Simply, Inc. - Annual Report: 2013 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

For the fiscal year ended December 31, 2013

or

For the transition period from                  to                 

Commission File No. 001-32217

InfoSonics Corporation

(Exact name of registrant as specified in its charter)

3636 Nobel Drive, Suite 325

San Diego, CA 92122

(Address of principal executive offices including zip code)

858-373-1600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    ¨  Yes    x  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter was $4,488,320. This calculation is based upon the closing price of $0.45 of the stock on June 28, 2013. Without asserting that any director or executive officer of the registrant, or the beneficial owner of more than five percent of the registrant’s common stock, is an affiliate, the shares of which they are the beneficial owners have been deemed to be owned by affiliates solely for this calculation.

As of March 7, 2014, there were 14,184,145 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Company’s 2014 Annual Meeting of Stockholders expected to be held on June 9, 2014.

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InfoSonics Corporation

Form 10-K for the Year Ended December 31, 2013

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Forward-Looking Statements

Certain statements in this annual report on Form 10-K constitute “forward-looking statements.” These forward-looking statements involve known or unknown risks, uncertainties and other factors that may or may not be outside our control and that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Specifically, the actions of competitors, suppliers and customers are generally outside of our control. Our ability to execute our business plans and to increase revenues and operating income are each dependent upon our ability to continue to expand our current businesses and to enter new business areas, as well as upon general economic conditions and other factors, including some of the factors identified as “Risk Factors” in this annual report and from time to time in our other SEC filings. You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continues,” or the negative of these terms, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We do not intend to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, unless required by law.

In this annual report on Form 10-K, “InfoSonics,” “InfoSonics Corporation,” “the Company,” “we,” “us” and “our” refer to InfoSonics Corporation and our wholly owned subsidiaries on a consolidated basis, unless the context otherwise provides.

PART I

Company Overview

We are a provider of wireless handsets (which may be referred to herein as “phones”, “cell phones”, “mobile phones”, “feature phones” and “smartphones”), tablets and accessories to carriers, distributors and original equipment manufacturers (“OEMs”) in Latin America, Asia Pacific, Europe, Africa and the United States. We design, develop, source and sell our proprietary line of products under the verykool^® brand and on a private label basis to certain customers (collectively referred to as verykool^® products). We first introduced our verykool^® brand in 2006 with the goal to provide the market with products that are unique, beautifully designed, feature packed and provide exceptional “value” for the consumer. Our verykool^® products include entry-level, mid-tier and high-end feature phones and Android-based smartphones.

Our corporate headquarters are in San Diego, California. We have wholly owned subsidiaries in Central and South America, which conduct some of our business activities in their respective regions, as well as subsidiaries in Hong Kong and China where we conduct research and development of our verykool^® products, oversee production at contract manufacturers, conduct quality control and monitor third party logistics and warehousing for shipment to our customers. We also have sales representatives, field engineers and marketing resources located throughout Latin America, our principal market.

Over the past five years, our business has had two primary components: (1) legacy distribution of wireless handsets supplied by major manufacturers, primarily Samsung, and (2) provision of our own proprietary verykool^® products that we originally sourced from independent design houses and original design manufacturers (“ODMs”). In 2009, more than 95% of our net sales of approximately $231 million were derived from distribution sales of Samsung products to carriers in Argentina. In late 2009, however, a stiff import tariff on certain electronic devices, including wireless handsets, was enacted in Argentina. The tariff had a significant negative impact on our sales beginning in the first quarter of 2010, and ultimately resulted in a complete shut-down of our distribution of third party branded products which ended with the termination on March 31, 2012 of our distribution agreement with Samsung. Since April 1, 2012, our business has and will continue to be centered on our verykool^® product line.

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Our flagship product line is now verykool^®. In order to better control our product roadmap, in April 2010 we established an in-house design center in China where we design a number of phones in our product portfolio. We continue to source the majority of our phones from independent design houses and ODMs. We contract with electronic manufacturing services (“EMS”) providers to manufacture all of our branded products.

We incorporated under the laws of the State of California on February 7, 1994, under the name InfoSonics Corporation. On September 11, 2003, we reincorporated under the same name under the laws of and into the State of Maryland.

Global Wireless Industry

Today’s wireless handsets can be segmented into two primary categories: feature phones and smartphones. The distinguishing characteristics of smartphones is that they are built on a mobile operating system and are generally more sophisticated, have higher computing power and are more expensive. Rapid technological developments within the wireless telecommunications industry have allowed wireless subscribers to talk, send and receive text messages, send and receive e-mails, capture and transmit digital images, send and receive multimedia messages, play games, listen to music, watch visual content, run application programs and browse the Internet using all-in-one wireless handsets. Wireless handsets, accessories and services also are being used around the world to provide remote monitoring, point-of-sale transaction processing, inter-device communications, local area networks, location monitoring, sales force automation, and customer relationship management. While current demand for some of these more advanced services and features is not as strong in certain of the price-sensitive foreign markets we serve, the cost of producing smartphones continues to decline and we believe demand will continue to increase in the future as the products become more affordable and worldwide economic conditions improve.

According to International Data Corporation (“IDC”), shipments of mobile phones during 2013 increased by 4.8% to an estimated 1.822 billion devices compared to 1.738 billion units in 2012. However, according to IDC, shipments of smartphones in 2013 hit the one billion unit milestone by growing 38% over the prior year to 1.004 billion units. This represents a majority of approximately 55% of all mobile phone shipments for the year. According to IDC, the top trends driving smartphone growth are lower cost and large screen devices. The Android operating system continued its undisputed worldwide dominance in smartphones in 2013, growing from a 69% market share in 2012 to nearly 79% in 2013, according to Strategy Analytics.

In 2014, Gartner, Inc. expects 4.9% growth over 2013 in worldwide mobile phone shipments to almost 1.9 billion units. DigiTimes Research expects about a 24% increase in smartphone shipments in 2014, which would indicate a 19% decline in global shipments of feature phones compared to 2013. DigiTimes expects the smartphone growth to be driven by demand in Russia, India, Indonesia and Latin American countries.

Our Business and Strategy

The worldwide market for wireless handsets and tablets is extremely competitive. It is characterized by a large number of providers, often with very similar products, who often ultimately compete on price at very thin margins. The capabilities and features of the phones are primarily a function of the chipset manufacturers, and it is difficult to achieve differentiation. Despite this, we still believe differentiation is possible through a combination of factors, including through development of our line of verykool^® xTreme ruggedized handsets. We strive for (1) a consistent, attractive industrial design, (2) a unique combination of features, and (3) an attractive price point which together provide exceptional “value” to the consumer and which we hope will set our phones apart from the competition.

Our strategy includes the following elements:

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Smartphones vs. Feature Phones.

Technological advances and affordability in smartphones, including the pervasiveness of the open source Android operating system, are driving the global wireless industry. The popularity of smartphones is gaining dramatically in developed countries with broader-based consumer purchasing power. However, in certain geographic regions including Latin America, the market is extremely price sensitive and the price points of traditional smartphones are beyond the reach of most consumers. With increasing volumes and lower production costs for smartphones, we intend to expand our portfolio of affordable smartphones. We will also continue to provide low-end feature phones, but expect to replace more expensive feature phones with entry-level smartphones.

Geographic Market Expansion.

Historically, our traditional market focus has been Latin America. In the last few years, we have also shipped products on a private label basis to customers in Western Europe, Russia, Singapore, other Southeast Asian countries and Africa. However, this business has been inconsistent and sporadic. In 2014, we intend to market the verykool^® brand into certain of these markets to introduce the brand and build a more consistent business base. We also intend to increase our presence in the United States market. During 2013, we sold products to a small number of distributors in the U.S. who serve small Regional Service Area (“RSA”) carriers. In December 2013, we signed a distribution agreement with Ingram Micro Mobility, which we anticipate will provide us the opportunity in 2014 to access Ingram’s vast U.S. distribution network to carrier, retail and on-line customer channels.

Leverage our Latin America Presence.

We have worked hard over the past six years to develop the verykool^® brand name in Latin America. In 2014, we intend to continue to leverage the brand equity we have built in Latin America, as well as our existing in-country sales and technical resources, to expand sales to existing customers, acquire new customers, and expand into other Latin American countries where possible.

Design Partnerships.

The pace of technological advancement in the wireless industry continues to accelerate. We are confident in the capabilities of our design team, but recognize that our resources are limited in comparison to some of our competitors. We have used technology partnerships in the past, and intend to seek them out in the future, to leverage our core team and expand our capabilities. This is expected to help us expand our product portfolio and enable us to participate in new technologies.

Customers

Our current Latin American customers include carriers, agents, distributors and resellers. Our customers elsewhere in Asia Pacific, Europe and Africa are all OEM customers to whom our products are sold on a private label basis and comprised 3% of verykool^® product sales in 2013. In the United States, our customers include distributors who primarily supply regional carriers. We sell our products pursuant to customer purchase orders and ship products by common carrier based on customer-specified delivery dates. During 2013, we sold products to approximately 35 customers. Our three largest customers in 2013 represented 20%, 14% and 13% of our net sales, respectively. Our first and third largest customers were carrier customers in Latin America and our second largest customer was an open market distributor.

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Purchasing and Suppliers

In earlier years, Samsung was the major supplier for our distribution business, primarily in Argentina. Products purchased from Samsung related entities represented 0%, 9% and 41% of our cost of sales in 2013, 2012 and 2011, respectively. The decline in concentration of Samsung purchases is due to the termination on March 31, 2012 of our Samsung distribution agreement.

