSettlement”), which provides for, among other things, a dismissal withprejudice of the lawsuit, releases of the defendants, corporate governancechanges and a payment by the Company or its insurer of plaintiffs’ attorneysfees to be ordered by the Court up to a maximum of $350,000. The DerivativeSettlement further provides that defendants deny any liability orresponsibility for the claims made and make no admission of any wrongdoing. TheCompany’s insurer funded the full settlement payment.  On June 3, 2009, the Court approved thesettlement and entered the final judgment and order of dismissal with prejudiceof the case.

 

*LGElectronics Litigation*

 

On July 1, 2009, theCompany filed suit in the Superior Court of the State of California, County ofSan Diego (the Superior Court) (Case No. 37-2009-00092797-CU-BT-CTL)against LG Electronics, Inc., LG Electronics USA, Inc., LGElectronics Panama S.A., LG Electronics Inc. Chile LTDA, LG ElectronicsGuatemala S.A. de C.V. (collectively LG) and DOES 1-10 (and together with LG,the Defendants).  The complaint allegesclaims for interference with contractual relations/inducing breach of contract,intentional interference with prospective economic relations, negligentinterference with prospective economic relations, breach of contract, breach ofimplied covenant of good faith and fair dealing, unjust enrichment, fraud,promissory estoppel and violation of California Business and Professions Code§§ 17200, et seq.    The Company isseeking in excess of $5 million in damages. On July 31, 2009, the Defendants removed the case to federal courtin San Diego, CA.  The defendants havefiled a motion to dismiss based on jurisdictional grounds.  Such motion is currently pending.

 

We maybecome involved in certain other legal proceedings and claims which arise inthe normal course of business. Other than as described above, as of September 30,2009, 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, you shouldcarefully consider the factors discussed in “Part I. Item 1A. Risk Factors”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 threequarters of 2009, we have recently experienced net losses and net losses mayreoccur in the near future. If we operate at a loss, our business may not befinancially viable.***

 

Although we hadnet income for the first three quarters of 2009, we experienced losses and negative cash flowsfor the year ended 2008.  As of September 30,2009, we had working capital of $25.9 million. Given the economic slowdown and contraction in the wider markets,including the Central and South American markets that we serve and generallyglobally, we cannot adequately evaluate the financial viability of our businessor our long-term prospects.

 

To maintain profitability, we must, among other things:

 

·              Continue to increasegross profits while controlling operational expenses;

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

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

 

If we do not succeed in these objectives, our business, among otherthings, might experience 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 September 30, 2009, we had outstanding debt in the amount of $30.1million under a receivables-based credit facility. Under this creditfacility, which expires in April 2010, Wells Fargo Century, Inc. mayadvance us up to $45,000,000 based on the expected collections of eligiblereceivables as well as the value of our eligible inventory as determined inaccordance with the terms of the facility. Any significant decrease in ourlevel of eligible accounts receivable or inventory will reduce our ability toborrow additional funds under the credit facility and may affect our ability toadequately finance our operations and expansion strategies. Further, if weviolate our loan covenants, default on our obligations or become subject to achange of control, our indebtedness would 

 

