| INFOSONICS CORP Item 1A Risk Factors Risks Relating to Our Business Our operating results may vary significantly, which may cause our stock price to fluctuate |
| Our operating results are influenced by a number of factors, which may cause our revenue and operating results to fluctuate greatly |
| These factors include: · product availability and pricing; · the addition or loss of supplier or customer relationships; · the timing of introduction of new products by our suppliers and competitors; · purchasing patterns of customers in different markets; · general economic conditions; and · promotions and subsidies by carriers We buy a significant amount of our products from a limited number of suppliers, who may not provide us with competitive products at reasonable prices when we need them in the future |
| We purchase wireless handsets and accessories principally from wireless communications equipment manufacturers and distributors |
| We depend on these suppliers to provide us with adequate inventories of currently popular brand name products on a timely basis and on favorable pricing and other terms |
| We currently have one exclusive and several non-exclusive agreements with our principal suppliers, which can be terminated on short notice and provide for certain territorial restrictions |
| Our suppliers may not offer us competitive products on favorable terms or with timely delivery |
| In addition new products from other manufacturers could impact the demand for products from manufacturers we represent |
| From time to time, we have been unable to obtain sufficient product supplies |
| Any failure or delay by our suppliers, particularly our three primary vendors, in supplying us with products on favorable terms may severely diminish our ability to obtain and deliver products to our customers on a timely and competitive basis |
| If we lose any of our principal suppliers, or if these suppliers are unable to fulfill our product needs, or if any principal supplier imposes substantial price increases and alternative sources of supply are not readily available, it would have a material adverse effect on our results of operations |
| 10 ______________________________________________________________________ Our continuing liabilities on leases from our former mall-based retail kiosk locations could have a negative impact on earnings and cash flow |
| Although we have assigned our five remaining retail leases to a third party and we have received indemnification from the third party, we remain liable to the lessor for the respective remaining lease terms of one or two years, if the third party does not fulfill its obligations under the leases |
| As of December 31, 2005 the total potential liability under these leases was dlra1cmam095cmam405 exclusive of a dlra95cmam044 escrow deposit held for our benefit to the extent that the third party should default on any of the assigned leases |
| This escrow is not reflected on our financial statements |
| This lease liability is included in the footnotes to our consolidated financial statements |
| The loss or reduction in orders from principal customers or a reduction in prices we are able to charge these customers will have a negative impact upon our revenues and could cause our stock price to decline |
| Our four largest customers in fiscal 2005 represented 17prca, 15prca, 13prca and 13prca of our net sales |
| The markets we serve are subject to severe price competition |
| Additionally, our customers are not contractually obligated to purchase product from us |
| For these and other reasons such as competitive pricing and competitive pressures, customers may seek to obtain products or services from us at lower prices than we have been able to obtain from these customers in the past |
| This could occur, for example, in the case of a customer purchasing large quantities of a product from us, who then terminates this relationship because the customer can obtain a lower price by buying directly from the manufacturer |
| The loss of any of our principal customers, a reduction in the amount of product or services our principal customers order from us or the inability to maintain current terms, including price, with these or other customers could have an adverse effect on our financial condition, results of operations and liquidity |
| We have experienced losses of certain customers through industry consolidation and ordinary course of business and there can be no assurance that any of our customers will continue to purchase products or services from us or that their purchases will be at the same or greater levels than in prior periods |
| Our future profitability depends on our ability to maintain existing margins and our ability to increase our sales, which we may not be able to do |
| The gross margins that we realize on sales of wireless handsets could be reduced due to increased competition or a growing industry emphasis on cost containment |
| Therefore, our future profitability will depend on our ability to maintain our margins or to increase our sales to help offset potential future declines in margins |
| We may not be able to maintain existing margins for products or services offered by us or increase our sales |
| Our ability to generate sales is based upon demand for wireless telecommunications products and our having an adequate supply of these products |
| Even if our sales rates do increase, the gross margins that we receive from our sales may not be sufficient to make our future operations profitable or as profitable |
| Our business depends on the continued tendency of wireless equipment manufacturers and carriers to outsource aspects of their business to us |
| Our business depends in large part on wireless equipment manufacturers and carriers outsourcing some of their business functions to us |
| We provide functions such as product approval and testing, inventory management, product fulfillment, preparation of product kits, and customized packaging, light assembly and end-user support services |
| Certain wireless equipment manufacturers and carriers have elected, and others may elect, to undertake these services internally |
| Additionally, our customer service levels, industry consolidation, competition, deregulation, technological changes or other factors could reduce the degree to which members of the wireless telecommunications industry rely on outsourced services such as the services we provide |
| Any significant change in the market for these services could have 11 ______________________________________________________________________ a material adverse effect on our current and planned business |
| We may not be able to effectively compete in our industry if consolidation of carriers continues |