For our branded verykool^® products, we have established key relationships with a number of leading contract manufacturers of wireless telecommunications equipment in China. Certain of these manufacturers are ODMs who design and manufacture wireless handsets to our specifications or based upon their own criteria. Others are contract manufacturers who we use to produce wireless handsets to our specifications as designed and prototyped by our in-house design team. In 2013, we purchased products from ten manufacturers, the top three representing 38%, 12% and 10%, respectively, of our cost of sales.

We purchase products from manufacturers pursuant to purchase orders placed from time to time in the ordinary course of business. Purchase orders are typically filled, based on manufacturing lead times, and shipped to our designated warehouses by common freight carriers. We believe that our relationships with our suppliers are generally good. Any failure or delay by our suppliers in supplying us with products on favorable terms and at competitive prices may severely diminish our ability to obtain and deliver products to our customers on a timely and competitive basis. Although there are a number of such suppliers available to provide or manufacture our products, the establishment of these relationships typically requires a significant investment of time by both parties, and a change in suppliers could cause a delay in or loss of sales and adversely affect our results.

Sales and Marketing

We believe that direct selling and one-on-one relationships, as well as in-depth product and competitive landscape knowledge, are important factors in the marketing of the products we sell. Accordingly, in our business-to-business environment, we promote relationship building and maintenance through personal customer contact by our in-country sales and marketing professionals. Additionally, in order to promote our verykool^® brand, we advertise in certain of the geographies where we do business in industry publications, both print and online, on billboards and by attending industry trade shows. Further, we may participate in co-op advertising sponsored by our carrier customers in radio and newspaper ads.

As of December 31, 2013, we employed or contracted with 15 sales, marketing and merchandizing professionals who are assigned specific geographic territories, most of whom reside in-country. Each salesperson is generally compensated with a base salary or retainer plus a commission or bonus based on sales in his or her territory.

Research and Development

We maintain an in-house development team in China. Our product roadmap is determined and monitored by close coordination between our Chinese team and corporate product management. The focus of our in-house team has been our ruggedized line of xTreme products. In December 2012 and June 2013, we restructured the team to eliminate redundancies and consolidate it into a single location in Shenzhen to be closer to our suppliers, contract manufacturers and customers. At December 31, 2013, the team had 23 employees. R&D expenses for the years ended December 31, 2011, 2012 and 2013 were $1.6 million, $2.2 million and $1.3 million, respectively.

Financial and Other Information about Our Business

Other information, including financial, customer, competitive and geographic information, as well as a further discussion of the impact of the Argentina tariff, is incorporated by reference herein from Items 1A and 7 hereof and Note 11 to our Consolidated Audited Financial Statements.

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Seasonality

Our operations may be influenced by a number of seasonal factors in the countries and markets in which we operate. Our business historically has experienced increased sales during the fourth quarter of the calendar year due to the Christmas holiday season. On the supply side of our business, because all manufacturing of our branded verykool^® phones is done in China, the first quarter of the calendar year can be a difficult time during closure of factories for the Chinese New Year. We strive to manage around the closure, but if factories have difficulty starting back up, we could experience delays in getting product and satisfying customer orders, which could have a material adverse effect on our results.

Competition

The industry and markets where we operate are highly competitive and such competition may increase in the future. Wireless handsets are subject to price competition and price erosion over the lives of the products. We compete on a number of factors, including product design and features, product pricing, level of services offered, market and product knowledge, customer service, product availability and overall value provided to our customers. Our competitors often possess substantially greater financial, technological, marketing, personnel and other resources than we do, which could enable them to withstand substantial price competition, launch new products and implement extensive advertising and promotional campaigns. Historically, the barriers to entry into the sourcing and distribution of wireless handsets have been relatively low. Our ability to continue to compete successfully in the wireless handset business is largely dependent on our ability to anticipate and respond to various competitive and other factors affecting the industry, including new or changing outsourcing requirements, new technology requirements, new and differentiated product introductions, inconsistent or inadequate supply of product, changes in consumer preferences, demographic trends, regional and local economic conditions, and discount pricing strategies and promotional activities by competitors.

We compete for sales of wireless handsets and accessories with well-established carriers, distributors and in some cases our current contract manufacturers. Manufacturers, including our own suppliers, sell their products directly to some large carriers, and as these carriers grow in size, they may pose more of a competitive threat to our business by bypassing our distribution system in favor of doing business directly with manufacturers. Our competitors in Latin America include wireless OEMs, wireless equipment manufacturers, carriers and wireless distributors such as BrightPoint, Inc. (now part of Ingram Micro), Brightstar Corporation and CT Miami. Our competition in Asia Pacific is very fragmented and includes a large number of Asia-based ODMs.

Information Systems

Our information systems are comprised of a standard licensed accounting and general ledger software system plus a licensed data base program that has been customized to meet our specific needs. The data base system allows management to exercise real-time control over many elements of our business including customer relationship management, purchasing, inventory management and control, sales order control and pricing management. It also provides management with many reports and statistical analysis relating to products, customers and suppliers. Although we believe our information systems are adequate, the two systems are discreet and do not interface with each other. As a result, there is a significant amount of duplicate data entry required to record all transactions in the accounting system. We have licensed a more complete and integrated enterprise resource planning (“ERP”) system which we are in the process of implementing.

Employees

As of December 31, 2013, we had 67 employees and contractors. Of these employees and contractors, 2 were in executive management positions, 15 were engaged in sales and marketing, 23 were in research and development, 3 were in service operations, 4 were in finance and administration, and 20 were in product development, logistics and field engineering. From time to time, we utilize temporary employees to perform warehouse functions. Our employees and contractors are not covered by a collective bargaining agreement. We believe that our relations with our employees and contractors are good.

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Available Information

Our website at www.infosonics.com provides a link to the Securities and Exchange Commission’s website where our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports (as well as exhibits and supplementary schedules) filed with or furnished to the SEC can be accessed free of charge. Our website also provides links to the charters for our Audit, Compensation and Nominating & Governance Committees as well as our Codes of Business Conduct and of Ethics, which can be accessed free of charge at http://www.infosonics.com/corporate_governance.aspx.

Risks Relating to Our Business

The loss or reduction in orders from principal customers or a reduction in prices we are able to charge these customers would have a negative impact upon our financial results.

Our three largest customers for the year ended December 31, 2013, represented 20%, 14% and 13% of our net sales, respectively. The markets we serve and are targeting for future business are subject to significant price competition and our customers are not contractually obligated to purchase products from us. For these and other reasons, such as competitive pricing and competitive pressures, customers may seek to obtain products or services from us at lower prices than we have been able to charge in the past, and they could terminate our relationship or reduce their purchases from us in favor of lower-priced alternatives. In addition, we have experienced losses of certain customer bases through industry consolidation, a trend that may increase in our markets, and in the ordinary course of business. The further loss of any of our principal customers, a reduction in the amount of product or services our principal customers order from us or the inability to maintain current terms, including price, with these or other customers could have an adverse effect on our financial condition, results of operations and liquidity.

We have been experiencing net losses and expect that net losses could continue for an uncertain period. If we continue to operate at a loss, our business may not be financially viable.

For the year ended December 31, 2013, our net loss was $597,000. We have now reported seven consecutive loss years with an aggregate net loss of $22.7 million. As of December 31, 2013, our cash balance was $2.4 million, we had net working capital of $16.0 million and we had no outstanding debt. Given the continued economic slowdown, our business now being focused on proprietary products without established markets and the uncertainty of most global markets, we cannot adequately evaluate the financial viability of our business or our long-term prospects with any certainty. While our business plan includes a number of objectives to achieve profitability, if we do not succeed in these objectives, our business might continue to experience losses and may not be sustainable in the future.

We may not succeed in our development, introduction and establishment of proprietary products in our markets.

The development, introduction and establishment of new products in our proprietary verykool^® line requires a significant investment in research and product development, manufacturing and marketing. Our development team in China has had success with delivery of new products, but has also encountered delays and design challenges, and may not be successful in developing the differentiated products we need to ultimately implement our strategy successfully. In addition, our new products may not be well received by our customers or the end-users. Further, failure to adequately carry out our product marketing, sales and delivery strategy or otherwise be successful in promoting our verykool^® brand may result in inventory obsolescence, including inventory which we have built in anticipation of market acceptance of our products. If any of these events occur, our financial condition and operating results would be negatively impacted.

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Our operating results may vary significantly, which may cause our stock price to fluctuate.

Our operating results are influenced by a number of factors that may cause our sales and operating results to fluctuate significantly from quarter to quarter. These factors include:

Our operating performance may cause our stock price to fluctuate. Between January 1, 2013 and March 7, 2014, our stock price has fluctuated between $0.38 and $4.23 per share, and we anticipate that significant volatility in our stock price will continue for the foreseeable future.

We do not currently have a bank line of credit or other source of financing.

We do not currently have a bank line of credit or other financing source. While we believe that our current cash resources and working capital may adequately fund our operations for the foreseeable future, the lack of financing could impede the future growth of our business. We are currently in discussions with a number of funding sources to provide financing, but there can be no assurance that a definitive agreement will be reached.

We face many risks relating to intellectual property rights.

Our business will be harmed if we and/or our manufacturers are found to have infringed intellectual property rights of third parties, or if our intellectual property protection is inadequate to protect proprietary rights used in our verykool^® product line.

