Accompanying notes are an integral part of these consolidated financial statements.
Accompanying notes are an integral part of these consolidated financial statements.
Accompanying notes are an integral part of these consolidated financial statements.
Condensed Notes to Consolidated Financial Statements
March 31, 2018
(unaudited)
NOTE 1. Basis of Presentation
The accompanying unaudited 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 10 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 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, 2017 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 InfoSonics. As discussed in Note 19, 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, except for the legal capital of Cooltech which is retroactively adjusted to reflect the legal capital of InfoSonics.
The Company’s consolidated financial statements include assets, liabilities and operating results of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
In the opinion of management, these unaudited consolidated financial statements reflect all normal recurring adjustments considered necessary to fairly present the Company’s results of operations, financial position and cash flows as of March 31, 2018 and for all periods presented. The results reported in these consolidated financial statements for the three months ended March 31, 2018 are not necessarily indicative of the operating results, financial condition or cash flows that may be expected for the full fiscal year of 2018 or for any future period.
NOTE 2: Going Concern Considerations
Effective January 1, 2017, the Company adopted 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. This update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. Under this standard, the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods.
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 May 21, 2018, the date the Company’s financial statements were 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 before May 21, 2019. Because the Company has sustained significant losses over the past year and has a substantial amount of debt that has matured and will mature in the coming year, 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.
6
NOTE 3. Stock-Based Compensation
The Company has two stock-based compensation plans: the 2006 Equity Incentive Plan (“2006 Plan”) and the 2015 Equity Incentive Plan (“2015 Plan”), both of which were approved by our stockholders. As of March 31, 2018, options to purchase 25,000 and 9,000 shares were outstanding under the 2006 Plan and the 2015 Plan, respectively, and a total of 52,000 shares were available for grant under the 2015 Plan. No options are available for grant under the 2006 Plan.
The Company’s stock options 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 months ended March 31, 2018 and 2017, 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 months ended March 31, 2018 and 2017, the Company did not grant any stock options. As of March 31, 2018, because all outstanding stock options were fully vested, there was no unrecognized compensation expense.
As of March 31, 2018, a total of 34,000 fully-vested stock options were outstanding with a weighted average exercise price of $27.20 per share and a weighted average remaining contractual life of 3.27 years.
NOTE 4. Earnings Per Share
Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per share are computed similarly to basic earnings 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 stock options.
Common shares from the potential exercise of certain options 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 the three-month periods ended March 31, 2018 and 2017, the number of such shares excluded was 34,000 and 43,000. There were no in-the-money options for the three-month periods ended March 31, 2018 and 2017 that were required to be excluded from the computation of net loss per share.
All share and per share numbers in this report have been retroactively restated for the Company’s two reverse stock splits effected in October 2017 and March 2018.
NOTE 5. Income 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 2004 through 2016 remain open to examination or re-examination. As of March 31, 2018, 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.
7
NOTE 6. Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market and consists primarily of cellular phones and cellular phone accessories. The Company records a reserve against inventories to account for obsolescence and possible price concessions required to liquidate inventories below cost. During the three months ended March 31, 2018, the inventory reserve balance was increased by $1,131,000 as a result of additional reserves taken as a consequence of the decision to discontinue the verykool
®
brand of products after the closing of the Cooltech Merger. As of March 31, 2018 and December 31, 2017, the inventory reserve was $1,167,000 and $36,000, respectively. From time to time, the Company has prepaid inventory as a result of payments for products which have not been received by the balance sheet date. As of March 31, 2018 the prepaid inventory balance was $358,000, which is included in prepaid assets in the accompanying consolidated balance sheet. There was no prepaid inventory balance at December 31, 2017. Inventory consists of the following (in thousands):
|
|
March 31,
2018
(unaudited)
|
|
|
December 31,
2017
(audited)
|
|
Finished goods
|
|
$
|
6,029
|
|
|
$
|
1,667
|
|
Inventory reserve
|
|
|
(1,167
|
)
|
|
|
(36
|
)
|
Net inventory
|
|
$
|
4,862
|
|
|
$
|
1,631
|
|
NOTE 7. Property and Equipment
Property and equipment are primarily located in the United States, Argentina and China and consisted of the following as of the dates presented (in thousands):
|
|
March 31,
2018
(unaudited)
|
|
|
December 31,
2017
(audited)
|
|
Machinery and equipment
|
|
$
|
283
|
|
|
$
|
51
|
|
Furniture and fixtures
|
|
|
367
|
|
|
|
220
|
|
Leasehold improvements
|
|
|
369
|
|
|
|
376
|
|
Subtotal
|
|
|
1,019
|
|
|
|
647
|
|
Less accumulated depreciation
|
|
|
(560
|
)
|
|
|
(256
|
)
|
Total
|
|
$
|
459
|
|
|
$
|
391
|
|
Depreciation expense for the three months ended March 31, 2018 and 2017 was $50,000 and $15,000, respectively.