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becomeimmediately due and payable. In addition, the terms of our credit facilityrestrict us from incurring certain additional indebtedness, which could limitour ability to expand our operations. Some of our loan covenants subject us to,among other things, limits on our ability to sell certain assets and makecertain payments, including, but not limited to, dividends, repurchases ofcommon stock and other payments outside the normal course of business, as wellas prohibits us regarding merging or consolidating with another corporation orselling all or substantially all of our assets.  As of September 30,2009, the Company was in compliance with the covenants of the credit facility.  If any of these adverse events occur or we areunable to renew our new credit facility or enter into an adequate creditrelationship as needed, our business’ financial condition or operating resultscould 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 period ended September 30, 2009, one vendor, Samsung Electronics deAmazonia, S.A., accounted for 84%, 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 addition,new products from other manufacturers could impact the demand for products frommanufacturers we represent. From time to time, we have been unable to obtainsufficient product supplies. Any failure or delay by our suppliers,particularly our one primary vendor, in supplying us with products on favorableterms may severely diminish our ability to obtain and deliver products to ourcustomers on a timely and competitive basis. If we lose any of our principalsuppliers, or if these suppliers are unable to fulfill our product needs, or ifany principal supplier imposes substantial price increases and alternativesources of supply are not readily available, it would have a material adverseeffect on our results of operations 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  in the threemonths ended September 30, 2009 represented 32%, 28% and 13% of our netsales during that period.  Thesecustomers are carriers in South America. The markets we serve are subject tosignificant price competition. Additionally, our customers are not contractuallyobligated to purchase products from us. For these and other reasons, such ascompetitive pricing and competitive pressures, customers may seek to obtainproducts or services from us at lower prices than we have been able to obtainfrom these customers in the past. This could occur, for example, in the case ofa customer purchasing large quantities of a product from us, who thenterminates this relationship because the customer can obtain a lower price bybuying directly from the manufacturer or other supplier. The loss of any of ourprincipal customers, a reduction in the amount of product or services ourprincipal customers order from us or the inability to maintain current terms,including price, with these or other customers could have an adverse effect onour financial condition, results of operations and liquidity. In addition, wehave experienced losses of certain customer bases through industryconsolidation and in the ordinary course of business.  Overall, there can be no assurance that any ofour customers will continue to purchase products or services from us or thattheir purchases will be at the same or greater levels than in prior periods,with any such customer decisions having the potential to adversely affect ourbusiness 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. United Stateslaws and regulations relating to investment and trade in foreign countriescould also change to our detriment. Any of these factors could have materialadverse effects on our business and operations. Also, although we purchase andsell products and services in U.S. dollars and do not engage in exchange swaps,futures or options contracts or other hedging techniques, fluctuations incurrency exchange rates could reduce demand for products sold in U.S. dollars.We cannot predict the effect that future exchange rate fluctuations will haveon our operating results or financial position. We may in the future engage incurrency hedging transactions, which could result in our incurring significantadditional financial risks, including expenses and losses.

 

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***Arecently passed Argentina tariff may substantially increase the cost at thepoint of sale for certain imported electronics, including the products we sell,and this which could have an adverse impact on our sales in Argentina.***

 

Argentina,a country where we sell a significant amount of ourproducts, purportedly passed a new tariff in November 2009potentially impacting certain imported electronics, includingcellular handsets.   At this time we are unaware of thetiming and any necessary final approval of this tariff. However, from the preliminary information we have obtained, thisnew tariff could impact the pricing at the point of sale inexcess of 30%, and could have an impact on the overall consumerdemand and the sales volume in Argentina.  For the year endedDecember 31, 2008 and the nine months ended September 30, 2009, sales of ourproducts in Argentina represented approximately 66% and 87%, respectively ofour total net sales.  We are unable to assess when or if this tariffwill be finally implemented, and if implemented, what specific impact it couldhave on our business and prospects in Argentina.  However, if implemented,a significant increase in importation tariffs could have a material adverseimpact on our sales and prospects for our products in Argentina.

 

***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.

 

***We may bedelisted from The NASDAQ Stock Market if we do not satisfy continued listing requirements.***

 

Between January 1,2008 and November 12, 2009, our common stock share price fluctuatedbetween $0.10 and $2.51 per share, and on November 12, 2009 it closed at$1.03.  On July 10, 2008, wereceived a letter from the Listing Qualifications Department of The NASDAQStock Market indicating that for the then-last 30 consecutive trading days, thebid price for our common stock had closed below the minimum $1.00 per sharerequirement for continued listing on The Nasdaq Stock Market under Nasdaq MarketplaceRule 4450(a)(5).  However, on July 7,2009, we received a letter from The NASDAQ Stock Market indicating that we hadregained compliance with the $1.00 minimum bid price requirement under Listing Rule 5450(a)(1)(formerlyMarketplace Rule 4450(a)(5)) and the matter noted in the July 10,2008 letter was closed.  If in the futurewe fail to comply with the continued listing standards of The NASDAQ GlobalMarket, including the minimum bid price requirement, our common stock would bedelisted from that market.