Because our proprietary verykool^® products are comprised of complex technology, we may be subject to or impacted by litigation regarding intellectual property rights. Third parties may assert intellectual property infringement claims against us and against our manufacturers. Defending claims may be expensive and divert the time and efforts of our management and employees. Increasingly, third parties have sought broad injunctive relief in our industry, which could ultimately limit our ability to sell our verykool^® products. If any litigation arises and we do not succeed in such litigation, we could be required to expend significant resources to pay damages, develop non-infringing intellectual property or to obtain licenses to the intellectual property that is the subject of such litigation. However, we cannot be certain that any such licenses, if available at all, will be available to us on commercially reasonable terms. In some cases, we might be forced to stop delivering certain or all of our verykool^® products if we or our manufacturers are subject to a final injunction or other restrictions.

We attempt to negotiate favorable intellectual property indemnities with our manufacturers for infringement of third-party intellectual property rights, but we may not be successful in our negotiations. Also, any manufacturer’s indemnity may not cover any or all damages and losses suffered by us due to a potentially infringing verykool^® product, and a manufacturer may not choose to accept a license or to modify or replace its products with non-infringing products, which would otherwise mitigate such damages and losses. Further, we may not be able to participate in intellectual property litigation involving a manufacturer or influence any ultimate outcome that may adversely impact our sales, such as an injunction or other restrictions that relating to our verykool^® products.

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In addition, it may be possible for a third party to obtain and use our or our manufacturers’ proprietary information or develop similar technology relating to our verykool^® products independently. Furthermore, effective patent, copyright, trademark and trade secret protection may be unavailable or limited, especially in certain foreign countries, such as China where adherence to enforcement of intellectual property rights is not as prevalent or available as in other countries, such as the United States. Unauthorized use of our or our manufacturers’ intellectual property rights by third parties and the cost of any litigation necessary to enforce our or our manufacturers’ intellectual property rights could have an adverse impact on our business.

The majority of our revenues during the year ended December 31, 2013 were, and for the near future will likely continue to be, generated outside of the United States, in countries that may have volatile currencies or other risks.

The vast majority of our sales activities are conducted in territories and countries outside of the United States, primarily in Latin America, and to a lesser extent in Europe and Asia Pacific. Historically, the majority of our sales transactions were denominated in U.S. dollars and therefore may be impacted by changes in the strength of the U.S. dollar relative to the foreign economies where we conduct business. Certain sales transactions in Mexico are denominated in the Mexican peso, which has been a very volatile currency. Further, the fact that we sell all of our products into, and have developed and manufactured products in, a number of territories and countries other than the United States exposes us to, among other things, increased credit risks, customs duties, import quotas and other trade restrictions, potentially greater and more unpredictable inflationary and currency pressures, labor risks and shipping delays. Changes may occur in social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently develop and sell products. United States laws and regulations relating to investment and trade in foreign countries could also change to our detriment. We are particularly exposed to the fact that all our R&D and manufacturing activities are in China, which may change its own policies on business and foreign investment in companies there. Any of these factors could have material adverse effects on our business and operations. Also, although we purchase and sell products in U.S. dollars and do not engage in significant exchange swaps, futures or options contracts or other hedging techniques, fluctuations in currency exchange rates could reduce demand for products sold in U.S. dollars. We cannot predict the effect that future exchange rate fluctuations will have on our operating results or financial position. We may in the future engage in currency hedging transactions, which could result in our incurring significant additional financial risks, including increased costs and losses resulting from these transactions.

We may not be able to adequately respond to rapid technological changes in the wireless handset industry, which could cause us to lose customers.

The technology relating to wireless handsets changes rapidly, resulting in product obsolescence or short product life cycles. We are required to anticipate future technological changes in our industry and to continually identify, obtain and market new products that will satisfy evolving industry and customer requirements. Although we are now making significant investments in R&D to keep our proprietary verykool^® products competitive in terms of technology and features, there is no guarantee we will have success with this, which could materially affect our business. Competitors or manufacturers of wireless handsets may market products which have perceived or actual advantages over products that we market or which otherwise render those products obsolete or less marketable. Furthermore, if we do not adequately anticipate future technological changes, we may not establish appropriate supplier relationships or perform appropriate product development. These factors all pose significant risks to loss of customers and decreased sales and profitability.

Substantial defaults by our customers on accounts receivables could have a significant negative impact on our cash flow and financial condition.

We offer open account terms to certain of our customers, both large and small, which may subject us to credit risks, particularly to the extent that our receivables represent sales to a limited number of customers or are concentrated in particular geographic markets. A substantial default by a major customer could have a material adverse effect on our financial position, cash flow and results of operations.

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We rely on our information technology systems to function efficiently, without interruptions, and if they do not, customer relationships could be harmed.

We are dependent upon our information systems to manage our business and to be responsive to our customers needs, and we plan to implement a new ERP system in 2014. These systems may experience interruptions, including interruptions of related services from third-party providers which may be beyond our control. Such business interruptions could cause us to fail to meet customer requirements and could result in the loss of business relationships. All information technology systems, both internal and external, are potentially vulnerable to damage or interruption from a variety of sources, including, without limitation, computer viruses, security breaches, energy blackouts, natural disasters, terrorism, war and telecommunication failures, as well as third-party provider failures. We have implemented various measures to manage our risks related to system and network disruptions, but a systems failure or security breach or other problem with our information technology systems could negatively impact our operations and financial results.

We face risks related to our dependence on third parties to manufacture our proprietary verykool^® products.

Our third party manufacturers typically provide limited or no warranties on their products. We generally pass through any warranties received from our manufacturers to our customers, and in absence of such warranties, we are solely responsible for the products. If a product we source from a manufacturer has delivery, quality or performance problems, our ability to provide satisfactory products to our customers could be disrupted (including, for example, during and after Chinese New Year) and our reputation could be impaired. We also may not be able to sell these products before payment is due our manufacturers or at prices above our cost. Any of these risks could have a negative impact on our business and operations.

The wireless handset industry is intensely competitive and we may not be able to continue to compete against well-established competitors with greater resources.

We compete for sales of wireless handsets and accessories with numerous well-established manufacturers, carriers and distributors, sometimes including our own suppliers and customers. Many of our competitors possess greater financial and other resources than we do and may market similar products or services directly to our customers or potential customers. Sourcing and distribution of wireless handsets and accessories has generally had low barriers to entry. As a result, additional competitors may choose to enter our industry in the future. The markets for wireless handsets and accessories are characterized by intense price competition and significant price erosion over the life of a product. Many of our competitors have the financial resources to withstand substantial price competition and to implement extensive advertising and promotional programs, both generally and in response to efforts by additional competitors to enter into new markets or introduce new products. Our ability to continue to compete successfully will depend largely on our ability to maintain our current industry relationships, with both manufacturers and carrier customers, as well as differentiate our verykool^® branded products from the competition. We may not be successful in anticipating and responding to competitive factors affecting our industry or these relationships, including introduction of new products, changes in consumer preferences, demographic trends, new or changing outsourcing requirements, the entry of additional well-capitalized competitors, international, national, regional and local economic conditions, and competitors’ discount pricing and promotion strategies. As wireless telecommunications markets mature, and as we seek to enter into new markets and offer new products, the competition that we face may change and grow more intense.

We rely on trade secret laws and agreements with our key employees and other third parties to protect our proprietary rights, which may not afford adequate protection.

We rely on trade secret laws to protect our proprietary knowledge, particularly, the information and technology related to our verykool^® brand, our database of customers and suppliers and business terms such as pricing. In general, we also have non-disclosure agreements with our key employees (including our design team in China) and limit disclosure of our trade secrets and other proprietary information. These measures may prove difficult to enforce and may not prove adequate to prevent misappropriation of our proprietary information.

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We are dependent on a small number of personnel.

Our success depends in large part on the abilities and continued service of our executive officers, particularly Joseph Ram, our CEO and largest stockholder, and other key employees. If we are unable to retain our executive officers or other key personnel, it could impede our ability to fully and timely implement our business plan and future growth strategy. In addition, in order to support our continued growth, we will be required to effectively recruit, develop and retain additional qualified management. Competition for such personnel is intense, and there can be no assurance that we will be able to successfully attract, assimilate or retain sufficiently qualified personnel.

We may become subject to lawsuits alleging medical risks associated with our wireless handsets, the cost of which could be substantial.

Lawsuits or claims have been filed or made against manufacturers of wireless handsets alleging possible medical risks, including brain cancer, associated with the electromagnetic fields emitted by wireless handsets. There has been only limited relevant research in this area, and this research has not been conclusive as to what effects, if any, exposure to electromagnetic fields emitted by wireless handsets has on human cells. Substantially all of our revenues are derived, either directly or indirectly, from sales of wireless handsets. We may become subject to lawsuits filed by plaintiffs alleging various health risks from our products. If any future studies find possible health risks associated with the use of wireless handsets, or if any damages claimed against us or a business partner is successful, it could have a material adverse effect on our business. Even an unsubstantiated perception that health risks exist could adversely affect our ability or the ability of our customers to market wireless handsets.

Risks Related To Our Common Stock

The market for our common stock is volatile and our stock price could decline.

An active trading market for our common stock may not be sustained, which could affect the ability of our stockholders to sell their shares and could depress the market price of our shares. Additionally, the stock market in general, including the market for telecommunications-related stocks in particular, has been highly volatile. For example, the closing price of our common stock has fluctuated between $0.38 and $4.23 from January 1, 2013 through March 7, 2014.

