Accompanying notes are an integral part of these condensed consolidated financial statements.
Accompanying notes are an integral part of these condensed consolidated financial statements.
Accompanying notes are an integral part of these condensed consolidated financial statements.
Accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed
Consolidated Financial Statements
June 30, 2019
(unaudited)
NOTE 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and these condensed notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results are likely to differ from those estimates, but management does not believe such differences will materially affect the financial position or results of operations of Cool Holdings, Inc., formerly known as InfoSonics Corporation (the “Company”), although they may. These unaudited consolidated financial statements and condensed notes should be read in conjunction with the financial statements and notes as of and for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K for such year.
On March 12, 2018, pursuant to
an Agreement and Plan of Merger (as amended “Merger Agreement”) by and among the Company, Cooltech Holding Corp. (“Cooltech”), and the Company’s wholly-owned subsidiary, InfoSonics Acquisition Sub, Inc. (“Merger Sub”), Cooltech merged with and into Merger Sub (the “Merger”), with Cooltech surviving as a wholly-owned subsidiary of the Company. As discussed in Note 18, because of the change of control that resulted from the Merger, it was treated as a reverse merger with Cooltech deemed to be acquiring InfoSonics for accounting purposes. Therefore, the Company’s historical financial statements prior to the Merger reflect those of Cooltech.
During the fourth quarter of 2018, the Company completed the closure of the verykool business segment that had been the legacy business of InfoSonics prior to the Merger. The historical results of the verykool segment are reported as discontinued operations in the unaudited financial statements for all periods from the merger through June 30, 2019.
The Company’s consolidated financial statements include assets, liabilities and operating results of its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, these unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to fairly present the Company’s financial condition as of June 30, 2019, and the results of operations, financial position and cash flows for all periods presented. The results reported in these consolidated financial statements for the three and six months ended June 30, 2019 are not necessarily indicative of the operating results, financial condition or cash flows that may be expected for the full fiscal year of 2019 or for any future period.
At June 30, 2019, six of the Company’s sixteen OneClick retail stores were located in Argentina. The inflation rate in Argentina increased dramatically in the latter part of 2017 and the first quarter of 2018. On May 16, 2018, the Center for Audit Quality in the United States categorized Argentina as an economy with a projected three-year cumulative inflation rate greater than 100%. As a consequence, beginning July 1, 2018, the Company has transitioned its Argentine operations to “highly inflationary” status which requires the Company to record foreign exchange gains or losses in the Argentine peso through its income statement rather than through the other comprehensive loss account on its balance sheet.
NOTE 2: Going Concern Considerations
In accordance with the
guidance issued by the FASB under ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, the Company is required to evaluate each reporting period whether there is substantial doubt about its ability to continue as a going concern. In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern for 12 months following the date the Company’s financial statements are issued. Management considered the Company’s current financial condition and liquidity sources, including current funds and available working capital, forecasted future cash flows and the Company’s conditional and unconditional obligations due within one year from the date of issuance of the financial statements. Because the Company has sustained significant losses over the past two years and its total liabilities exceed its total assets, management has substantial doubt that the Company could remain independent and continue as a going concern for the required period of time if it were not able to refinance or restructure its existing debt and raise additional capital to fund its working capital needs.
These consolidated financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.
7
NOTE 3. Stock-Based Compensation
The Company’s 2015 Equity Incentive Plan (“2015 Plan”) was approved by our stockholders. The 2015 Plan is an omnibus plan that allows for grants of stock options, stock appreciation rights, stock awards, restricted stock, stock units and performance units. As of June 30, 2019, options to purchase 2,000 shares were outstanding under the 2015 Plan and 5,000 shares were available for future grant.
The Company’s stock options typically vest on an annual or a monthly basis. Stock options generally are exercisable for up to seven years after grant, subject to continued employment or service. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Such amount may change as a result of additional grants, forfeitures, modifications in assumptions and other factors. Income tax effects of share-based payments are recognized in the financial statements for those awards which will normally result in tax deductions under existing tax law. During the three and six months ended June 30, 2019 and 2018, the Company recorded no compensation expense related to options previously granted. Under current U.S. federal tax law, the Company receives a compensation expense deduction related to non-qualified stock options only when those options are exercised and vested shares are received. Accordingly, the financial statement recognition of compensation expense for non-qualified stock options creates a deductible temporary difference that results in a deferred tax asset and a corresponding deferred tax benefit in our consolidated statements of operations.
During the three and six months ended June 30, 2019 and 2018, the Company did not grant any stock options. As of June 30, 2019, because all outstanding stock options were fully vested, there was no unrecognized compensation expense.
As of June 30, 2019, the 2,000 fully-vested and exercisable stock options then outstanding had a weighted average exercise price of $34.54 per share and a weighted average remaining contractual life of 2.88 years.
During the quarter ended June 30, 2018, the Company granted a restricted stock award of 42,000 shares with 17,000 shares vesting on the date of grant and the remaining 25,000 shares vesting in four equal installments on the last day of each calendar quarter beginning June 30, 2018. The total value of the award was $200,000, and stock-based compensation expense for the final quarter of vesting ending March 31, 2019 was $30,000.