NOTE 8. Goodwill and Other Intangible Assets
Goodwill
As of March 31, 2018, the balance of goodwill arising from the OneClick Acquisitions on October 1, 2017 described in Note 18 was as follows (in thousands):
|
|
March 31,
2018
(unaudited)
|
|
|
December 31,
2017
(audited)
|
|
OneClick International
|
|
$
|
4,511
|
|
|
$
|
4,511
|
|
OneClick License
|
|
|
1,425
|
|
|
|
1,425
|
|
InfoSonics
|
|
|
3,343
|
|
|
|
—
|
|
Total
|
|
$
|
9,279
|
|
|
$
|
5,936
|
|
There were no indicators of impairment identified as a result of the Company’s review of events and circumstances related to its goodwill subsequent to the Acquisitions.
8
Definite-lived Intangible Assets
The Company’s definite-lived intangible assets also arose from the OneClick Acquisitions on October 1, 2017. These assets and related accumulated amortization consisted of the following as of the dates presented (in thousands):
|
|
March 31,
2018
(unaudited)
|
|
|
December 31,
2017
(audited)
|
|
OneClick Tradename
|
|
$
|
938
|
|
|
$
|
938
|
|
Covenant Not To Compete
|
|
|
258
|
|
|
|
258
|
|
Domain Name
|
|
|
2
|
|
|
|
2
|
|
Subtotal
|
|
|
1,198
|
|
|
|
1,198
|
|
Less accumulated amortization
|
|
|
(126
|
)
|
|
|
(63
|
)
|
Total
|
|
$
|
1,072
|
|
|
$
|
1,135
|
|
Amortization expense for the three months ended March 31, 2018 amounted to $63,000. There was no amortization expense in the prior year period.
NOTE 9. Accrued Expenses
As of March 31, 2018 and December 31, 2017, accrued expenses consisted of the following (in thousands):
|
|
March 31,
2018
(unaudited)
|
|
|
December 31,
2017
(audited)
|
|
Accrued product costs
|
|
$
|
587
|
|
|
$
|
—
|
|
Accrued coop advertising
|
|
|
39
|
|
|
|
—
|
|
Accrued compensation (wages, benefits, severance, vacation)
|
|
|
1,721
|
|
|
|
497
|
|
Income taxes payable
|
|
|
1
|
|
|
|
—
|
|
Customer deposits and overpayments
|
|
|
1,184
|
|
|
|
13
|
|
Accrued interest
|
|
|
450
|
|
|
|
247
|
|
Other accruals
|
|
|
553
|
|
|
|
519
|
|
Total
|
|
$
|
4,535
|
|
|
$
|
1,276
|
|
NOTE 10. Line of Credit
In April 2016, the Company obtained a revolving credit facility of $500,000 to finance accounts receivable. The outstanding balances under the credit facility bore interest at the floating WSJ prime rate plus 1%, with a floor of 4.5%, payable monthly in arrears. In addition to other restrictive covenants, a first priority security interest lien on all assets of Cooltech Distribution, a subsidiary of the Company, was pledged to the lender, an international financial institution. This liability was guaranteed personally by two executive officers of the Company. At December 31, 2016, the amount drawn on the credit facility was $500,000. On October 31, 2017, the line was fully repaid and terminated and the lender
released its security interest in the Company’s assets.
