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EX-32.1 - CERTIFICATION - I/OMAGIC CORP | iomagic_10k-ex3201.htm |
EX-31.2 - CERTIFICATION - I/OMAGIC CORP | iomagic_10k-ex3102.htm |
EX-31.1 - CERTIFICATION - I/OMAGIC CORP | iomagic_10k-ex3101.htm |
EX-23.1 - CONSENT - I/OMAGIC CORP | iomagic_10k-ex2301.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
S
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the fiscal year ended December 31,
2009
|
OR
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the transition period from ______ to
______
|
Commission
file number: 000-27267
I/OMAGIC
CORPORATION
(Exact
name of registrant as specified in its charter)
Nevada
|
33-0773180
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
4
Marconi, Irvine, CA
|
92618
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (949) 707-4800
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.001 par value
(Title
of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes £ No S
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes £ No S
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. Yes S No £
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files. Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K 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. S
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.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (Do not check if
a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £ No S
The
aggregate market value of the voting common equity held by nonaffiliates of the
registrant computed by reference to the closing sale price of such stock, was
approximately $163,000 as of June 30, 2009, the last business day of the
registrant’s most recently completed second fiscal quarter. The registrant has
no non-voting common equity.
The
registrant had 4,540,292 shares of common stock, $.001 par value, outstanding as
of March 16, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE: None.
TABLE
OF CONTENTS
Page | ||
PART I | ||
Item
1.
|
Business
|
1 |
Item
1A.
|
Risk Factors | 12 |
Item
1B.
|
Unresolved Staff Comments
|
22 |
Item 2. | Properties | 22 |
Item 3. | Legal Proceedings | 22 |
Item 4. |
(Removed and Reserved)
|
22 |
PART II | ||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 22 |
Item 6. | Selected Financial Data | 23 |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 42 |
Item 8. | Financial Statements and Supplementary Data | 42 |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 42 |
Item 9A. | Controls and Procedures | 42 |
Item 9A(T). | Controls and Procedures | 43 |
Item 9B. | Other Information | 43 |
PART III | ||
Item 10. | Directors, Executive Officers and Corporate Governance | 44 |
Item 11. | Executive Compensation | 47 |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 51 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 53 |
Item 14. | Principal Accounting Fees and Services | 54 |
PART IV | ||
Item
15.
|
Exhibits, Financial Statement Schedules. | 56 |
Index
to Consolidated Financial Statements and Supplemental
Information
|
F-1 | |
Index
To Exhibits
|
||
Signatures
|
||
Exhibits
Filed with this Report
|
ii
PART
I
CAUTIONARY
STATEMENT
All
statements included or incorporated by reference in this Annual Report on Form
10-K, other than statements or characterizations of historical fact, are
“forward-looking statements.” Examples of forward-looking statements include,
but are not limited to, statements concerning projected net sales, costs and
expenses and gross margins; our accounting estimates, assumptions and judgments;
the demand for our products; the competitive nature of and anticipated growth in
our industry; and our prospective needs for additional capital. These
forward-looking statements are based on our current expectations, estimates,
approximations and projections about our industry and business, management’s
beliefs, and certain assumptions made by us, all of which are subject to change.
Forward-looking statements can often be identified by such words as
“anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,”
“estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,”
“ongoing,” similar expressions and variations or negatives of these words. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict. Therefore, our
actual results could differ materially and adversely from those expressed in any
forward-looking statements as a result of various factors, some of which are
listed under “Risk Factors” in Item 1A of this Report. These
forward-looking statements speak only as of the date of this Report. We
undertake no obligation to revise or update publicly any forward-looking
statement for any reason, except as otherwise required by law.
Item
1.
|
Business.
|
Company
Overview
We sell
electronic data storage products and other consumer electronics products in the
North American retail marketplace, which includes the United States and
Canada. During 2009 and 2008, all of our net sales were generated
within the United States.
Our
current product offerings are predominantly optical data storage products. Our
optical data storage products include recordable compact disc, or CD, drives and
recordable digital video or versatile disc, or DVD, drives. Our CD and DVD
drives are primarily for use with desktop computers, notebooks, sub-notebooks
and netbooks, collectively referred to as PCs. Our optical data storage products
accounted for approximately 93% and 64% of our net sales in 2009 and 2008,
respectively.