During the quarter ended June 30, 2019, the Company made stock grants to directors and employees aggregating 600,000 shares valued at $1,560,000. In addition, restricted stock grants on 100,000 shares valued at $260,000 were made to employees with annual vesting over 2 years from the date of grant. Also in June 2019, in connection with the Company’s termination of its then chief financial officer, the Company accelerated the vesting on 26,667 restricted shares valued at $69,000 and paid a portion of his severance using 53,571 shares valued at $108,000. Total stock-based compensation expense during the quarter ended June 30, 2019 amounted to $1,779,000.
NOTE 4. Earnings Per Share
Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similarly to basic earnings (loss) per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential additional common shares that were dilutive had been issued. Common share equivalents are excluded from the computation if their effect is anti-dilutive. The Company’s common share equivalents consist of convertible preferred stock, stock options and warrants.
Common shares from the potential exercise of certain options and warrants are excluded from the computation of diluted earnings (loss) per share if their exercise prices are greater than the Company’s average stock price for the period. For both the three and six-month periods ended June 30, 2019, the number of such shares excluded was 5,598,000. For both the three and six-month periods ended June 30, 2018, the number of such shares excluded was 398,000. For both the three and six-month periods ended June 30, 2019, the number of in-the-money warrants excluded from the computation of net loss per share because their inclusion would have been anti-dilutive amounted to 93,000, and the number of preferred shares excluded was 322,000. For both the three and six-month periods ended June 30, 2018, the number of in-the-money warrants excluded from the computation of net loss per share amounted to 1,183,000, and the number of preferred shares excluded was 658,000.
All share and per share numbers in this report have been retroactively restated for the Company’s reverse stock split effected in March 2018.
8
NOTE 5. In
come Taxes
The Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with applicable standards of the Financial Accounting Standards Board (“FASB”). 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. As a result of this review, the Company concluded that at this time there are no uncertain tax positions, and there has been no cumulative effect on retained deficit.
The Company is subject to U.S. federal income tax as well as income tax in multiple states and foreign jurisdictions. For all major taxing jurisdictions, the tax years 2014 through 2018 remain open to examination or re-examination. As of June 30, 2019, the Company does not expect any material changes to unrecognized tax positions within the next twelve months.
The Company recognizes the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact the Company’s financial position or results of operations.
NOTE 6. Inventory
Inventory is stated at the lower of cost (first-in, first-out) or net realizable value and consists primarily of consumer electronics and accessories. The Company writes down its inventory to net realizable value when it is estimated to be slow-moving or obsolete. As of June 30, 2019 and December 31, 2018, inventory was net of write-downs of $391,000 and $351,000, respectively.
NOTE 7. Property and Equipment
Property and equipment are primarily located in the United States, Argentina and the Dominican Republic and consisted of the following as of the dates presented (in thousands):
|
|
June 30, 2019
(unaudited)
|
|
|
December 31,
2018
|
|
Vehicles
|
|
$
|
48
|
|
|
$
|
48
|
|
Machinery and equipment
|
|
|
145
|
|
|
|
146
|
|
Furniture and fixtures
|
|
|
124
|
|
|
|
122
|
|
Leasehold improvements
|
|
|
1,122
|
|
|
|
1,100
|
|
Subtotal
|
|
|
1,439
|
|
|
|
1,416
|
|
Less accumulated depreciation
|
|
|
(641
|
)
|
|
|
(407
|
)
|
Total
|
|
$
|
798
|
|
|
$
|
1,009
|
|
Depreciation and amortization expense of property and equipment for the three and six months ended June 30, 2019 was $116,000 and $238,000, respectively. Depreciation and amortization expense for the three and six months ended June 30, 2018 was $50,000 and $89,000, respectively.
NOTE 8. Intangible Assets
The Company’s definite-lived intangible assets arose from the acquisition of OneClick. These assets and related accumulated amortization consisted of the following as of the dates presented (in thousands):
|
|
June 30,
2019
(unaudited)
|
|
|
December 31,
2018
|
|
Tradenames
|
|
$
|
938
|
|
|
$
|
938
|
|
Covenants Not To Compete
|
|
|
258
|
|
|
|
258
|
|
Domain Name
|
|
|
2
|
|
|
|
2
|
|
Subtotal
|
|
|
1,198
|
|
|
|
1,198
|
|
Less accumulated amortization
|
|
|
(441
|
)
|
|
|
(315
|
)
|
Total
|
|
$
|
757
|
|
|
$
|
883
|
|
9
Amortization expense for the three
and six
months ended
June
3
0
, 201
9 and 2018
amounted to $6
3
,000
and $
126
,000, respectively
, for both years
.
The OneClick trade name is being amortized over 60 months
and the covenants not to compete are being amortized over 48 months. Amortization expense for the years ending December 31, 201
9
(remaining 6 months)
through 2022 will be $
126
,000, $2
52
,000, $2
36
,000 and $14
3
,000
.