| The past several years have witnessed a consolidation within the carrier community |
| If this trend continues, it could result in a reduction or elimination of promotional activities by the remaining carriers as they seek to reduce their expenditures which could, in turn, result in decreased demand for our products or services |
| Moreover, consolidation of carriers reduces the number of potential contracts available to us |
| We could also lose business if carriers, which currently are our customers, are acquired by other carriers which are not our customers |
| Wireless operators may also change their policy regarding sales to their agents by independent distributors, such as requiring those agents to purchase products from the carrier or manufacturer, rather than from distributors such as us |
| This type of requirement could have a material adverse effect on our business and results of operations |
| Our sales and inventory risk may be materially affected by fluctuations in regional demand patterns and economic factors for which we cannot plan |
| The demand for our products and services has fluctuated and may continue to vary substantially within the regions served by us |
| We believe the roll-out of third generation, or 3G, cellular telephone systems and other new technologies, which have been delayed and could further be delayed, have had and will continue to have an effect on overall subscriber growth and handset replacement demand |
| Economic slow-downs in regions served by us or changes in promotional programs offered by carriers may lower consumer demand for our products and create higher levels of inventories which could decrease our gross and operating margins |
| We could face a substantial inventory risk due to depreciation and equipment price erosion if our products are not sold in a timely manner |
| We may not be able to adequately respond to rapid technological changes in the wireless telecommunications industry, which could cause us to lose customers |
| The technology relating to wireless telecommunications equipment changes rapidly resulting in product obsolescence or short product life cycles |
| We are required to anticipate future technological changes in our industry and to continually identify, obtain and market new products in order to satisfy evolving industry and customer requirements |
| While our top three vendors have historically kept their products competitive in terms of technological changes, there is no guarantee they will continue to do so, which could materially effect our business |
| Competitors or manufacturers of wireless equipment may market products which have perceived or actual advantages over products that we handle or which otherwise render those products obsolete or less marketable |
| We have made and continue to make significant capital investments in accordance with evolving industry and customer requirements including maintaining levels of inventories of currently popular products that we believe are necessary based on current market conditions |
| This utilization of capital for inventory buildup of this nature increases our risk of loss due to product obsolescence |
| Furthermore, if we do not adequately anticipate future technological changes, we may not have established adequate relationships with suppliers |
| Substantial defaults by our customers on accounts receivables could have a significant negative impact on our cash flow and financial condition |
| We currently offer and intend to offer open account terms to certain of our customers, both large and small, which may subject us to credit risks, particularly to the extent that our receivables represent sales to a limited number of customers or are concentrated in particular geographic markets |
| Although we have an accounts receivable insurance policy, this policy carries a substantial deductible and may not cover us in all instances |
| We also have an accounts receivable-based credit facility in order to reduce our working capital requirements |
| The extent of our ability to use our accounts receivable-based credit facility is dependent on the amount of and collection cycle of our accounts receivable |
| Adverse changes in our ability to use 12 ______________________________________________________________________ accounts receivable financing could have a material adverse effect on our financial position, cash flows and results of operations |
| We rely on our suppliers to provide favorable terms, including payment terms, in order for us to make appropriate product purchases, and without such terms, our ability to procure products could be reduced |
| Our business is dependent on our ability to obtain adequate supplies of currently popular products on favorable pricing and other terms |
| Our ability to fund our product purchases is dependent on our principal suppliers providing favorable payment terms that allow us to maximize the efficiency of our capital usage |
| The payment terms we receive from our suppliers are dependent on several factors, including, but not limited to, our payment history with the supplier, the suppliers’ credit granting policies, contractual provisions, our overall credit rating as determined by various credit rating agencies, industry conditions, our recent operating results, financial position and cash flows and each supplier’s ability to obtain credit insurance on amounts that we owe them |
| Adverse changes in any of these factors, certain of which may not be wholly in our control, could have a material adverse effect on our operations |
| Approximately 70prca of our revenues during the fiscal year ended December 31, 2005 were generated outside of the United States in countries that may have volatile currencies or other risks |
| We engage in significant sales activities in territories and countries outside of the United States, particularly Latin American countries, including Argentina in 2005 |
| The fact that we distribute products into a number of countries exposes us to increased credit risks, customs duties, import quotas and other trade restrictions, potentially greater and more unpredictable inflationary pressures, and shipping delays |
| Changes may occur in social, political, regulatory and economic conditions or in laws and policies governing foreign trade and investment in the territories and countries where we currently distribute products |
| United States laws and regulations relating to investment and trade in foreign countries could also change to our detriment |
| Any of these factors could have a material adverse effect on our business and operations |