9
NOTE 11. Notes Payable to Related Parties
Notes payable to related parties consisted of the following as of the dates presented (in thousands):
|
|
March 31,
2018
(unaudited)
|
|
|
December 31,
2017
(audited)
|
|
Class B promissory notes
|
|
$
|
200
|
|
|
$
|
200
|
|
Class C promissory notes
|
|
|
667
|
|
|
|
667
|
|
0% promissory notes due 3/31/19
|
|
|
604
|
|
|
|
44
|
|
8% secured promissory notes due 3/31/19
|
|
|
—
|
|
|
|
1,050
|
|
8% promissory notes due 3/31/19
|
|
|
2,031
|
|
|
|
2,031
|
|
Total face amount
|
|
|
3,502
|
|
|
|
3,992
|
|
Less unamortized discount
|
|
|
(184
|
)
|
|
|
(236
|
)
|
Total carrying value
|
|
|
3,318
|
|
|
|
3,756
|
|
Amount classified as current
|
|
|
3,318
|
|
|
|
441
|
|
Amount classified as long-term
|
|
$
|
—
|
|
|
$
|
3,315
|
|
During 2016, the Company issued Class A, B, and C promissory notes. The Class A promissory notes in the amount of $748,000 were paid off in April 2017. The Class B promissory notes are non-interest bearing, and payable upon the closing of an initial public offering of the Company’s common stock (including any reverse merger or similar combination with a publicly traded company in conjunction with a financing transaction) (an “IPO”). The Class C promissory notes are non-interest bearing, and payable on the earlier of (i) the one-year anniversary of the closing of an IPO and (ii) the closing of a post-IPO financing transaction in which the Company receives gross proceeds of at least $10,000,000. The Class B promissory notes, which became due on March 12, 2018 upon the closing of the InfoSonics Merger with Cooltech described in Note 19, are now delinquent. The Class C promissory notes are due on March 12, 2019, one year from the closing of the InfoSonics Merger. Accretion of the discount for the three months ended March 31, 2018 amounted to $24,000. There was no accretion for the three months ended March 31, 2017.
Discount rate yield-to-maturity expected maturity (years) probability of triggering repayment classified as current
On December 22, 2016, the Company issued a $200,000 promissory note payable to a related party bearing interest of 8% per annum and maturing on the earlier of June 22, 2017 or the closing of a financing in which the Company receives gross proceeds of at least $2,000,000 (a “Qualified Financing”). The note is convertible at the issuance price upon a Qualified Financing, at the holder’s option, into securities sold in the Qualified Financing. In February 2018, this note was extended from its original maturity date to March 31, 2019. No other terms of the note were changed and the extension was treated as a modification of the note rather than an extinguishment.
The 8% secured promissory notes were assumed in the October 2017 OneClick Acquisitions described in Note 18. The notes are secured by the assets of OneClick International and OneClick License pursuant to a security agreement.