NOTE 9. Accrued Expenses and Other Current Liabilities
As of June 30, 2019 and December 31, 2018, accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
June 30, 2019
(unaudited)
|
|
|
December 31,
2018
|
|
Accrued compensation (wages, benefits, severance, vacation)
|
|
$
|
1,326
|
|
|
$
|
697
|
|
Customer deposits and overpayments
|
|
|
142
|
|
|
|
31
|
|
Accrued interest
|
|
|
586
|
|
|
|
170
|
|
Accrued taxes
|
|
|
365
|
|
|
|
406
|
|
Current portion of operating lease liabilities
|
|
|
936
|
|
|
|
—
|
|
Other accruals
|
|
|
245
|
|
|
|
251
|
|
Total
|
|
$
|
3,600
|
|
|
$
|
1,555
|
|
|
|
|
|
|
|
|
|
|
NOTE 10. Notes Payable
Notes payable consisted of the following as of the dates presented (in thousands):
|
|
June 30,
2019
(unaudited)
|
|
|
December 31,
2018
|
|
8% secured promissory notes due August 2018
|
|
$
|
—
|
|
|
$
|
250
|
|
0% convertible notes due January 2021
|
|
|
275
|
|
|
|
275
|
|
4% promissory note due April 2021
|
|
|
704
|
|
|
|
847
|
|
0% promissory note due April 2019
|
|
|
—
|
|
|
|
418
|
|
8% promissory note due March 2021
|
|
|
2,107
|
|
|
|
2,107
|
|
12% convertible notes due October 2019
|
|
|
4,000
|
|
|
|
4,000
|
|
12% convertible notes due November 2019
|
|
|
1,220
|
|
|
|
1,220
|
|
12% convertible notes due May 2020
|
|
|
3,500
|
|
|
|
—
|
|
Total face amount
|
|
|
11,806
|
|
|
|
9,117
|
|
Unamortized discount
|
|
|
(1,561
|
)
|
|
|
(1,780
|
)
|
Total carrying value
|
|
|
10,245
|
|
|
|
7,337
|
|
Amount classified as current
|
|
|
7,503
|
|
|
|
4,464
|
|
Amount classified as long-term
|
|
$
|
2,742
|
|
|
$
|
2,873
|
|
In August 2017, the Company issued a $250,000 secured promissory note with a 1-year term bearing interest at 8%. The $250,000 note was not paid upon maturity, and went into default. Upon agreement with the holder, the note was paid in full, including additional default interest on February 14, 2019.
In January 2018, the Company issued an aggregate of $1,000,000 of 3-year 0% convertible notes and warrants. The notes are convertible into an aggregate of 570,287 shares of common stock of the Company and the warrants are exercisable for 570,287 shares of common stock of the Company at an exercise price of $9.15 per share. The Company valued the debt and the warrants in accordance with ASC 470-20-25-2 using a binomial option pricing model for the warrants, and the conversion feature, which was determined to be a Beneficial Conversion Feature, was recorded at fair value based on the difference between the closing market price of the Company’s stock on the date of the transaction and the implied conversion price in the fair value of the debt. The valuation assumed a 105% volatility rate of the Company’s common stock, a risk-free interest rate of 2.20% and a credit spread of 7.70%. The warrants were assigned a value of $127,000 and the conversion feature was assigned a value of $144,000. The remaining value of $729,000 was assigned to the debt. The aggregate discount of $271,000 is being amortized to interest expense over the 3-year life of the notes on a straight-line basis. In connection with the debt exchange on August 15, 2018, holders of an aggregate principal amount of $725,000 of the notes converted their notes to common stock, leaving a principal balance of $275,000 outstanding. The
10
unamortized discount related to the converted notes amounted to $163,000, which amount
was recorded as accretion
expense in the period
.
Accretion of the discount for the three
and six
months ended
June 30
, 2019 amounted to $6,000
and $12,000, respectively
.
In April 2018, the Company issued a $1,000,000 installment note bearing interest at 4.02% per annum due April 30, 2021. The principal balance outstanding on the note at June 30, 2019 was $704,000. The note specifies varying monthly payments of principal and interest with annual principal payments of $305,000, $359,000 and $183,000 in 2019 through 2021.
In August 2018, in connection with the Unitron acquisition, the Company assumed the remaining balance of $868,000 on 0% promissory notes with $450,000 paid in October 2018 and $418,000 paid in April 2019.
In September 2018, the Company entered into a Note Consolidation Agreement with a lender in which 12 promissory notes and associated accrued interest were consolidated into single unsecured 8% promissory note in the principal amount of $2,107,000. The note is due in a lump sum on March 31, 2021. Interest compounds annually. Because the present value of the cash flows under the terms of the new debt instrument was less than 10% different from the present value of the aggregate remaining cash flows under the terms of the original instruments, the debt instruments were not considered to be substantially different and the transaction was not considered a debt extinguishment.