| Although we purchase and sell products and services in United States dollars and do not engage in exchange swaps, futures or options contracts or other hedging techniques, fluctuations in currency exchange rates could reduce demand for products sold in United States dollars |
| We cannot predict the effect that future exchange rate fluctuations will have on our operating results |
| We may in the future engage in currency hedging transactions, which could result in our incurring significant additional losses |
| We rely on our information technology system to function efficiently, without interruptions, and if it does not, customer relationships could be harmed |
| We have focused on the application of our information technology system to provide customized services to wireless communications equipment manufacturers and carriers |
| Our ability to meet our customers’ technical and performance requirements is highly dependent on the effective functioning of our information technology systems, which may experience interruptions, including aspects provided by third-party providers |
| These business interruptions could cause us to fall below acceptable performance levels pursuant to our customers’ requirements and could result in the loss of the related business relationship |
| Some of our information technology systems are managed and operated by third party providers |
| All information technology systems, both internal and external, are potentially vulnerable to damage or interruption from a variety of sources, including, without limitation, computer viruses, security breaches, energy blackouts, natural disasters, terrorism, war and telecommunication failures and third-party provider failures |
| We have implemented various measures to manage our risks related to system and network disruptions, but a systems failure or security breach could negatively impact our operations and financial results |
| 13 ______________________________________________________________________ We have outstanding indebtedness, which is secured by substantially all our assets and which could prevent us from borrowing additional funds, if needed |
| We had outstanding debt in the amount of approximately dlra10dtta0 million and dlra2dtta6 million at December 31, 2005 and December 31, 2004, respectively, in the form of a bank line of credit of up to dlra25 million at December 31, 2005, the borrowing base of which is based on a percentage of eligible accounts receivable |
| If we violate our loan covenants, default on our obligations or become subject to a change of control, our indebtedness would become immediately due and payable |
| Any significant decrease in our level of eligible accounts receivable will reduce our ability to borrow additional funds to adequately finance our operations and expansion strategies |
| The terms of our credit facility could substantially prohibit us from incurring additional indebtedness, which could limit our ability to expand our operations |
| We are also subject to negative covenants that, among other things, limit our ability to sell certain assets and make certain payments, including but not limited to, dividends, repurchases of common stock and other payments outside the normal course of business, as well as prohibiting us from merging or consolidating with another corporation or selling all or substantially all of our assets |
| We depend on third parties to manufacture products that we distribute and, accordingly, rely on their quality control procedures |
| Product manufacturers typically provide limited warranties directly to the end consumer or to us, which we generally pass through to our customers |
| If a product we distribute for a manufacturer has quality or performance problems, our ability to provide adequate products to our customers could be disrupted and our reputation could be negatively affected, thereby adversely impacting our business |
| The wireless telecommunications industry is intensely competitive and we may not be able to continue to compete against well established competitors with greater financial and other resources |
| We compete for sales of wireless telecommunications equipment and accessories, and expect that we will continue to compete, with numerous well-established carriers, distributors and manufacturers, including our own suppliers |
| Many of our competitors possess greater financial and other resources than we do and may market similar products or services directly to our customers |
| Distribution of wireless telecommunications equipment and accessories has generally had low barriers to entry |
| As a result, additional competitors may choose to enter our industry in the future |
| The markets for wireless handsets and accessories are characterized by intense price competition and significant price erosion over the life of a product |
| Many of our competitors have the financial resources to withstand substantial price competition and to implement extensive advertising and promotional programs, both generally and in response to efforts by additional competitors to enter into new markets or introduce new products |
| Our ability to continue to compete successfully will depend largely on our ability to maintain our current industry relationships, both manufacturers and carrier customers |
| We may not be successful in anticipating and responding to competitive factors affecting our industry, including new or changing outsourcing requirements, the entry of additional well-capitalized competitors, new products which may be introduced, changes in consumer preferences, demographic trends, international, national, regional and local economic conditions and competitors’ discount pricing and promotion strategies |
| As wireless telecommunications markets mature and as we seek to enter into new markets in the Latin American region and offer new products in the future, the competition that we face may change and grow more intense |
| Our continued growth depends on retaining our current key employees and attracting additional qualified personnel, and we may not be able to continue to do so |
| Our success depends in large part on the abilities and continued service of our executive officers and other key employees, particularly Joseph Ram, our Chief Executive Officer |
| Although we have entered 14 ______________________________________________________________________ into employment agreements with several of our officers and employees, including Mr |
| Ram, we may not be able to retain their services under applicable law |
| The loss of executive officers or other key personnel could have a material adverse effect on us |
| In addition, in order to support our continued growth, we will be required to effectively recruit, develop and retain additional qualified management |