The market price of our common stock has been and is likely to remain volatile, and investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects, resulting in a substantial loss on their investment.

We may be delisted from The NASDAQ Stock Market if we do not satisfy continued listing requirements.

At various times over the last several years we faced potential delisting from The NASDAQ Stock Market for failure to maintain the minimum $1.00 bid price per share requirement for continued listing. If our common stock trades for 30 consecutive business days below the $1.00 minimum closing bid price requirement, NASDAQ will send us a deficiency notice advising us that we will be afforded a “compliance period” of 180 calendar days to regain compliance with the applicable requirements. Because of our most recent failure to comply with this requirement in December 2012, we were afforded two 180-day periods by The NASDAQ Stock Market to regain compliance. On January 9, 2014, after the closing bid price of our stock had been at $1.00 per share or greater for 10 consecutive business days, we were notified by The NASDAQ Stock Market that we had regained compliance.

If our common stock were delisted from The NASDAQ Stock Market, you may find it difficult to dispose of your shares and our share price may be adversely affected.

If our common stock were to be delisted from The NASDAQ Capital Market, trading of our common stock most likely would be conducted in the over-the-counter market on an electronic bulletin board established for

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unlisted securities such as OTC Pink, OTCQX, OTCQB or the OTC Bulletin Board. Such trading would reduce the market liquidity of our common stock. As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock, thereby negatively impacting the share price of our common stock.

If our common stock is delisted from The NASDAQ Capital Market and the trading price remains below $5.00 per share, trading in our common stock might also become subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, which require additional disclosure by broker-dealers in connection with any trade involving a stock defined as a “penny stock” (generally, any equity security not listed on a national securities exchange or quoted on The NASDAQ Stock Market that has a market price of less than $5.00 per share, subject to certain exceptions). Many brokerage firms are reluctant to recommend low-priced stocks to their clients. Moreover, various regulations and policies restrict the ability of stockholders to borrow against or “margin” low-priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the common stock can result in an individual stockholder paying transaction costs that represent a higher percentage of total share value than would be the case if our share price were higher. This factor may also limit the willingness of institutions to purchase our common stock. Finally, the additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from facilitating trades in our common stock, which could severely limit the market liquidity of the stock and the ability of investors to trade our common stock, thereby negatively impacting the share price of our common stock.

The ability of our stockholders to control our policies or effect a change in control of our company is limited, which may not be in our stockholders’ best interests.

Some provisions of our charter and bylaws and the General Corporation Law of Maryland, under which we are incorporated, may delay or prevent a change in control of our company or other transactions that could provide our common stockholders with a premium over the then-prevailing market price of our common stock or that might otherwise be in the best interests of our stockholders. These include the ability of our Board of Directors to authorize the issuance of preferred stock without stockholder approval, which preferred stock may have voting provisions that could delay or prevent a change in control or other transaction that might involve a premium price or otherwise be in the best interests of our stockholders. Maryland law imposes restrictions on some business combinations and requires compliance with statutory procedures before some mergers and acquisitions can occur. These provisions of Maryland law may have the effect of discouraging offers to acquire us even if the acquisition would be advantageous to our stockholders.

Stockholders have been and may be diluted as a result of past or future offerings or other financings or equity grants.

We have raised and may in the future raise additional capital through one or more public offerings, private placements or other financings involving our securities and have made or may make stock option and other equity incentive grants. As a result of these financings or grants, ownership interests in us may be diluted, potentially substantially.

Our largest stockholder may have strategic interests that differ from those of our other stockholders, and can significantly influence important corporate matters.

As of March 1, 2014, our Chief Executive Officer Joseph Ram, beneficially owned approximately 30% of our outstanding common stock. As a result, Mr. Ram may be able to significantly influence corporate actions relating to:

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Not Applicable.

Our corporate headquarters office is located in San Diego, California. Our verykool^® R&D facility is located in Shenzhen, China, close to our contract manufacturers. All of these facilities are occupied pursuant to operating leases. The table below summarizes information concerning those leases, but does not include local sales tax, VAT tax or common area maintenance charges where applicable:

We believe that these facilities are adequate for our current requirements and that suitable alternative or additional space will be available as needed for alternative space or to accommodate future expansion of our operations. We expect the Shenzhen lease to be renewed or replaced by March 31, 2014 at comparable terms.

Viamport Litigation

On May 22, 2012, a lawsuit was filed against the Company in Santo Domingo, Dominican Republic (Case No. FP-12-461) by Viaimport, SRL, a former customer of the Company, and served on the Company on July 12, 2012. The complaint alleges breach of contract and seeks U.S. $1 million in damages. The Company believes that this case is without merit and intends to vigorously defend itself. In addition, on August 31, 2012, the Company filed a lawsuit against Viaimport and its principal, Omar Hassan, in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County Florida (Case No. 12-34647CA32) for non-payment of purchase obligations aggregating $288,559 and other damages. On August 12, 2013, Viaimport filed a counterclaim against InfoSonics in Miami-Dade County, which is essentially a mirror image of the Dominican Republic complaint. On November 19, 2013, InfoSonics filed a request with the Dominican Republic Court to request dismissal of the case there for lack of jurisdiction in order to have both related actions heard in Miami-Dade County. Both lawsuits are in the discovery stage. The Miami actions are scheduled for trial on May 27, 2014; no trial date has been set for the Dominican Republic case. The parties began settlement discussions on January 16, 2014, which discussions are still ongoing. At this time we do not believe these matters will have a material adverse effect on our financial condition. However, the ultimate legal and financial liability with respect to these matters cannot be estimated with certainty and the Dominican Republic case is complicated by its foreign venue.

Steelhead Litigation

On January 14, 2013, Steelhead Licensing LLC (“Steelhead”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the District of Puerto Rico, alleging that certain of our products infringe claims of U.S. Patent No. 5,491,834. Steelhead was seeking injunctive relief as well as the recovery of unspecified monetary damages. On May 24, 2013 we entered into a Settlement and Patent License Agreement with Steelhead whereby we denied any wrongdoing and received a fully paid up and perpetual license to Steelhead patents in exchange for a one-time cash payment of an immaterial amount. The lawsuit has now been dismissed with prejudice.

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Wyncomm Litigation

On April 12, 2013, Wyncomm LLC (“Wyncomm”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the District of Delaware, alleging that certain of our products infringe claims of U.S. Patent No. 5,506,866. Wyncomm is seeking recovery of unspecified monetary damages. We do not believe we infringe the Wyncomm patent and intend to defend ourselves vigorously. On February 13, 2014 we filed an answer with the Court stating that we do not infringe and setting forth multiple defenses. We are currently in settlement discussions with Wyncomm, and do not believe this lawsuit will have a material adverse effect on our financial condition.

Blue Spike Litigation

On October 8, 2013, Blue Spike, LLC (“Blue Spike”) filed a patent infringement lawsuit against the Company in the U.S. District Court for the Eastern District of Texas, alleging that certain of our products infringe claims of U.S. Patent No. 5,745,569. Blue Spike is seeking recovery of unspecified monetary damages. We do not believe we infringe the Blue Spike patent and intend to defend ourselves vigorously. On February 10, 2014 we filed an answer with the Court stating that we do not infringe and setting forth multiple defenses. Due to the inherent uncertainty of litigation, we cannot identify probable or estimable damages related to the lawsuit at this time.

The Company may become involved in certain other legal proceedings and claims which arise in the normal course of business. Other than as described above, as of the filing date of this report, the Company did not have any significant litigation outstanding.

Not Applicable.

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PART II

Our Common Stock trades on The NASDAQ Capital Market under the symbol “IFON.” The following table sets forth, for the periods indicated, the high and low trading prices of our Common Stock as reported by The NASDAQ Stock Market:

As of March 7, 2014 the closing price of our common stock on The NASDAQ Capital Market was $3.68, and there were approximately nine stockholders of record.

We have not paid any cash dividends and do not expect to pay any cash dividends in the foreseeable future.

The information regarding equity compensation plans is incorporated by reference into Item 12 of this Form 10-K, which incorporates by reference the information set forth in the Company’s Definitive Proxy Statement in connection with the 2014 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the 2013 fiscal year.

Unregistered Issuances.

None for applicable period.

Issuer Repurchases of Equity Securities.

None for applicable period.

Not Applicable.

Our management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our accompanying Consolidated Audited Financial Statements and related notes, as well as the “Risk Factors” and other information contained in this annual report. The discussion is based upon, among other things, our Consolidated Audited Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to, among other things, make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent liabilities at the financial statement dates and the reported amounts of revenues and expenses during the reporting periods. We review our estimates and assumptions on an ongoing basis. Our estimates are based on our historical

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experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations, although they could. Our critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined below in “Critical Accounting Policies.” All references to results of operations in this discussion are references to results of continuing operations, unless otherwise noted.

Overview and Recent Developments

We are a provider of wireless handsets (which may be referred to herein as “phones”, “cell phones”, “mobile phones”, “feature phones” and “smartphones”) and accessories to carriers, distributors and OEMs in Latin America, Asia Pacific, Europe, Africa and the United States. We design, develop, source and sell our proprietary line of products under the verykool^® brand and on a private label basis to certain customers (collectively referred to as verykool^® products). verykool^® products include entry-level, mid-tier and high-end feature phones and Android-based smartphones. We first introduced the verykool^® brand in 2006, and have been working to gain brand identity and grow sales. We have recently transformed our company from our prior business model as a distributor of phones designed, developed and manufactured by others, to our current business model of designing, manufacturing, sourcing and selling our own verykool^® products.