In October 2018, the Company issued an aggregate of $4,000,000 of 1-year 12% convertible notes and warrants. The notes are convertible at the option of the holder after six months from the date of issuance into an aggregate of 941,181 shares of common stock of the Company and the warrants are exercisable for 470,592 shares of common stock of the Company at an exercise price of $4.25 per share. The Company valued the debt and the warrants in accordance with ASC 470-20-25-2 using a binomial option pricing model for the warrants, and the conversion feature, which was determined to be a Beneficial Conversion Feature, was recorded at fair value based on the difference between the closing market price of the Company’s stock on the date of the transaction and the implied conversion price in the fair value of the debt. The valuation assumed a 90% volatility rate of the Company’s common stock, a 25% discount on the value of the underlying stock due to trading restrictions, and a risk-free interest rate of 2.47%. The warrants were assigned a value of $769,000 and the conversion feature was assigned a value of $1,173,000. The remaining value of $2,058,000 was assigned to the debt. The aggregate discount of $1,942,000 is being amortized to interest expense over the 1-year life of the notes on a straight-line basis, which approximates the effective interest method. Accretion of the discount for the three and six months ended June 30, 2019 amounted to $485,000 and $971,000, respectively.
In November 2018, the Company issued an aggregate of $1,220,000 of 1-year 12% convertible notes and warrants. The notes are convertible at the option of the holder after six months from the date of issuance into an aggregate of 277,274 shares of common stock of the Company and the warrants are exercisable for 138,638 shares of common stock of the Company at an exercise price of $4.40 per share. The Company valued the debt and the warrants in accordance with ASC 470-20-25-2 using a binomial option pricing model for the warrants. The conversion feature was not assigned any value as the implied conversion price in the fair value of the debt was higher than the closing market price of the Company’s stock on the date of the transaction. The valuation assumed a 90% volatility rate of the Company’s common stock, a 25% discount on the value of the underlying stock due to trading restrictions, and a risk-free interest rate of 2.52%. The warrants were assigned a value of $118,000 and the remaining value of $1,102,000 was assigned to the debt. The discount of $118,000 is being amortized to interest expense over the 1‑year life of the notes on a straight-line basis. Accretion of the discount for the three and six months ended June 30, 2019 amounted to $29,000 and $58,000, respectively.
In May 2019, the Company issued an aggregate of $3,500,000 of 1-year 12% convertible notes and warrants. The notes are convertible at the option of the holder after six months from the date of issuance into an aggregate of 1,258,996 shares of common stock of the Company and the warrants are exercisable for 629,500 shares of common stock of the Company at an exercise price of $2.72 per share. The Company valued the debt and the warrants in accordance with ASC 470-20-25-2 using a binomial option pricing model for the warrants, and the conversion feature, which was determined to be a Beneficial Conversion Feature, was recorded at fair value based on the difference between the closing market price of the Company’s stock on the date of the transaction and the implied conversion price in the fair value of the debt. The valuation assumed a 105% volatility rate of the Company’s common stock, a 30% discount on the value of the underlying stock due to trading restrictions, and a risk-free interest rate of 2.33%. The warrants were assigned a value of $507,000 and the conversion feature was assigned a value of $243,000. In addition, the Company incurred fundraising costs of $190,000, which were recorded as an additional discount. The remaining value of $2,750,000 was assigned to the debt. The aggregate discount of $940,000 is being amortized to interest expense over the 1-year life of the notes on a straight-line basis, which approximates the effective interest method. Accretion of the discount for the three and six months ended June 30, 2019 amounted to $117,000.
Interest expense for notes payable for the three and six months ended June 30, 2019 amounted to $900,000 and $1,628,000, respectively. Interest expense for notes payable for the three and six months ended June 30, 2018 amounted to $325,000 and $572,000, respectively.
11
NOTE 1
1
. Capital Stock
On January 9, 2019, the Company entered into a fee settlement agreement with a vendor to whom it owed $164,000. In the agreement, the parties agreed to satisfy this obligation by the Company issuing to the vendor 93,448 restricted common shares and warrants to purchase 93,448 common shares at $1.64 per share. The warrants are exercisable beginning July 9, 2019 and expire January 9, 2022. The fair value of the restricted stock on the date of issuance was estimated to be $114,000 using a 25% discount for trading restrictions computed using a risk-free interest rate of 2.52% for the 6-month hold period and an expected volatility of 90% based on the Company’s historical stock price fluctuation. The fair value of the warrants was estimated on the date of issuance at $59,000 using the Black-Scholes pricing model and assuming a 90% volatility rate and a risk-free interest rate of 2.54% based on the 3-year U.S. Treasury rate then in effect. The combined value of the stock and warrants was $173,000, and the Company recorded a loss on extinguishment of debt of $9,000.
During March 2019, holders of warrants on 382,165 shares of the Company’s common stock exercised the warrants at the strike price of $3.02 per share, which resulted in aggregate cash proceeds to the Company of $1,154,000.