| If we are unable to attract and retain additional necessary personnel, it could delay or hinder our plans for growth |
| We rely on trade secret laws and agreements with our key employees and other third parties to protect our proprietary rights, and there is no assurance that these laws or agreements adequately protect our rights |
| We rely on trade secret laws to protect our proprietary knowledge, particularly our database of customers and suppliers and business terms such as pricing |
| In general, we also have non-disclosure agreements with our key employees and limit access to and distribution of our trade secrets and other proprietary information |
| These measures may prove difficult to enforce and may not prove adequate to prevent misappropriation of our proprietary information |
| We may become subject to suits alleging medical risks associated with our wireless handsets, and the cost of these suits could be substantial, and divert funds from our business |
| Lawsuits or claims have been filed or made against manufacturers of wireless handsets over the past years alleging possible medical risks, including brain cancer, associated with the electromagnetic fields emitted by wireless communications handsets |
| There has been only limited relevant research in this area, and this research has not been conclusive as to what effects, if any, exposure to electromagnetic fields emitted by wireless handsets has on human cells |
| Substantially all of our revenues are derived, either directly or indirectly, from sales of wireless handsets |
| We may become subject to lawsuits filed by plaintiffs alleging various health risks from our products |
| Even an unsubstantiated perception that health risks exist could adversely affect our ability or the ability of our customers to market wireless handsets |
| Risks Related To Our Common Stock Stockholders may be diluted as a result of future offerings or other financings |
| We may need to raise additional capital through one or more future public offerings, private placements or other financings involving our securities |
| As a result of these financings, ownership interests in our company may be greatly diluted |
| See our discussion of our recent sale of common stock and warrants described in Item 1—Company Business—Recent Developments Subsequent to Fiscal Year End in this Form 10-K Our common stock, and our stock price could be volatile and could decline, resulting in a substantial loss on your investment |
| Prior to our initial public offering in June 2004, there was not a public market for our common stock |
| An active trading market for our common stock may not be sustained, which could affect the ability of our stockholders to sell their shares and could depress the market price of their shares |
| The stock market in general and the market for telecommunications-related stocks in particular, has been highly volatile |
| As a result, the market price of our common stock is likely to be volatile, and investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects |
| The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section |
| In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price |
| This type of litigation against us could result in substantial costs and divert our management’s attention and resources |
| 15 ______________________________________________________________________ Shares of common stock that are issuable pursuant to our stock option plans and our outstanding warrants, when issued, could result in dilution to existing stockholders and could cause the market price of our common stock to fall |
| We have reserved shares of common stock that may be issuable pursuant to our stock option plans and to our outstanding options and warrants outside those plans |
| These securities, when issued and outstanding, may reduce earnings per share under accounting principles generally accepted in the United States of America and, to the extent that they are exercised and shares of common stock are issued, dilute percentage ownership to existing stockholders which could have an adverse effect on the market price of our common stock |
| The ability of our stockholders to control our policies or effect a change in control of our company is limited, which may not be in our stockholders’ best interests |
| Some provisions of our charter and bylaws and the General Corporation Law of Maryland, where we are incorporated, may delay or prevent a change in control of our company or other transactions that could provide our common stockholders with a premium over the then-prevailing market price of our common stock or that might otherwise be in the best interests of our stockholders |
| These include the ability of our Board of Directors to authorize the issuance of preferred stock without stockholder approval, which preferred stock may have voting provisions that could delay or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interests of our stockholders |
| Maryland law imposes restrictions on some business combinations and requires compliance with statutory procedures before some mergers and acquisitions can occur |
| These provisions of Maryland law may have the effect of discouraging offers to acquire us even if the acquisition would be advantageous to our stockholders |
| Our largest stockholder may have strategic interests that differ from those of our other stockholders, and he may be able to significantly influence important corporate matters |
| As of March 29, 2006, Joseph Ram, our Chief Executive Officer beneficially owned approximately 37dtta6prca of our outstanding common stock |
| Ram may be able to significantly influence corporate actions relating to: · control the composition of our board of directors; · control our management and policies; · determine the outcome of significant corporate transactions, including changes in control that may be beneficial to stockholders; and · act in their mutual interests, which may conflict with, or be different from, the interests of other stockholders |
| Available Information Our website at www |
| com provides a link to the Securities and Exchange Commission’s website where our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K (including exhibits and supplementary schedules) and amendments to those reports, filed with or furnished to the SEC under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, can be accessed free of charge |
| Further, copies of these reports are located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 |
| Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330 |
| The SEC maintains a website that contains reports, proxy and information statements, and other information regarding our filings, at www |