10
NOTE 12. Notes Payable
Notes payable consisted of the following as of the dates presented (in thousands):
|
|
March 31,
2018
(unaudited)
|
|
|
December 31,
2017
(audited)
|
|
Class B promissory notes
|
|
$
|
100
|
|
|
$
|
100
|
|
Class C promissory notes
|
|
|
333
|
|
|
|
333
|
|
10% promissory note due on demand
|
|
|
500
|
|
|
|
500
|
|
8% convertible promissory note due March 2019
|
|
|
450
|
|
|
|
250
|
|
8% secured promissory notes due July/August 2018
|
|
|
1,350
|
|
|
|
1,350
|
|
0% promissory notes due January and March 2018
|
|
|
—
|
|
|
|
715
|
|
0% promissory notes in default
|
|
|
261
|
|
|
|
261
|
|
0% promissory notes due March 2019
|
|
|
156
|
|
|
|
|
|
8% promissory notes in default
|
|
|
—
|
|
|
|
200
|
|
12% promissory notes due May 2018
|
|
|
750
|
|
|
|
|
|
12% promissory notes due March 2019
|
|
|
495
|
|
|
|
|
|
0% convertible notes due January 2021
|
|
|
1,000
|
|
|
|
|
|
8% promissory notes due March 2019
|
|
|
1,776
|
|
|
|
1,776
|
|
8% secured promissory notes due March 2019
|
|
|
4,555
|
|
|
|
3,455
|
|
Total face amount
|
|
|
11,726
|
|
|
|
8,940
|
|
Unamortized discount
|
|
|
(277
|
)
|
|
|
(26
|
)
|
Total carrying value
|
|
|
11,449
|
|
|
|
8,914
|
|
Amount classified as current
|
|
|
10,707
|
|
|
|
3,374
|
|
Amount classified as long-term
|
|
$
|
742
|
|
|
$
|
5,540
|
|
In May 2015, the Company issued a promissory note for $500,000, with interest payable on the first of each month at a rate of 10% per annum, and a maturity date of April 30, 2016. This loan was amended on May 1, 2016 to be due on demand.
On December 22, 2016, the Company issued a $250,000 note payable bearing interest of 8% per annum and maturing on the earlier of June 22, 2017 or the closing of a financing in which the Company receives gross proceeds of at least $2,000,000 (a “Qualified Financing”). The note is convertible at the issuance price upon a Qualified Financing, at the holder’s option, into securities sold in the Qualified Financing. In February 2018, this note was extended from its original maturity date to March 31, 2019. No other terms of the note were changed and the extension was treated as a modification of the note rather than an extinguishment.
The 8% secured promissory notes were assumed in the October 2017 OneClick Acquisitions described in Note 18. The notes are secured by the assets of OneClick International and OneClick License pursuant to a security agreement.
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 value the debt and the warrants in accordance with ASC 470-20-25-2 using a binomial option pricing model for the warrants and a trinomial option pricing model for the conversion feature, which was determined to be a Beneficial Conversion Feature. 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.
NOTE 13. Related Party Transactions
During the three months ended March 31, 2018 and 2017, the Company was engaged in non-arm’s length transactions, which were in the normal course of business and were measured at the exchange amount. Transactions included sales of products, purchases of inventory as well as general expenses, reimbursements and sales commissions incurred from related parties. The related parties involved in these transactions included the following:
Nirvana Corp
. - This entity is controlled by a family member of the CEO of the Company and conducts business as a reseller of consumer electronic products.
11
Smash Technologies, LLC
– This entity is controlled by a family member of the CEO of the Company and conducts business as a reseller of accessories.
Stamax Corp.
– This entity is a predecessor entity of OneClick License and prior to October 1, 2017 was controlled by certain members of management.
OneClick License
– Prior to October 1, 2017, this entity was controlled by certain members of management. It is now a wholly-owned subsidiary of the Company.
Verablue Caribbean Group SRL
– This entity controlled by certain members of management and is a retailer of consumer electronic products.
There are no long-term arrangements with any of the related parties. Pricing and other material payment terms are determined on a case by case basis. The terms are not materially different than the terms being negotiated with unaffiliated third parties.
Products and services sold by the Company to related parties were as follows for the periods presented (in thousands):
|
|
For
the
Three
Months
Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Nirvana Corp
|
|
$
|
—
|
|
|
$
|
215
|
|
Smash Technologies LLC
|
|
|
—
|
|
|
|
18
|
|
Stamax Corp.
|
|
|
—
|
|
|
|
36
|
|
Verablue Carribbean Group SRL
|
|
|
662
|
|
|
|
—
|
|
OneClick License LLC
|
|
|
—
|
|
|
|
812
|
|
Total
|
|
$
|
662
|
|
|
$
|
1,081
|
|
Purchases from, or operating expenses paid to, related parties by the Company were as follows for the periods presented (in thousands):
|
|
For
the
Three
Months
Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Stamax Corp.