NOTE 12. Related Party Transactions
During the three and six months ended June 30, 2019 and 2018, the Company was engaged in non-arm’s length transactions with Smash Technologies, LLC (“Smash”), a reseller of accessories controlled by a family member of the Company’s CEO who was terminated on June 5, 2019. The Company purchased products from Smash in the normal course of business, which purchases were measured at the exchange amount. During the three and six months ended June 30, 2019, product purchases from Smash amounted to $35,000, and $82,000, respectively. During the three and six months ended June 30, 2018, product purchases from Smash amounted to $192,000 and $206,000, respectively. There are no long-term arrangements with Smash, and, at June 30, 2019, there were no amounts outstanding and payable to Smash.
NOTE 13. Recent Accounting Pronouncements
Recently Adopted:
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).”
The guidance in ASU 2016-02 and subsequently issued amendments required lessees to capitalize virtually all leases with terms of more than twelve months on the balance sheet as a right-of-use asset and recognize an associated lease liability. Entities were allowed to apply the modified retrospective approach (1) retrospectively to each comparative period presented (comparative method) or (2) retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment (effective date method). ASU 2016‑02 was effective for public companies for interim and annual reporting periods beginning after December 15, 2018. The Company adopted the new standard on January 1, 2019 using the effective date method. Therefore, upon adoption, the Company recognized and measured leases without revising comparative period information or disclosures. The Company implemented the transition package of three practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classifications. As a result of adopting the new standard on January 1, 2019, the Company recorded initial right-of-use assets of $4,642,000 with a corresponding initial lease liability, which was also adjusted by reclassifications of existing assets and liabilities primarily related to deferred rent. The adoption of this new standard did not have a material impact on the Company’s consolidated results of operations or cash flows.
The Company enters into leases primarily for its retail stores, distribution center and corporate offices. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and lease expense for such leases are recognized on a straight-line basis over the lease term.
The Company determines if an arrangement is a lease at inception and whether the lease meets the classification criteria of a finance or operating lease. The Company currently has no financing leases. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using the Company’s incremental borrowing rates. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.
Where lease agreements contain renewal options, the Company does not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that the Company is reasonably certain of renewing the lease at inception or when a triggering event occurs. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense for the three and six months ended June 30, 2019 amounted to $305,000 and $653,000, respectively.
12
Supplemental lease information as of
June 30
, 2019 is as follows ($
in thousands):
Operating right of use assets
|
|
$
|
4,179
|
|
Current operating lease liabilities
|
|
$
|
936
|
|
Long-term operating lease liabilities
|
|
$
|
3,288
|
|
Weighted-average remaining lease term in years
|
|
|
5.10
|
|
Weighted-average discount rate
|
|
|
12
|
%
|
As of June 30, 2019, maturities of lease liabilities are as follows (in thousands):
Years Ending December 31,
|
|
|
|
|
2019 (remaining six months)
|
|
$
|
784
|
|
2020
|
|
|
1,327
|
|
2021
|
|
|
1,188
|
|
2022
|
|
|
837
|
|
2023
|
|
|
829
|
|
Thereafter
|
|
|
1,593
|
|
Total lease payments
|
|
|
6,558
|
|
Less: interest
|
|
|
2,334
|
|
Total
|
|
|
4,224
|
|
Less: current portion
|
|
|
936
|
|
Long-term portion
|
|
$
|
3,288
|
|
As of June 30, 2019, the Company had no material operating leases that had not yet commenced.
Issued (Not adopted yet):
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flow - Classification of Certain Cash Receipts and Cash Payments (Topic 230)” ("ASU 2016-15"), which addresses a few specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. For the Company, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If the Company early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the potential impact this standard may have on its consolidated statement of cash flows and the timing of adoption.
Other Accounting Standards Updates not effective until after June 30, 2019 are not expected to have a material effect on the Company’s financial position or results of operations.
13
NOTE 1
4
. Segments
The tables below (in thousands) reflect the operating results of the Company’s segments for the reported periods, consistent with the management and measurement system utilized within the Company. The two segments include (1) the Company’s OneClick retail stores, and (2) its Cooltech Distribution business. Performance measurement of each segment is based on sales, gross profit and operating income (loss). The segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Operating Decision Maker (“CODM”) in determining how to allocate Company resources and evaluate performance. The CODM is a group of Company executives who comprise the management committee, consisting of the Company’s Chief Executive Officer and its Chief Financial Officer.