Over the past five years, our business has had two primary components: (1) legacy distribution of wireless handsets supplied by major manufacturers, primarily Samsung, and (2) provision of our own proprietary verykool^® products that we originally sourced from independent design houses and original design manufacturers (“ODMs”). In 2009, more than 95% of our net sales of approximately $231 million were derived from distribution sales of Samsung products to carriers in Argentina. In late 2009, however, a stiff import tariff on certain electronic devices, including wireless handsets, was enacted in Argentina. The tariff had a significant negative impact on our sales beginning in the first quarter of 2010, and ultimately resulted in a complete shut-down of our distribution business of third party branded products which ended with the termination on March 31, 2012 of our distribution agreement with Samsung. Since April 1, 2012, our business has and will continue to be centered on our verykool^® product line.

The majority of our phones are sourced from independent design houses and ODMs. In addition, a number of phones in our product portfolio are developed internally by our in-house design team in Shenzhen, China, which currently consists of 23 employees. We contract with electronic manufacturing services (“EMS”) providers to manufacture all of our branded products.

Historically, our traditional market focus has been Latin America. During 2013 we did a small amount of business with customers in the United States and sought to expand our presence in the U.S. market. In December 2013 we signed a distribution agreement with Ingram Micro Mobility which we anticipate will provide us the opportunity in 2014 to access Ingram’s vast U.S. distribution network to carriers, retail and on-line customer channels.

Areas of Management Focus and Performance Indicators

We focus on the needs of our customers, developing and sourcing new and innovative products, fostering close relationships with manufacturers, and expanding our business in our current markets and entering into new geographic markets, all while maintaining close attention to operational efficiencies and costs. We are particularly focused on increasing sales volumes of higher margin proprietary products in a cost effective manner to enable us to return to profitability, as well as monitoring and managing levels of accounts receivable and inventory to minimize risk. Performance indicators that are important for the monitoring and management of our business include top line sales growth, cost of sales and gross margin percentage, operating expenses in absolute dollars and as a percent of revenues and operating and net income (loss). We rely upon our in-house software

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management system to exercise real-time control over many elements of our business including customer relationship management, purchasing, inventory management and control, sales order control and pricing management.

Management and employees spend a significant amount of time traveling to Latin America and Asia Pacific with the purpose of spending time with our key customers, suppliers, our Chinese design team and other contractors and employees. We believe that these relationships are vital to our success and we will continue to dedicate a significant amount of time to this area.

Critical Accounting Policies and Estimates

Critical accounting policies are those policies that, in management’s view, are most important in the portrayal of our financial condition and results of operations. The notes to our consolidated Financial Statements also include disclosure of significant accounting policies. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the condition and results that we report in our financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain. Our critical accounting policies and estimates and assumptions that require the most significant judgment are discussed further below.

Revenue Recognition and Allowance for Returns

Revenues for wireless handset and accessory sales are recognized when (i) shipment of the products to customers has occurred and title has passed, (ii) when collection of the outstanding receivables is probable and (iii) the final price of the products is determined, which occurs at the time of shipment. Sales are recorded net of discounts, rebates, cooperative marketing arrangements, returns and allowances. On select sales, we may agree to cooperative arrangements wherein we agree to fund future marketing programs related to the products purchased by the customer. Such arrangements are usually agreed to in advance. The amount of the co-op allowance is recorded as a reduction of the sale and added to accrued expenses as a current liability. Subsequent expenditures made pursuant to the arrangements reduce this liability. To the extent we incur costs in excess of the established cooperative fund, we recognize the amount as a selling or marketing expense. As part of the sales process, we may perform certain value-added services such as programming, software loading and quality assurance testing. These value-added services are considered an ancillary component of the sales process and amounts attributable to these processes are included in the unit cost to the customer. Furthermore, these value-added services are related to services prior to the shipment of the products, and no value-added services are provided after delivery of the products. We recognize as a reserve against the related receivables estimates for product returns based on historical experience and other judgmental factors, evaluate these estimates on an ongoing basis and adjust our estimates each period based on actual product return activity. We recognize freight costs billed to our customers in sales and actual freight costs incurred as a component of cost of sales.

Allowance for Doubtful Accounts

We provide for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. We evaluate the collectability of our accounts receivable on an ongoing basis. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations, we record a specific allowance against amounts due in order to reduce the net recognized receivable to the amount we reasonably believe will be collected, after consideration for accounts receivable insurance coverage we may have. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and our historical experience.

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Inventory Reserves

We regularly monitor inventory quantities on hand and record a provision for excess, slow moving and obsolete inventories based primarily on historical usage rates and our estimated forecast of product demand and expected pricing. We attempt to tightly control our inventory levels and in the recent past have moved more to a build-to-order model. However, because we need to place non-cancelable orders with our contract manufacturers with a lead time of 30 to 60 days, and because we may not have a confirmed customer purchase order in hand as quickly as we would like to, we sometimes take inventory risk. As our products get closer to end-of-life status, we are more strict about our build-to-order policy in order to limit our inventory exposure on older product.

Results of Operations:

The following table sets forth certain items from our consolidated statements of operations and comprehensive loss as a percentage of net sales for the periods indicated:

We do not believe that inflation had a significant impact on our results of operations for the periods reported in our Consolidated Audited Financial Statements.

Year Ended December 31, 2013 Compared With Year Ended December 31, 2012

Net Sales

For the year ended December 31, 2013, our total net sales of $37.9 million increased by $3.6 million, or 10.5%, compared to net sales of $34.3 million in 2012. Sales during 2013 of verykool^® products increased by $6.3 million, or 20.1%, compared to $31.6 million in 2012, offset by the decrease of $2.7 million of Samsung distribution sales in 2012. Our Samsung distribution business ended March 31, 2012. Our revenue growth reflects strong performance with carrier customers in Peru, Guatemala, Puerto Rico and the Dominican Republic, partially offset by declines in private label sales in Europe, Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”). 2013 represented a record year for sales of verykool^® products, both in terms of dollar value and units sold. We shipped 1.9 million units in 2013, an 86% increase over 1.0 million units shipped in 2012. However, the product mix shifted significantly to low-end feature phones resulting in a reduction of our average selling price from $30.19 in 2012 to $19.65 in 2013.

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Cost of Sales, Gross Profit and Gross Margin

For the year ended December 31, 2013, cost of sales was $31.0 million, 81.7% of net sales, and gross margin was 18.3%, compared to cost of sales of $27.5 million, 80.2% of net sales, and a 19.8% gross margin for the year ended December 31, 2012. In 2013, our gross profit amounted to $6.9 million, an increase of 2.0% from $6.8 million in 2012. The 7.7% reduction in gross margin was primarily the result of a higher concentration of sales of low-end feature phones at lower gross margins.

Operating Expenses and Operating Loss

For the year ended December 31, 2013, operating expenses of $8.1 million decreased by $1.2 million, or 13.0%, from $9.3 million in 2012. Selling, general and administrative (“SG&A”) expenses decreased by $0.3 million and R&D spending decreased by $0.9 million. The decrease in SG&A expenses in 2013 compared to 2012 was primarily the result of a lack of bad debt expense in 2013 compared to an isolated bad debt recorded in the first quarter of 2012. The decreased R&D expenses were primarily the result of the reduction-in-force and consolidation of our development team into our Shenzhen, China office which we accomplished in the first and second quarters of 2013. Severance costs of $100,000 for the employees terminated in the first quarter of 2013 were recorded in the fourth quarter of 2012 as we finalized the plan to eliminate the headcount redundancies in December 2012.

For the year ended December 31, 2013, we sustained an operating loss of $1.1 million, cutting by more than half the operating loss of $2.5 million for the year ended December 31, 2012. The $1.4 million improvement came primarily from the $1.2 million reduction in operating expenses and $0.1 million improvement in gross profit.

Interest Expense and Other Income (Expense)

For the year ended December 31, 2013, other income (expense) of $582,000 consisted principally of $527,000 related to the legal defeasance of a previously recorded supplier obligation that had been included in accrued expenses on our balance sheet and $55,000 related to a forfeited customer deposit. Interest income, principally from a customer installment obligation, amounted to $17,000. In 2012, other income (expense) included $72,000 of expense comprised of $48,000 of foreign exchange losses and a $24,000 loss on disposal of fixed assets. We also recorded $61,000 of interest income primarily related to financed customer receivables.

Net Loss

For the year ended December 31, 2013, our net loss was $597,000 after a tax provision of $51,000 related primarily to a foreign dividend received from one of our wholly owned subsidiaries. Because of our prior operating losses and lack of carry-back ability, our provision for income taxes for 2012 was nominal and our net loss was $2.5 million.

