Form 10-K for INFOSONICS CORP
14-Mar-2014
Annual Report
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Our management's discussion and analysis of financial condition and results of operations should be read in conjunction with our accompanying Consolidated Audited Financial Statements and related notes, as well as the "Risk Factors" and other information contained in this annual report. The discussion is based upon, among other things, our Consolidated Audited Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to, among other things, make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent liabilities at the financial statement dates and the reported amounts of revenues and expenses during the reporting periods. We review our estimates and assumptions on an ongoing basis. Our estimates are based on our historical
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experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations, although they could. Our critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined below in "Critical Accounting Policies." All references to results of operations in this discussion are references to results of continuing operations, unless otherwise noted.
Overview and Recent Developments
We are a provider of wireless handsets (which may be referred to herein as "phones", "cell phones", "mobile phones", "feature phones" and "smartphones") and accessories to carriers, distributors and OEMs in Latin America, Asia Pacific, Europe, Africa and the United States. We design, develop, source and sell our proprietary line of products under the verykool? brand and on a private label basis to certain customers (collectively referred to as verykool? products). verykool? products include entry-level, mid-tier and high-end feature phones and Android-based smartphones. We first introduced the verykool? brand in 2006, and have been working to gain brand identity and grow sales. We have recently transformed our company from our prior business model as a distributor of phones designed, developed and manufactured by others, to our current business model of designing, manufacturing, sourcing and selling our own verykool? products.
Over the past five years, our business has had two primary components:
(1) legacy distribution of wireless handsets supplied by major manufacturers, primarily Samsung, and (2) provision of our own proprietary verykool? products that we originally sourced from independent design houses and original design manufacturers ("ODMs"). In 2009, more than 95% of our net sales of approximately $231 million were derived from distribution sales of Samsung products to carriers in Argentina. In late 2009, however, a stiff import tariff on certain electronic devices, including wireless handsets, was enacted in Argentina. The tariff had a significant negative impact on our sales beginning in the first quarter of 2010, and ultimately resulted in a complete shut-down of our distribution business of third party branded products which ended with the termination on March 31, 2012 of our distribution agreement with Samsung. Since April 1, 2012, our business has and will continue to be centered on our verykool? product line.
The majority of our phones are sourced from independent design houses and ODMs. In addition, a number of phones in our product portfolio are developed internally by our in-house design team in Shenzhen, China, which currently consists of 23 employees. We contract with electronic manufacturing services ("EMS") providers to manufacture all of our branded products.
Historically, our traditional market focus has been Latin America. During 2013 we did a small amount of business with customers in the United States and sought to expand our presence in the U.S. market. In December 2013 we signed a distribution agreement with Ingram Micro Mobility which we anticipate will provide us the opportunity in 2014 to access Ingram's vast U.S. distribution network to carriers, retail and on-line customer channels.
Areas of Management Focus and Performance Indicators
We focus on the needs of our customers, developing and sourcing new and innovative products, fostering close relationships with manufacturers, and expanding our business in our current markets and entering into new geographic markets, all while maintaining close attention to operational efficiencies and costs. We are particularly focused on increasing sales volumes of higher margin proprietary products in a cost effective manner to enable us to return to profitability, as well as monitoring and managing levels of accounts receivable and inventory to minimize risk. Performance indicators that are important for the monitoring and management of our business include top line sales growth, cost of sales and gross margin percentage, operating expenses in absolute dollars and as a percent of revenues and operating and net income (loss). We rely upon our in-house software