|
|
OneClick
Retail Stores
|
|
|
Cooltech
Distribution
|
|
|
Total
Segments
|
|
Three months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,345
|
|
|
$
|
584
|
|
|
$
|
4,929
|
|
Gross profit (loss)
|
|
$
|
1,314
|
|
|
$
|
(12
|
)
|
|
$
|
1,302
|
|
Operating loss
|
|
$
|
(535
|
)
|
|
$
|
(359
|
)
|
|
$
|
(894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,065
|
|
|
$
|
3,147
|
|
|
$
|
6,212
|
|
Gross profit
|
|
$
|
805
|
|
|
$
|
305
|
|
|
$
|
1,110
|
|
Operating loss
|
|
$
|
(986
|
)
|
|
$
|
(220
|
)
|
|
$
|
(1,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Operating Loss to Cool Holdings as Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments
|
|
$
|
(894
|
)
|
|
$
|
(1,206
|
)
|
|
|
|
|
Unallocated expenses
|
|
|
(3,755
|
)
|
|
|
(1,281
|
)
|
|
|
|
|
Total consolidated operating loss
|
|
$
|
(4,649
|
)
|
|
$
|
(2,487
|
)
|
|
|
|
|
|
OneClick Retail Stores
|
|
|
Cooltech Distribution
|
|
|
Total Segments
|
|
Six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
8,698
|
|
|
$
|
1,456
|
|
|
$
|
10,154
|
|
Gross profit (loss)
|
$
|
2,553
|
|
|
$
|
(7
|
)
|
|
$
|
2,546
|
|
Operating loss
|
$
|
(1,374
|
)
|
|
$
|
(697
|
)
|
|
$
|
(2,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
5,644
|
|
|
$
|
4,660
|
|
|
$
|
10,304
|
|
Gross profit
|
$
|
1,650
|
|
|
$
|
441
|
|
|
$
|
2,091
|
|
Operating loss
|
$
|
(2,046
|
)
|
|
$
|
(588
|
)
|
|
$
|
(2,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Operating Loss to Cool Holdings as Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments
|
$
|
(2,071
|
)
|
|
$
|
(2,634
|
)
|
|
|
|
|
Unallocated expenses
|
|
(5,340
|
)
|
|
|
(2,384
|
)
|
|
|
|
|
Total consolidated operating loss
|
$
|
(7,411
|
)
|
|
$
|
(5,018
|
)
|
|
|
|
|
14
NOTE 1
5
. Geographic Information
Long-lived assets are principally located in Company facilities in the United States, Argentina and the Dominican Republic. The unaudited net sales by geographical area for the three and six months ended June 30, 2019 and 2018 were (in thousands):
|
|
For
the
Three
Months
Ended
June 30,
|
|
|
For
the
Six
Months
Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Central America
|
|
$
|
8
|
|
|
$
|
325
|
|
|
$
|
27
|
|
|
$
|
420
|
|
South America
|
|
|
2,225
|
|
|
|
2,307
|
|
|
|
4,171
|
|
|
|
4,174
|
|
Caribbean
|
|
|
947
|
|
|
|
832
|
|
|
|
1,899
|
|
|
|
1,555
|
|
United States
|
|
|
1,749
|
|
|
|
2,748
|
|
|
|
4,057
|
|
|
|
4,155
|
|
Total
|
|
$
|
4,929
|
|
|
$
|
6,212
|
|
|
$
|
10,154
|
|
|
$
|
10,304
|
|
NOTE 16. Commitments and Contingencies
The Company has in the past and may in the future become involved in certain legal proceedings and claims which arise in the normal course of business. As of the filing date of this report, the Company did not have any significant litigation outstanding.
NOTE 17. Fair Value of Financial Instruments
The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that use primarily market-based or independently-sourced market parameters. If market observable inputs for model-based valuation techniques are not available, the Company makes judgments about assumptions market participants would use in estimating the fair value of the financial instrument. Carrying values of cash, cash equivalents, restricted cash, trade and other accounts receivable, prepaid assets, accounts payable, accrued expenses and other current liabilities and short‑term notes payable approximate their fair values due to the short-term nature and liquidity of these financial instruments. The Company estimates that the fair value of its long-term debt approximates its carrying value based on significant level 2 observable inputs. During the three and six months ended June 30, 2019 and 2018, the Company did not record any material nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition.
NOTE 18. Merger with Cooltech
On July 25, 2017, the Company entered into an Agreement and Plan of Merger (as amended “Merger Agreement”) by and among the Company, Cooltech Holding Corp., and the Company’s wholly-owned subsidiary, InfoSonics Acquisition Sub, Inc. (“Merger Sub”), pursuant to which Cooltech would merge with and into the Merger Sub, with Cooltech surviving as a wholly-owned subsidiary of the Company. After approval by the Company’s stockholders at a Special Meeting held on March 7, 2018, the Merger closed on March 12, 2018. The Merger involved a series of transactions and events as described below.
On August 2, 2017, the Company sold 100,000 shares of common stock at $10.00 per share in a public offering and the concurrent private placement of warrants to purchase 100,000 shares of common stock at $12.10 per share to investors related to Cooltech. Proceeds from these offerings were used by the Company to pay expenses of the Merger.
On August 3, 2017, the Company entered into a stock purchase agreement for the private placement of 175,000 shares of common stock at a purchase price of $10.00 per share and warrants to purchase 175,000 shares of common stock at $12.10 per share (the “Private Placement”) to investors related to Cooltech. The aggregate purchase price of $1,750,000 was placed into escrow and closing of the offering was contingent upon approval of such transaction by the Company’s stockholders.