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Year Ended December 31, 2012 Compared With Year Ended December 31, 2011

Net Sales

For the year ended December 31, 2012, our net sales of $34.3 million decreased by $0.6 million, or 1.7%, compared to net sales of $34.9 million in 2011. The significant decrease in our distribution business from 2011 to 2012 was almost entirely offset by the increase in sales of our branded verykool^® products. Our Samsung distribution business ended March 31, 2012 as a consequence of a stiff import tariff on certain electronic devices, including wireless handsets, that was enacted in Argentina in November 2009 and an additional import regulation which became effective in March 2011. These protective import actions began to negatively affect our sales beginning in the first quarter of 2010, accelerated through 2010 and continued through the end of 2011. In 2012, our Samsung distribution sales declined by $10.7 million, or 81%, to $2.5 million from $13.2 million in 2011. Nearly offsetting this decline was an increase in sales of our branded verykool^® products of $10.1 million, or 47.3%, to $31.6 million from $21.4 million in 2011. This represented a record year for sales of verykool^® products, both in terms of dollar value and units sold.

Cost of Sales, Gross Profit and Gross Margin

For the year ended December 31, 2012, cost of sales was $27.5 million, 80.2% of net sales, and gross margin was 19.8%, compared to cost of sales of $30.3 million, 87.0% of net sales, and a 13.0% gross margin for the year ended December 31, 2011. In 2012, our gross profit amounted to $6.8 million, an increase of 49.9%, from $4.5 million in 2011. The significant improvements in both our gross profit and our gross margin percentage were primarily a result of the shift in the mix of sales to a lower concentration of distribution sales and a higher concentration of branded sales incident to the expiration of our distribution agreement with Samsung. Sales of our verykool^® branded products typically result in higher gross margins than our distribution sales. In 2011, distribution sales comprised 38% of total revenues, with 62% represented by branded sales. In 2012, distribution sales fell to 8% of total revenues, with 92% coming from sales of branded verykool^® products.

Operating Expenses and Operating Loss from Continuing Operations

For the year ended December 31, 2012, operating expenses of $9.3 million increased by $2.2 million, or 31.5%, from $7.1 million in 2011. Selling, general and administrative (“SG&A”) expenses increased by $1.6 million and R&D spending increased by $0.6 million. The increased SG&A expenses included increases in the following areas: personnel additions in the sales, logistics and service departments, sales commissions on increased sales of verykool^® branded products, marketing, homologation and an isolated bad debt recorded in the first quarter of 2012. The increased R&D expenses were primarily the result of increased headcount during the second half of 2012 to enable the contemporaneous development of a number of new smartphone models. In December 2012, as these developments drew to a close, we finalized a plan to eliminate the headcount redundancies in the first quarter of 2013 and restructure our China workforce. Severance costs for the terminated employees of $100,000 were recorded in the fourth quarter of 2012 and were included in R&D expense for the year.

For the year ended December 31, 2012, we sustained an operating loss from continuing operations of $2.5 million, equal to the operating loss of $2.5 million for the year ended December 31, 2011. The $2.2 million increase in gross profit in 2012 was offset by the $2.2 million increase in operating expenses.

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Interest Expense and Other Income (Expense)

During the year ended December 31, 2012, other income (expense) included $72,000 of expense comprised of $48,000 of foreign exchange losses and a $24,000 loss on disposal of fixed assets. We also recorded $61,000 of interest income primarily related to financed customer receivables. In 2011 we had $30,000 of other income, consisting primarily of gain on sale of fixed assets, and $11,000 of interest income on a tax refund.

Net Loss

Because other income (expense) and income tax expense in both 2012 and 2011 were minimal, our net losses in both years were substantially equivalent to the operating losses for the respective years. The nominal income tax was the result of our prior operating losses and lack of carry-back ability.

Financial Condition, Liquidity and Capital Resources

Historically, we have used cash from sale of products and lines of credit (bank and vendor) to provide the capital needed to support our business. In late 2011, we added a new foreign exchange (“FX”) hedging facility with our bank as a tool to hedge our exposure to changes in certain foreign currency exchange rates. We electively terminated this facility in the first quarter of 2013 and the restricted cash supporting it was returned to our general cash reserves.

The primary drivers affecting our cash and liquidity are net income (losses) and working capital requirements. Capital equipment is not significant in our business, and at December 31, 2013 we did not have any material commitments for capital expenditures. Our largest working capital requirement is for accounts receivable, and, to a lesser extent, inventory (including prepaid inventory, which is a component of prepaid assets), as we continually strive to minimize inventory levels. We typically bill customers on an open account basis, subject to our credit qualification, with payment terms ranging between net 30 and net 90 days. Some of our larger carrier customers, however, often delay payments beyond the invoiced payment terms. If our net revenue increases, it is likely that our accounts receivable balance will also increase. Our Chinese suppliers from whom we purchase product do not offer us vendor credit. Furthermore, we typically are required to pay a 15% to 20% deposit at the time we place a purchase order with the remaining balance due prior to shipment.

As of December 31, 2013, we had $2.4 million of cash and cash equivalents and $16.0 million of working capital compared to $6.2 million of cash, cash equivalents and restricted cash and $16.2 million of working capital as of December 31, 2012. As of both December 31, 2013 and 2012, we had no bank debt.

As of December 31, 2013, cash and cash equivalents consisted of cash on hand and in bank accounts.

Operating Activities

Net cash used by operating activities for the year ended December 31, 2013 amounted to $3.7 million compared to $5.9 million for the year ended December 31, 2012. The $2.2 million reduction of cash required to fund operations was due largely to the $1.2 million reduction in the net loss, adjusted for non-cash items, for 2013 compared to 2012.

In 2013, we used $3.4 million of cash to fund our net working capital requirements. This included a $1.6 million increase in trade accounts receivable, reflecting the 40% increase in sales in the fourth quarter of 2013 compared to 2012, partially offset by a more current receivable base. Days sales outstanding in receivables at December 31, 2013 was 90 days, which was a substantial improvement over the 109 days at December 31, 2012. We also used $1.9 million to increase our prepaid inventory levels, partially offset by a $1.2 million reduction in inventories. An additional $1.0 million was used to reduce payables and accruals.

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In 2012, we used $4.4 million of cash to fund our net working capital requirements. This included a $1.9 million increase in trade accounts receivable, reflecting a larger share of our fourth quarter sales to carrier customers who delayed payments in December. Days sales outstanding in receivables at December 31, 2011 was 109 days, which was significantly greater than the 65 days at December 31, 2011. We also used $1.4 million to increase our inventory levels, although this was partially offset by a $1.1 million reduction in prepaid inventories. An additional $1.9 million was used to reduce payables and accruals and $0.3 million for other assets.

Investing Activities

Cash used to purchase property and equipment, primarily tooling and molds for our proprietary verykool^® products, amounted to $145,000 in 2013 compared to $396,000 in 2012. In 2013, we freed up $1.0 million of restricted cash which had been used to secure our obligations under an FX hedging facility with our bank which was terminated in the first quarter.

Financing Activities

There were no financing activities in the years ended December 31, 2013, 2012 or 2011.

We believe that our current cash resources and working capital may adequately fund our operations at the current level. However, the lack of additional cash resources could impede the future growth of our business. In January 2014, we received commitments from certain of our product vendors to extend 60 day credit terms to us, supported by credit insurance. We would still be required to pay the upfront 15% to 20% deposit upon placement of purchase orders, but the remaining balance would be subject to the 60 day credit terms beginning on the date of product delivery. We would reimburse the vendor for the cost of the credit insurance, as well as pay a finance charge based on the balances outstanding during the 60-day term. Two credit insurers have committed to a combined policy coverage of $4 million, and the combined cost of the insurance and the finance charge would be at effective annual rates from 5.8% to 7.4%. In addition, we are currently in discussions with a number of funding sources to provide additional asset-based financing, but there can be no assurance that a definitive agreement will be reached.

Off-Balance Sheet Arrangements

At December 31, 2013, we did not have any off-balance sheet arrangements.

Contractual Obligations

We lease corporate and administrative office facilities and equipment under non-cancelable operating leases. Rent expense under these leases was approximately $301,000, $385,000 and $406,000 for the years ended December 31, 2013, 2012 and 2011, respectively. At December 31, 2013, we had no amounts outstanding related to any debt obligations.

The following is a schedule of aggregate future minimum rental payments required by the above leases (in thousands):

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The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market risk” for us refers to the risk of loss arising from adverse changes in interest rates and various foreign currencies. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures.

Interest Rates

At December 31, 2013, we had no outstanding interest bearing debt and no rate-sensitive investments.

Foreign Exchange and Other Risks

At December 31, 2013 and 2012, foreign currency cash accounts in Mexican pesos amounted to $18,000 and $105,000, respectively. Also at December 31, 2013 and 2012, accounts receivable denominated in Mexican pesos amounted to $165,000 and $271,000, respectively. Prior to December 2011, all of our sales transactions were denominated in U.S. dollars. Beginning in December 2011, we began to price sales in foreign currencies only to certain customers in Mexico. Product costs, and the majority of our operating expenses are also denominated in U.S. dollars, but payroll and other costs of our China development team are denominated in Chinese Yuan Renminbi.

Foreign currency risks are associated with our cash, receivables, payroll and payables denominated in foreign currencies. Fluctuations in exchange rates will result in foreign exchange gains and losses on these foreign currency assets and liabilities, which are included in other income (expense) in our consolidated statements of operations. There were no forward contracts outstanding at December 31, 2013 or 2012. We do not believe that foreign currency fluctuations had a material impact on our financial results during 2013, 2012 or 2011.

As a result of our international sales, our future operating results could be adversely affected by a variety of factors, including changes in specific countries’ political, economic or regulatory conditions and trade protection measures, particularly China.

The information required by this item is included below in “Item 15 Exhibits, Financial Statements and Financial Statement Schedules” and incorporated by reference herein.