|
|
$
|
—
|
|
|
$
|
9
|
|
Nirvana Corp
|
|
|
—
|
|
|
|
4
|
|
Smash Technologies LLC
|
|
|
—
|
|
|
|
6
|
|
OneClick License
|
|
|
—
|
|
|
|
656
|
|
Total
|
|
$
|
—
|
|
|
$
|
675
|
|
NOTE 14. Recent Accounting Pronouncements
Recently Adopted:
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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.” This ASU requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the ASU (1) provides a definition of the term substantial doubt, (2) requires an evaluation every reporting period, including interim periods, (3) provides principles for considering the mitigating effect of management’s plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This standard was effective for the fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter. As discussed in Note 2 above, the Company adopted this guidance effective January 1, 2017, and determined that as of March 31, 2018, there was 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.
12
In May 2014, the FASB issued ASU 2014-09, “Revenue
from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amou
nt that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, this guidance requires that entities disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting revenue gross versus net),” which clarifies gross versus net revenue reporting when anothe
r party is involved in the transaction. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing,” which amends the revenue guidance on identifying performance obligations and ac
counting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients,” which provides narrow-scope improvements to the guidance on collectabili
ty, non-cash consideration, and completed contracts at transition. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which amended the guidance on performance obliga
tion disclosures and makes technical corrections and improvements to the new revenue standard. T
he Company adopted this guidance effective January 1, 2018, which adoption did not have an impact on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes," which requires that deferred tax liabilities and assets be classified on our Consolidated Combined Balance Sheets as noncurrent based on an analysis of each taxpaying component within a jurisdiction. ASU No. 2015-17 is effective for non-public business entities the fiscal year commencing after December 15, 2017. The Company adopted this guidance effective January 1, 2018, which adoption did not have an impact on the Company’s consolidated financial statements.
Issued (Not adopted yet):
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. For the Company, ASU 2016-01 is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the potential impact this standard may have on its consolidated financial statements and the timing of adoption.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use (“ROU”) asset for all leases. For finance leases the lessee would recognize interest expense and amortization of the ROU asset and for operating leases the lessee would recognize a straight-line total lease expense. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016-02 is effective for annual and interim reporting periods within those years beginning after December 15, 2018 and early adoption is permitted. This update should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
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.
In May 2017, the FASB issued ASU No.
2017-09
, “Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting.” ASU
2017-09
clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of the award changes as a result of the change in terms or conditions. The guidance is effective prospectively for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The Company does not expect the adoption of this new guidance to have a material impact on its consolidated financial statements.
13
Other Accounting Standards Updates not effective until after March 31, 2018 are not expected to have
a material effect on the Company’s financial position or results of operations.
NOTE 15. Geographic Information
The Company currently operates in one business segment. Fixed assets are principally located in Company or third-party facilities in the United States, with immaterial amounts located in Argentina and Asia. The unaudited net sales by geographical area for the three months ended March 31, 2018 and 2017 were (in thousands):
|
|
For
the
Three
Months
Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Central America
|
|
$
|
289
|
|
|
$
|
381
|
|
South America
|
|
|
2,082
|
|
|
|
470
|
|
Mexico
|
|
|
568
|
|
|
|
—
|
|
Caribbean
|
|
|
838
|
|
|
|
—
|
|
EMEA
|
|
|
—
|
|
|
|
295
|
|
Canada
|
|
|
—
|
|
|
|
14
|
|
United States
|
|
|
1,547
|
|
|
|
1,650
|
|
Total
|
|
$
|
5,324
|
|
|
$
|
2,810
|
|
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 FASB accounting guidance requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. Fair value as defined by the guidance is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value estimates of financial instruments are not necessarily indicative of the amounts we might pay or receive in actual market transactions. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The Company follows ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which established a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The Company’s cash, cash equivalents are measured at fair value in the Company’s consolidated financial statements and are valued using unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs under ASC 820). The carrying amount of our accounts receivable, other trade accounts receivable, prepaid expenses, accounts payable, accrued expenses, notes payable to related parties and notes payable reported in the consolidated balance sheets approximates fair value because of the short maturity of those instruments.