On October 10, 2017, the Company effected a one-for-five reverse stock split of its common stock in order to regain compliance with the minimum bid price rule of Nasdaq. On October 25, 2017, Nasdaq notified the Company that it had regained compliance.
15
The original Merger Agreement contemplated that the Merger consideration would be 2,500,000
shares of the Company’s common stock. However, in late December 2017 it was determined that Cooltech would be unable to obtain the audited financial statements required by the SEC for an entity that it had acquired in October 2017. The entity, Unitron d
el Caribe S.A. (“Unitron”), is a company operating OneClick stores in the Dominican Republic. Consequently, it was determined that the acquisition would be unwound and the Merger Agreement was amended to reduce the merger consideration by 25%, or 625,000
shares, to 1,875,000 shares. On January 5, 2018, Cooltech and
the
seller
of Unitron
entered into a settlement agreement to unwind the transaction pursuant to which Cooltech agreed to return to the Seller the assets of Unitron on an as-is where-is basis (t
he “Unitron
Assets”),
and the Seller agreed to return an aggregate sum of $4,568,000. Concurrently, Cooltech entered into an option agreement (the “Option Agreement”) pursuant to which it was granted the sole, exclusive and irrevocable right and option to
acquire the Unitron Assets (the “Option”). The Option
was
exercisable during the period of time beginning March 12, 2018, the effective date of the Merger, and ending on January
5, 2019 (the “Option Period”), unless sooner terminated or extended in accord
ance with the terms of the Agreement. Upon exercise of the Option, and in consideration for receipt of the Unitron Assets, Cooltech shall pay an aggregate sum of $4,568,000, subject to adjustment as set forth therein, in the form of cancellation of certain
indebtedness owed to Cooltech by the grantor of the Option and assumption of certain liabilities of Unitron. Also, shareholders of Cooltech shall receive an aggregate of 625,000 shares of InfoSonics common stock (including securities convertible into comm
on stock), provided all necessary approvals as set forth in the Merger Agreement
were
obtained.
On January 19, 2018, the Company sold $1 million of three-year 0% convertible notes and warrants to investors related to Cooltech. The notes are convertible into an aggregate of 114,285 shares of common stock and the warrants are exercisable for 114,285 shares of common stock at an exercise price of $9.15 per share. The warrants are exercisable commencing July 19, 2018 and have a term of exercise equal to three years. Proceeds from these sales were used by the Company to pay expenses of the Merger and for general corporate purposes.
On March 9, 2018, the Company effected a second one-for-five reverse stock split of its common stock in order to achieve the $4.00 Nasdaq minimum bid price required for an initial listing necessitated by the change of control caused by the Merger.
On March 12, 2018, both the Private Placement and the Merger closed. The Company issued 175,000 common shares and warrants contemplated by the Private Placement and an aggregate of 1,875,000 shares of its common and preferred stock for all of the outstanding capital stock of Cooltech. Although InfoSonics was the legal acquiror of Cooltech in the Merger, for accounting purposes, Cooltech was considered to be acquiring InfoSonics. Cooltech was determined to be the “accounting acquirer” because after the Merger and above described related transactions: (i) stockholders related to Cooltech own 2,150,000 shares of InfoSonics common stock plus warrants on approximately 389,000 additional shares, which together gives them approximately 82% of the common shares of the Company on a fully-diluted basis, (ii) Cooltech directors now hold a majority of board seats in the combined organization and (iii) Cooltech management hold all key executive management positions in the Company. Consequently, in accordance with the provisions of Accounting Standards Codification Topic 805, “Business Combinations” (“ASC 805”), the Merger has been accounted for as a reverse acquisition using the acquisition method of accounting. Accordingly, Cooltech’s historical financial information replaces InfoSonics’ historical financial information for all periods prior to the Merger.
Because the Merger involved only the exchange of equity and Cooltech is a private company whose value was difficult to measure, the fair value of the equity of InfoSonics immediately before the Merger was used to measure consideration transferred because it has a quoted market price. The closing market price per share of the Company’s stock on March 12, 2018, the date of the Merger closing, was $8.15. Using this price, the total fair value of the Merger consideration amounted to approximately $6.15 million. This amount is comprised of two elements: (1) $5.5 million representing the value of the 675,656 outstanding shares of InfoSonics common stock at $8.15/share
, and (2) $676,000 representing the value of outstanding stock warrants and options. The purchase price was allocated to the net assets acquired in the transaction is as follows (in thousands):
Cash
|
|
$
|
1,264
|
|
Accounts receivable
|
|
|
2,692
|
|
Inventory
|
|
|
3,190
|
|
Prepaid assets
|
|
|
1,454
|
|
Fixed assets
|
|
|
58
|
|
Goodwill
|
|
|
3,343
|
|
Other assets
|
|
|
28
|
|
Accounts payable
|
|
|
(2,744
|
)
|
Accrued expenses
|
|
|
(2,396
|
)
|
Long-term convertible debt
|
|
|
(735
|
)
|
Total
|
|
$
|
6,154
|
|
16
NOTE
19
. Acquisition of Cooltech Corp.