 

If we are delisted fromThe NASDAQ Global Market, we may apply to transfer our common stock to TheNASDAQ Capital Market.  However, ourapplication may not be granted if we do not satisfy the applicable listingrequirements for The NASDAQ Capital Market at the time of the application.  Even if we successfully transfer our commonstock to The NASDAQ Capital Market, but are unable to satisfy the minimum bidprice requirement or any of the other continued listing standards of The NASDAQCapital Market, our common stock would be delisted from The NASDAQ CapitalMarket.

 

***If our commonstock were delisted from The NASDAQ Stock Market, you may find it difficult todispose of your shares and our share price may be adversely affected.***

 

If our common stock wereto be delisted from The NASDAQ Global Market and we could not satisfy thelisting standards of The NASDAQ Capital Market, trading of our common stockmost likely would be conducted in the over-the-counter market on an electronicbulletin board established for unlisted securities such as the Pink Sheets orthe OTC Bulletin Board.  Such tradingwould reduce the market liquidity of our common stock.  As a result, an investor would find it moredifficult to dispose of, or obtain accurate quotations for the price of, ourcommon stock, thereby negatively impacting the share price of our common stock.

 

If our common stock isdelisted from The NASDAQ Global Market and we could not satisfy the listingstandards of The NASDAQ Capital Market and the trading price remains below$5.00 per share, trading in our common stock might also become subject to therequirements of certain rules promulgated under the Securities ExchangeAct of 1934, which require additional disclosure by broker-dealers inconnection with any trade involving a stock defined as a “penny stock”(generally, any equity security not listed on a national securities exchange orquoted on The NASDAQ Stock Market that has a market price of less than $5.00per share, subject to certain exceptions). Many brokerage firms are reluctantto recommend low-priced stocks to their clients. Moreover, various regulationsand policies restrict the ability of shareholders to borrow against or “margin”low-priced stocks, and declines in the 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 current price of the common stockcan result in an individual shareholder paying transaction costs that representa higher 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, which could severely limit the marketliquidity of the stock and the ability of investors to trade our common stock,thereby negatively impacting the share price of our common stock.

 

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

 

None.

 

**Item 3.    Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.    Other Information**

 

None.

 

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

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                          |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Agreement and General  Release of Claims, dated October 6, 2009, by and among Abraham Rosler,  the Abraham Rosler Family Trust and InfoSonics Corporation (1). |
| 31.1                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer (+).                                                                                   |
| 31.2                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer (+).                                                                                   |
| 32.1                |       | Section 1350  Certification of Chief Executive Officer (+).                                                                                                    |
| 32.2                |       | Section 1350  Certification of Chief Financial Officer (+).                                                                                                    |

 

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(1)   Incorporated by reference to Exhibit 10.1to the Company’s Current Report on Form 8-K (File No. 001-32217),filed on October 8, 2009.

(+)   Filed herewith.

 

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**SIGNATURES**

 

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

 
| ** ** | ** **             | ** ** | **InfoSonics Corporation** |
|------------|------------------------|------------|----------------------------|
|       |                   |       |                       |   |
|       |                   |       |                       |   |
| Date:      | November 16, 2009 |       | By:                        | /s/  Joseph Ram |
|       |                   |       |                       | Joseph Ram |
|       |                   |       |                       | Chief Executive Officer and President |
|       |                   |       |                       |   |
|       |                   |       |                       |   |
| Date:      | November 16, 2009 |       | By:                        | /s/  Jeffrey Klausner |
|       |                   |       |                       | Jeffrey Klausner |
|       |                   |       |                       | Chief Financial Officer |

 

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