None.

(i) Disclosure Controls and Procedures

An evaluation was performed pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) under the supervision and with the participation of our management, including the President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report. These disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

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Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Annual Report.

(ii) Internal Control Over Financial Reporting.

Management’s Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our President and Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2013 as required by the Exchange Act Rule 13a-15(c). In making this assessment, we used the criteria set forth in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2013. This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to law, rules and regulations that permit us to provide only management’s report in this Annual Report.

(iii) Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our fourth fiscal quarter ended December 31, 2013, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

None.

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PART III

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 2014 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.

We have adopted a Code of Ethics that applies to our President and Chief Executive Officer, Chief Financial Officer and Controller and a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees. Copies of these codes are available on our website (www.infosonics.com) and are also available without charge upon written request directed to Investor Relations, InfoSonics Corporation, 3636 Nobel Drive, Suite 325, San Diego, California 92122.

If we make changes to our Code of Ethics or Code of Business Conduct and Ethics in any material respect or waive any provision of either such Code for certain management persons covered by either such Code, we expect to provide the public with appropriate notice of any such change or waiver by publishing a description of such event on our corporate website, www.infosonics.com, or by other appropriate means as required by applicable rules of the SEC.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 2014 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 2014 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 2014 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.

The information required by this item is incorporated by reference to our Definitive Proxy Statement related to the 2014 Annual Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission no later than 120 days following the end of the fiscal year.

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PART IV

(a) The following documents, included elsewhere in this annual report on Form 10-K (see F-pages herein regarding financial statement information) are incorporated herein by reference and filed as part of this report:

(1) Financial statements:

The consolidated balance sheets as of December 31, 2013 and 2012, and the consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the years ended December 31, 2013, 2012 and 2011, together with notes thereto.

(2) Financial statement schedule:

Schedule II – Valuation and Qualifying Accounts.

(3) Exhibit index

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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INFOSONICS CORPORATION

Consolidated Financial Statements

For the years ended December  31, 2013, 2012 and 2011

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

InfoSonics Corporation

San Diego, California

We have audited the accompanying consolidated balance sheets of InfoSonics Corporation and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule of InfoSonics Corporation listed in Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of InfoSonics Corporation as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ SINGERLEWAK LLP

Irvine, California

March 14, 2014

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INFOSONICS CORPORATION

Consolidated Balance Sheets

(Amounts in thousands, except per share data)

Accompanying notes are an integral part of these financial statements.

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INFOSONICS CORPORATION

Consolidated Statements of Operations and Comprehensive Loss

(Amounts in thousands, except per share data)

Accompanying notes are an integral part of these financial statements.

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INFOSONICS CORPORATION

Consolidated Statements of Stockholders’ Equity

(Amounts in thousands)

Accompanying notes are an integral part of these financial statements.

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INFOSONICS CORPORATION

Consolidated Statements of Cash Flows

(Amounts in thousands)

The accompanying notes are an integral part of these financial statements.

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NOTE 1—ORGANIZATION AND LINE OF BUSINESS

InfoSonics Corporation (“InfoSonics”) was incorporated in February 1994 in the state of California and reincorporated in September 2003 in the state of Maryland. InfoSonics and its subsidiaries, InfoSonics Latin America, Inc., InfoSonics de Mexico S.A. de C.V., InfoSonics de Guatemala S.A., InfoSonics El Salvador S.A. de C.V., InfoSonics S.A., InfoSonics Colombia S.A., verykool USA, Inc., InfoSonics de Panama, verykool Hong Kong Limited, and verykool Wireless Technology Limited (collectively, the “Company”), develop, manufacture and sell wireless telecommunication products and accessories to wireless carriers, distributors, retailers, dealer agents and OEMs. The Company markets its branded products throughout Latin America and on a private label basis in certain countries in Asia Pacific, Europe and Africa. The Company has also recently re-entered the United States market.

NOTE 2—DISCONTINUED OPERATIONS

During the quarter ended June 30, 2008, the Company assessed its distribution business in the United States and Mexico. Due to the changing environment and consolidation in the United States of the smaller regional cellular carriers (one of the Company’s then target markets) into larger national carriers, along with the Company’s inability to penetrate the Mexico market due to challenges of fostering sales relations with the dominant cellular carriers there, management determined that it was necessary to take decisive actions to mitigate further losses. The Company implemented actions necessary to close operations related to distribution operations in both of those countries. As of December 31, 2011, the discontinuance of both the domestic and Mexican businesses was complete. The results of the discontinued operations were as follows (in thousands):

NOTE 3—RESTRUCTURING

In December 2012, the Company finalized a plan to reduce its workforce in China by 21 employees, or 20% of its worldwide workforce. The reductions, which were accomplished in the first quarter of 2013, were intended to eliminate headcount redundancies built up during multiple concurrent product developments and to restructure the China workforce with a shift toward more resources in the Company’s Shenzhen office and a lower concentration in Beijing. Severance costs, mandated by Chinese labor law, related to the terminated employees of $100,000 were recorded in the fourth quarter of 2012 as R&D expense in the accompanying consolidated statement of operations. A second restructuring was affected in the second quarter of 2013 to further reduce headcount and consolidate the development team in a single location in Shenzhen. Total costs related to this restructuring amounted to approximately $192,000 including $134,000 in severance paid to terminated employees as well as legal fees and expenses related to abandonment of one incomplete development project.

NOTE 4—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Consolidated Financial Statements include the accounts of InfoSonics and its wholly owned subsidiaries as listed in Note 1. All significant intercompany accounts and transactions are eliminated in consolidation.

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Revenue Recognition and Allowance for Returns

Revenues for wireless handset and accessory sales are recognized when (i) shipment of the products to customers has occurred and title has passed, (ii) collection of the outstanding receivables are probable and (iii) the final price of the product is determined, which occurs at the time of shipment. Sales are recorded net of discounts, rebates, cooperative marketing arrangements, returns and allowances. On select sales, the Company may agree to cooperative arrangements wherein the Company agrees to fund future marketing programs related to the products purchased by the customer. Such arrangements are usually agreed to in advance. The amount of the co-op allowance is recorded as a reduction of the sale and added to accrued expenses as a current liability. Subsequent expenditures made pursuant to the arrangements reduce this liability. To the extent the Company incurs costs in excess of the established cooperative fund, the Company recognizes the amount as a selling or marketing expense. As part of the sales process, the Company may perform certain value-added services such as programming, software loading and quality assurance testing. These value-added services are considered an ancillary component of the sales process and amounts attributable to these processes are included in the unit cost to the customer. Furthermore, these value-added services are related to services prior to the shipment of the products, and no value-added services are provided after delivery of the products. The Company recognizes as a reserve against the related receivables estimates for product returns based on historical experience and other judgmental factors, evaluates these estimates on an ongoing basis and adjusts its estimates each period based on actual product return activity. The Company recognizes freight costs billed to its customers in net sales and actual freight costs incurred as a component of cost of sales.

Foreign Currency Transactions

Certain of the Company’s foreign subsidiaries have a functional currency that is not the U.S. dollar. Assets and liabilities of such subsidiaries are translated to U.S. dollars using exchange rates in effect at the balance sheet dates. Revenues and expenses are translated at average exchange rates in effect during the period. Translation adjustments are included in stockholders’ equity in the accompanying consolidated balance sheets as a component of accumulated other comprehensive income (loss).

Comprehensive Income (Loss)

Comprehensive income (loss) as defined by U.S. generally accepted accounting principles (GAAP) includes all changes in equity (net assets) during a period from non-owner sources. The Company’s comprehensive loss includes foreign currency translation adjustments, which are excluded from net income and are reported as a separate component of stockholders’ equity as accumulated other comprehensive loss.

Cash and Cash Equivalents

For consolidated financial statement purposes, cash equivalents are defined as investments which have an original maturity of ninety days or less from the original date of purchase. Cash and cash equivalents consist of cash on hand and in banks. The Company maintains its cash and cash equivalents balances in a bank that from time to time exceed amounts insured by the Federal Deposit Insurance Corporation. As of December 31, 2013 and 2012, the Company maintained deposits totaling $2.0 million and $5.5 million, respectively, with certain financial institutions in excess of federally insured amounts. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

Restricted Cash

Restricted cash as of December 31, 2012 consisted of a cash deposit with a bank that was pledged as collateral for the Company’s foreign exchange hedging facility. The Company terminated the hedging facility in the first quarter of 2013 and had no restricted cash as of December 31, 2013.

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Trade Accounts Receivable

The Company provides for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. The Company writes off an account when it is considered to be uncollectible. The Company evaluates the collectability of its accounts receivable on an ongoing basis. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, the Company records a specific allowance against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and the Company’s historical experience. As of December 31, 2013 and 2012, the allowance for doubtful accounts was $373,000 and $339,000, respectively.

Inventory

Inventory is stated at the lower of cost (first-in, first-out) or market and consists primarily of wireless phones and wireless phone accessories. The Company writes down its inventory when it is estimated to be excess or obsolete. As of December 31, 2013 and 2012, the inventory was net of write-downs of $84,000 and $278,000, 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 December 31, 2013 and 2012, the prepaid inventory balances included in prepaid assets were $2,968,000 and $1,061,000, respectively.

Property and Equipment

Property and equipment are stated at cost. The Company provides for depreciation using the straight-line method over estimated useful lives of eighteen months to seven years. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains or losses on the sale of property and equipment are reflected in the statements of operations.