On June 1, 2018,
the Company exercised an option to acquire all of the outstanding stock of a Canadian shell company called Cooltech Corp. for $1.00. At the time of the acquisition, Cooltech Corp. had $21,000 in cash and $21,000 of accounts payable, plus entitlement to a pending claim in an intellectual property lawsuit. Subsequent to the acquisition, the company recognized a $1,277,000 gain on the pending claim.
NOTE 20. Acquisition of Unitron Assets
On August 17, 2018,
the Company exercised an option to acquire the assets of a chain of
seven retail electronics stores in the Dominican Republic referred to as the “Unitron Assets.” The Option Agreement, as amended, was issued on January 5, 2018 as part of the Company’s
Merger with Cooltech. As required in the Option Agreement, upon exercise by the Company, the Cooltech shareholders at the date of the merger received 625,000 restricted shares of the Company’s common stock, which was recorded directly to stockholders’ equity. Consideration for the Unitron acquisition was comprised of $3,700,000 of previously advanced funds and the assumption of $868,000 of debt. The purchase price was allocated to the net assets acquired in the transaction as follows (in thousands):
Cash
|
|
$
|
18
|
|
Accounts receivable
|
|
|
27
|
|
Inventory
|
|
|
1,243
|
|
Other current assets
|
|
|
601
|
|
Fixed assets
|
|
|
332
|
|
Intangibles
|
|
|
76
|
|
Goodwill
|
|
|
4,399
|
|
Other assets
|
|
|
41
|
|
Accounts payable
|
|
|
(2,169
|
)
|
Notes payable
|
|
|
(868
|
)
|
Total
|
|
$
|
3,700
|
|
For the period from August 17, 2018, the date of acquisition, through December 31, 2018, net sales and operating loss from the Dominican Republic entity included in the Company’s consolidated statement of operations amount to $1,607,000 and $204,000, respectively. On an unaudited pro forma basis, if the acquisition had occurred on January 1, 2018, the Company’s combined net sales and net loss from continuing operations for the year ended December 31, 2018 would have been $26,503,000 and $22,383,000, respectively.
NOTE 21. Pending Acquisition of Simply Mac
On May 9, 2019, the Company, Simply Mac, Inc. (“Simply Mac”) and GameStop Corp. (the “Seller”) entered into a stock purchase agreement (the “Stock Purchase Agreement”), pursuant to which the Company will purchase from the Seller all of the issued and outstanding shares of capital stock of Simply Mac (the “Stock Purchase”). The Stock Purchase Agreement was amended and restated on July 12, 2019. Following the Stock Purchase, Simply Mac will be a wholly-owned subsidiary of the Company.
Subject to certain working capital, inventory, indebtedness and other adjustments, the aggregate consideration for the Stock Purchase will be equal to $3.8 million plus the value of Simply Mac’s inventory at closing. The consideration will consist of (i) $3.8 million in cash and (ii) a secured promissory note in favor of the Seller. As of June 30, 2019, the Company had deposited $750,000 of the required cash into escrow, and on July 11, 2019, deposited an additional $350,000 into escrow. The remaining $2.7 million is required to be deposited into escrow in three tranches: (1) $350,000 by August 12, 2019, (2) $350,000 by September 12, 2019, and (3) $2 million by September 20, 2019. A portion of the cash consideration will be held in escrow to secure the indemnification obligations of Simply Mac and the Seller under the Stock Purchase Agreement and for satisfaction of any working capital or inventory adjustments payable to the Company.
The Stock Purchase Agreement contains representations, warranties and covenants customary for a transaction of its size and nature. Subject to certain limitations, the parties have agreed to indemnify each other for breaches of their respective representations, warranties, covenants and other specified matters therein. The Stock Purchase Agreement may be terminated at any time prior to closing by mutual written agreement, or by Seller on August 19, 2019 if the Company does not make the $350,000 escrow deposit due August 12, 2019, or by Seller on September 20, 2019 if the Company does not make the $350,000 escrow deposit due September 12, 2019, or by either party upon breach by the other party of any representation, warranty, covenant or other agreement set forth in the Stock Purchase Agreement, after an opportunity to cure in some cases.
17
NOTE 2
2
. Subsequent Eve
nt
On July 9, 2019, Cool Holdings Inc. (the “Company”) closed a private placement of $350,000 of 12% unsecured convertible notes (the “Notes”). The Notes mature 12 months from the date of issuance. The proceeds from the private placement were used entirely to fund the Company’s pending acquisition of Simply Mac referred to in Note 21. The Company intends to seek shareholder and regulatory approvals needed to enable the Notes, as well as the majority of other outstanding notes payable, and unpaid accrued interest to be converted into shares of the Company’s common stock (the “Equity Securities”) at a price that is 20% below the 5-day average closing price immediately prior to the date on which such approval is obtained (the “Approval Date”). Upon receipt of the required approvals, the principal and unpaid accrued interest of the Notes may be converted at the election of the holders at any time after the Approval Date.
18