At March 31, 2018 and December 31, 2017, the Company did not have any material applicable nonrecurring measurements of nonfinancial assets and nonfinancial liabilities.
NOTE 18. Acquisition of OneClick
Effective October 1, 2017, the Cooltech acquired all of the outstanding membership interests of OneClick International, LLC and OneClick License, LLC
(collectively, “OneClick”) (the “OneClick Acquisitions”). OneClick is a consumer electronics retailer, specializing in commercializing Apple products and compatible brand accessories and providing professional technical support to Apple retail customers. Pursuant to non-exclusive authorized reseller, distributor and service provider agreements with Apple, Inc., OneClick is authorized to purchase, resell and service certain authorized Apple products to other Apple-authorized resellers, end-users and other purchasers not purchasing such products for resale within the United States and Argentina.
14
In the acquisition of OneClick International, the Company issued promissory notes in the aggregate face amount of $2,996,000
($2,812,000 net of debt
discount)
and assumed liabilities of $11,963,000.
A
preliminary purchase price allocation
of the net assets acquired in the transaction is as follows:
Cash
|
|
$
|
1,072
|
|
Accounts receivable and due from related parties
|
|
|
6,358
|
|
Inventory
|
|
|
1,648
|
|
Fixed assets
|
|
|
321
|
|
Intangibles
|
|
|
866
|
|
Goodwill
|
|
|
4,510
|
|
Accounts payable and due to related parties
|
|
|
(6,530
|
)
|
Notes payable
|
|
|
(5,433
|
)
|
Total
|
|
$
|
2,812
|
|
In the acquisition of OneClick License, the Company issued promissory notes in the aggregate face amount of $562,000 ($526,000 net of debt discount) and cancelled liabilities of the members to the Company in the aggregate amount of $796,000. A preliminary purchase price allocation of the net assets acquired in the transaction is as follows:
Cash
|
|
$
|
45
|
|
Accounts receivable
|
|
|
277
|
|
Inventory
|
|
|
275
|
|
Fixed assets
|
|
|
44
|
|
Intangibles
|
|
|
330
|
|
Goodwill
|
|
|
1,425
|
|
Other assets
|
|
|
483
|
|
Accounts payable
|
|
|
(756
|
)
|
Notes payable
|
|
|
(798
|
)
|
Other liabilities
|
|
|
(3
|
)
|
Total
|
|
$
|
1,322
|
|
NOTE 19. 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. (“Cooltech”), 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 (the “Merger”), with Cooltech surviving as a wholly-owned subsidiary of InfoSonics. 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.
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 del 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 a third-party seller (the “Seller”) 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 (the “Unitron
15
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 irre
vocable right and option to acquire the Unitron Assets (the “Option”). The Option is 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 termi
nated or extended in accordance 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 secur
ities convertible into common stock), provided all necessary approvals as set forth in the Merger Agreement have been 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 is the legal acquiror of Cooltech in the Merger, for accounting purposes, Cooltech is 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.
Because the Merger involves 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 is 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 amounts to approximately $7.9 million. This amount is comprised of three elements: (1) $5.5 million representing the value of the 675,656 outstanding shares of InfoSonics common stock at $8.15/share; (2)
the $1.75 million value of the Private Placement, and (3) $676,000 representing the value of outstanding stock warrants and options. A breakdown of the net assets acquired in the transaction is as follows (in thousands):
Cash
|
|
$
|
1,266
|
|
Private placement proceeds
|
|
|
1,750
|
|
Accounts receivable
|
|
|
2,692
|
|
Inventory
|
|
|
3,190
|
|
Prepaid assets
|
|
|
1,454
|
|
Fixed assets
|
|
|
58
|
|
Goodwill
|
|
|
3,372
|
|
Other assets
|
|
|
28
|
|
Accounts payable
|
|
|
(2,746
|
)
|
Accrued expenses
|
|
|
(2,396
|
)
|
Long-term convertible debt
|
|
|
(735
|
)
|
Total
|
|
$
|
7,933
|
|
16