Derivative Instruments and Hedging Activities

The Company is exposed to certain risks relating to its ongoing business activities, and previously used a hedging strategy to manage one of those risks. The risk managed by the use of derivative instruments was foreign currency fluctuation risk. Forward contracts were entered into to manage the foreign currency risk associated with various commitments arising from trade accounts receivable that are denominated in the currency in the country where the product is shipped. Derivatives were held only for the purpose of hedging such risks, and not for speculation. The Company began pricing in foreign currencies in the fourth quarter of 2011 and the practice was limited to Mexico. The Company terminated the hedging facility in the first quarter of 2013 and there were no outstanding forward exchange contracts as of December 31, 2013 or 2012.

Fair Value of Financial Instruments

The Company measures its financial instruments in its financial statements at fair value or amounts that approximate fair value. 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 and cash equivalents, restricted cash, accounts receivable, prepaid expenses, accounts payable, and accrued expenses approximate their fair values due to the short-term nature and liquidity of these financial instruments.

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Accounting for the Impairment of Long-Lived Assets

The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. Management determined that there was no impairment of long-lived assets during the years ended December 31, 2013, 2012 and 2011.

Stock-Based Compensation

The Company’s share-based compensation plans are described in Note 9. The Company measures compensation cost for all employee stock-based awards at fair value on the date of grant and recognizes compensation expense, net of estimated forfeitures, over the requisite service period, usually the vesting period. Equity instruments issued to non-employees for goods or services are accounted for at fair value and are marked to market until service is complete or a performance commitment date is reached, whichever is earlier. The fair value of stock options is determined using the Black-Scholes valuation model.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Advertising Expense

The Company expenses all advertising costs, including direct response advertising, as they are incurred. Advertising expense for the years ended December 31, 2013, 2012 and 2011 was $523,000, $692,000 and $534,000, respectively.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company’s assets and liabilities result in a deferred tax asset, the Company performs an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized.

In addition, the Company recognizes the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company recognizes interest and penalties related to tax uncertainties as operating expenses.

Based on our evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.

The Company is subject to U.S. Federal income tax as well as to income tax of multiple state and foreign country jurisdictions. Federal income tax returns of the Company are subject to IRS examination for the 2004 through 2013 tax years. State income tax returns are subject to examination for a period of three to four years after filing.

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Earnings (Loss) Per Share

The Company computes basic earnings (loss) per share 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 common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive. The Company’s common share equivalents consist of stock options and warrants.

Common shares from exercise of certain options and warrants have been excluded from the computation of diluted earnings per share because their exercise prices were greater than the Company’s weighted-average stock price for the period. For the years ended December 31, 2013, 2012 and 2011, the number of such shares excluded was 756,000, 106,000 and 106,000, respectively. In addition, because their effect would have been anti-dilutive, common shares from exercise of in-the-money options for the years ended December 31, 2013, 2012 and 2011 of 137,000, 537,000 and 527,000, respectively, have also been excluded from the computation of net loss per share.

Geographic Reporting

The Company allocates revenues to geographic areas based on the location to which the product was shipped.

Estimates and Assumptions

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.

Major Suppliers

The Company contracts with various suppliers. Although there are a limited number of suppliers that could supply the Company’s inventory, management believes any shortfalls from existing suppliers might be absorbed from other suppliers on comparable terms; however, there are no assurances of such other suppliers providing products on acceptable terms. Furthermore, a change in suppliers could cause a delay in sales and adversely affect results.

During the year ended December 31, 2013, the Company’s three largest suppliers accounted for 38%, 12% and 10%, respectively, of total cost of sales. During the year ended December 31, 2012, the Company’s three largest suppliers accounted for 24%, 24% and 21%, respectively, of total cost of sales. During the year ended December 31, 2011, the Company’s three largest suppliers accounted for 42%, 21% and 10%, respectively, of total cost of sales.

Concentrations of Credit Risk, Customers and Suppliers

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and accounts receivable. We maintain our cash and cash equivalents with various high-credit-quality financial institutions located primarily in the United States. Currently the Company’s cash balances are kept primarily in demand accounts at these banks, but the Company may periodically invest excess cash in certificates of deposit or money market accounts in order to maintain safety and liquidity. The Company’s investment strategy generally results in lower yields on investments but reduces the risk to principal in the short term prior to these funds being used in its business. The Company has not experienced any material losses on financial instruments held at financial institutions.

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The Company has historically sold its products primarily to wireless network carriers throughout Latin America, as well as to distributors and value added resellers, or VARs. More recently, the Company entered the EMEA and APAC markets with private label sales to original equipment manufacturers, or OEMs, as well as sales of branded products to U.S. distributors. The Company provides credit to its customers in the normal course of business and generally requires no collateral. Credit risk with respect to accounts receivable is generally concentrated due to the small number of entities comprising the Company’s overall customer base. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses based upon the Company’s historical experience related to credit losses and any unusual circumstances that may affect the ability of its customers to meet their obligations. The Company’s bad debt expenses have not been significant relative to its total revenues.

Since a majority of the Company’s sales are made to wireless network carriers, there are a limited number of potential customers in each country in which the Company does business. Carriers often purchase products from a number of suppliers, and there can be significant movement in the carrier/supplier relationships from year to year. In each of 2013 and 2011, three customers represented 10% or more of the Company’s total net sales. During 2012, only two customers represented 10% or more of the Company’s total net sales. The top three customers in 2013 accounted for 20%, 14% and 13%, respectively, of total net sales and represented 18%, 15% and 24% of accounts receivable, respectively, at December 31, 2013. During 2012, the top two customers accounted for 16% and 11% of total net sales, and represented 12% and 19% of accounts receivable, respectively, as of December 31, 2012. During 2011, the top three customers accounted for 14%, 13% and 13% of total net sales, and represented 11%, 15% and 17% of accounts receivable respectively at December 31, 2011.

The Company’s agreement with Samsung to distribute its products to customers in Argentina expired on March 31, 2012, at which time Samsung ceased to be a supplier. For its verykool^® products, the Company contracts with a number of OEM suppliers, design houses and contract manufacturers. In 2013, the Company purchased products from 10 manufacturers, with the top three representing 38%, 12% and 10%, respectively, of cost of sales. Although each may supply a somewhat differentiated product or service, management believes any shortfalls from existing suppliers can be absorbed by other suppliers on comparable terms. However, there are no assurances this can be achieved, and a change in suppliers could cause a delay in product shipments and sales and adversely affect results.

Recently Issued Accounting Pronouncements

Recently Adopted:

In January 2013, the FASB issued guidance clarifying the scope of disclosures about offsetting assets and liabilities. The guidance limits the scope of balance sheet offsetting disclosures to derivative instruments, including bifurcated embedded derivatives, repurchase agreements and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement of similar agreement. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Entities are required to provide the new disclosures retrospectively for all comparative periods. The Company adopted this guidance effective January 1, 2013. The adoption of this new guidance did not have an impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued new accounting guidance on the reporting of amounts reclassified from accumulated other comprehensive income. The guidance is intended to improve the reporting of reclassifications out of accumulated other comprehensive income of various components. This includes requiring an entity to present either parenthetically on the face of the financial statements or in the notes, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The new guidance is effective for public entities for annual periods, and interim periods within those periods, beginning after December 15, 2012. The Company adopted this guidance effective January 1, 2013, which adoption did not have an impact on the Company’s consolidated financial statements.

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Issued (Not adopted yet):

In March 2013, the FASB issued an update on a parent’s accounting for the cumulative translation adjustment, which we refer to as CTA, upon derecognition of certain subsidiaries or group of assets within a foreign entity or of an investment in a foreign entity. The objective of the update is to resolve the diversity in practice about the appropriate guidance to apply to the release of CTA into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or a business within a foreign entity. The update provides that the entire amount of the CTA associated with the foreign entity would be released when there has been a sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity. This update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The update should be applied prospectively from the beginning of the fiscal year of adoption. We do not expect the adoption of this new guidance to have an impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued an amendment of the income tax reporting rules intended to clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax benefit is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be netted with the deferred tax asset. The amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. We are currently evaluating the impact that adoption will have on the determination or reporting of our financial results.

NOTE 5—PROPERTY AND EQUIPMENT

Property and equipment are primarily located in the United States and China and consisted of the following as of the dates presented (in thousands):

Depreciation expense was $263,000, $276,000 and $172,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

NOTE 6—FOREIGN EXCHANGE HEDGING FACILITY

On December 9, 2011, the Company entered into a Foreign Exchange Trading Master Agreement and a Pledge Agreement (collectively, the “Agreement”) with HSBC Bank USA (the “Bank”). Under the terms of the Agreement, the Company and the Bank could enter into spot and/or forward foreign exchange transactions and/or foreign currency options. The Company used these derivative instruments to manage the foreign currency risk associated with its trade accounts receivable that were denominated in foreign currencies, primarily the Mexican

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peso. In order to secure its obligations under the Master Trading Agreement, the Company deposited $1 million into a restricted account pursuant to a related pledge agreement. During the year ended December 31, 2012, the Company sustained a loss of $48,000 on its hedging transactions. In February 2013, the Company elected to terminate the facility due to its limited use and the restricted cash deposit was returned to the Company’s general cash reserves.

NOTE 7—ACCRUED EXPENSES

As of December 31, 2013 and 2012, accrued expenses consisted of the following (in thousands):