SAN DIEGO, November 11, 2010 – InfoSonics Corporation (NASDAQ: IFON), a provider of wireless handset solutions serving Latin America and Asia Pacific, today announced results for its third quarter ended September 30, 2010.
Commenting further on the results and strategy, Mr. Ram noted, “Our change in strategy will result in a change in our business model. The distribution business is characterized by very thin gross profit margins, exposure to inventory carrying costs and obsolescence, high levels of sales and marketing expenses and post sales service and support. By the end of 2011, we expect that a minority of our business will come from distribution revenues with the remainder being derived from the development, manufacture and sale of our own proprietary line of wireless handsets. In addition, we believe a substantial portion of our future revenues will come from sales to OEM customers in Asia Pacific. As a consequence, we expect that our gross profit margins will improve and operating expenses will decline as a percent of sales. Although we will now incur research and development expenses, the reduction in other SG&A spending should more than offset our internal development costs. Additionally, much of our production will be scheduled on a build-to-order basis, which should result in lower inventory levels and exposure. This quarter we incurred a number of expenses linked to this business transition which we believe will not be recurring. We have also taken additional steps to de-leverage costs related to our distribution business and better align our cost structure to our new business model. Our goal is to restore InfoSonics to profitability in the coming year.”
InfoSonics reported net sales for the third quarter of 2010 of $8.2 million, compared to $65.3 million for the third quarter of 2009 and $22.4 million on a sequential basis for the second quarter of 2010. The decrease in net sales in both periods was due principally to continued reductions in Argentina distribution sales caused by the recently enacted import tariff, which can increase the price of imported handsets by up to 30 percent. Gross margin in the third quarter of 2010 was 6.6 percent, which was the same percentage in the third quarter of 2009 and 7.0 percent in the second quarter of 2010. Included in cost of sales for the third quarter of 2010 was a $306,000 charge to write down certain inventories to estimated market values. Without this charge, the gross profit margin for the quarter would have been 10.4 percent, reflecting a higher percentage of sales derived from the company’s verykool product line.
Operating expenses in the third quarter of 2010 were $2.5 million, compared to $4.0 million in the third quarter of 2009 and $2.4 million in the second quarter of 2010. The third quarter of 2010 includes $406,000 in research and development expenses related to the company’s new China development subsidiary, which was established during the second quarter of 2010. The decrease in expenses in the third quarter of 2010 compared to the same quarter last year related mostly to reductions in variable expenses linked to the decline in sales, offset partially by the new R&D expenses. The slight increase in expenses compared to the second quarter of 2010 reflects a full quarter of spending for our development team and the same level of SG&A spending. However, SG&A expenses in the third quarter of 2010 included over $200,000 of customer incentives which are not expected to be recurring and approximately $100,000 of expenses for bad debts and severance benefits from a reduction in force during the quarter.
The company ended the third quarter of 2010 with $17.2 million in cash and cash equivalents, representing a 38-percent increase over $12.5 million at the end of the previous quarter. The company has no outstanding indebtedness, and stockholders’ equity at September 30, 2010 amounted to $22.1 million, equivalent to $1.56 per common share outstanding.
About Infosonics Corporation
InfoSonics is a provider of wireless handsets and related products to carriers and distributors in Latin America and Asia Pacific. The Company distributes products supplied by OEMs and also designs, develops, manufactures, markets, sells and provides after-sales support for its own proprietary line of products under the verykool® and other private label brands. Additional information can be found on our corporate website at www.infosonics.com and at www.verykool.net.
Except for the factual statements made herein, the information contained in this news release consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks, uncertainties and assumptions that are difficult to predict. Words and expressions reflecting optimism, satisfaction or disappointment with current prospects, as well as words such as “believes,” “hopes,” “intends,” “estimates,” “expects,” “projects,” “plans,” “anticipates” and variations thereof, or the use of future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Such forward-looking statements are not guarantees of performance and our actual results could differ materially from those contained in such statements. Factors that could cause or contribute to such differences include, without limitation: (1) intense competition internationally, including competition from alternative business models, such as manufacturer-to-carrier sales, which may lead to reduced prices, lower sales, lower gross margins, extended payment terms with customers, increased capital investment and interest costs, bad debt risks and product supply shortages; (2) dependency on sales in Argentina which have been and will continue to be significantly reduced or eliminated as a result of the recently adopted import tariff in that country; (3) the ability of the Company’s new China R&D group to develop new verykool® handsets and successfully introduce them into new emerging markets; (4) extended general economic downturn in world markets; (5) inability to secure adequate supply of competitive products on a timely basis and on commercially reasonable terms; (6) 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 or modification of tariffs, taxes, duties, levies and other charges and other related risks of our international operations, such as the recently adopted tax/duty change in Argentina on certain electronics (including cellular phones), which could significantly increase selling prices to our customers and end-users; (7) the ability to attract new sources of profitable business from expansion of products or services or risks associated with entry into new markets, including geographies, products and services; (8) an interruption or failure of our information systems or subversion of access or other system controls may result in a significant loss of business, assets or competitive information; (9) significant changes in supplier terms and relationships or shortages in product supply; (10) continued consolidation in the wireless handset carrier market; (11) loss of business from one or more significant customers; (12) customer and geographical accounts receivable concentration risk and other related risks; (13) rapid product improvement and technological change resulting in inventory obsolescence; (14) uncertain political and economic conditions internationally, including terrorist or military actions; (15) the loss of a key executive officer or other key employees and the integration of new employees; (16) changes in consumer demand for multimedia wireless handset products and features; (17) our failure to adequately adapt to industry changes and to manage potential growth and/or contractions; (18) seasonal buying patterns; (19) the resolution of any litigation for or against the Company; (20) the recent loss of the Company’s bank line of credit and the ability of the company to have access to adequate capital to fund its operations; and (21) the ability of the Company to generate taxable income in future periods. Reference is also made to other factors detailed from time to time in our periodic reports filed with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this release and we undertake no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after the date of this release.
Vernon A. LoForti
Chief Financial Officer