During
2009, we also sold both mobile and desktop external magnetic data storage
products primarily from our inventory on hand. We marketed our mobile magnetic
data storage products with 1” and 2.5” hard disk drives with universal serial
bus, or USB, connections that plug into any standard USB port and that provide
from 4 gigabytes, or 4,000 megabytes, to up to 120 gigabytes, or 120,000
megabytes of storage capacity, depending on a user’s operating system and other
factors. We designed our mobile magnetic data storage products as cost-effective
portable alternatives to flash media devices and standard hard disk drives. Our
mobile magnetic data storage products accounted for approximately 3% and 16% of
our net sales for 2009 and 2008, respectively.
Our
desktop magnetic data storage products, utilizing 3.5” hard disk drives, require
an independent power source and offer storage capacities ranging from 250
gigabytes, or 250,000 megabytes, to up to 1 terabyte, or 1,000,000 megabytes,
depending on a user’s operating system and other factors. Our desktop magnetic
data storage products accounted for approximately 3% and 10% of our net sales
for 2009 and 2008, respectively.
1
During
the fourth quarter of 2007 and the first quarter of 2008, we introduced a line
of high-definition televisions, or HDTVs, utilizing liquid crystal displays, or
LCDs. However, we discontinued sales of HDTVs in the second quarter
of 2008 and do not anticipate re-entering that market in for the foreseeable
future. During 2008, our HDTV product line accounted for
approximately 9% of our net sales. We did not sell any HDTVs in
2009.
We also
sell other consumer electronics products, which accounted for approximately 1%
of our net sales in each of 2009 and 2008.
We sell
our products through computer, consumer electronics and office supply
superstores, wholesale clubs, electronics distributors and other major North
American retailers, including AAFES (Army Air Force Exchange Services), Best Buy
Canada, Costco, Fred Meyer Stores/Kroger, Micro Center, Office Depot, Office
Max, Staples and Target. Our retailers sell our products in retail locations
throughout North America. We also have relationships with other retailers,
catalog companies and Internet retailers such as Dell, predominantly through
distribution by D&H Distributing, Ingram Micro, GB Micro and Tech
Data.
We refer
to our retailers and distributors collectively as our customers. We refer to the
ultimate consumers of our products as end-users or consumers.
Our sales
have historically been seasonal. The seasonality of our sales is in direct
correlation to the seasonality experienced by our customers and the seasonality
of the consumer electronics industry in general. After adjusting for
the addition of new customers, our fourth quarter has historically generated the
strongest sales, which correlates to well-established consumer buying patterns
during the Thanksgiving through Christmas holiday season. Our first and third
quarters have historically shown some strength from time to time based on
post-holiday season sales in the first quarter and back-to-school sales in the
third quarter. Our second quarter has historically been our weakest quarter for
sales, again following well-established consumer buying patterns.
During
2009, our most significant retailer and distributors were Staples, Tech Data and
D&H Distributing. Collectively, this retailer and these two distributors
accounted for 88% of our net sales for 2009, or 49%, 29% and 10%, respectively.
During 2008, our most significant distributor and retailers were Tech Data,
Staples and Target. Collectively, this distributor and these two retailers
accounted for 78% of our net sales for 2008, or 35%, 26% and 17%,
respectively.
We market
our products primarily under our I/OMagic® and
Digital Research Technologies® brand
names, but from time to time, we market products under our Hi-Val® brand
name. We sell our data storage products primarily under our I/OMagic® brand
name, bundling various hardware devices with different software applications to
meet a range of consumer needs.
We do not
directly manufacture any of the components incorporated into products that we
sell. We subcontract the manufacturing of the majority of our products or source
our products from Asia, predominantly in Taiwan and China, which allows us to
offer products at highly competitive prices. Most of our subcontract
manufacturers and suppliers have substantial product development resources and
facilities, and are among the major component manufacturers and suppliers in
their product categories, which we believe affords us substantial flexibility in
offering new and enhanced products.
I/OMagic
Corporation was incorporated under the laws of the State of Nevada in October
1992. Our principal executive offices are located in Irvine, California and our
main telephone number is (949) 707-4800.
2
Data
Storage Industry Overview
Storing/archiving,
managing, protecting, securing, retrieving and transferring electronic data has
become critical to individuals and businesses due to their increasing dependence
on and participation in data-intensive activities. The data storage industry is
growing in response to the needs of individuals and businesses to store, manage,
protect, retrieve and transfer increasing amounts of data resulting
from:
●
|
the
growth in the number of PCs, and the increase in the number, size and
complexity of computer operating systems, computer networks and software
programs;
|
●
|
the
introduction of netbooks and sub-notebooks that do not include an optical
drive and the projected growth of these categories;
and
|
●
|
the
existence and availability of increasing amounts of digital entertainment
data, such as movies, music, photos, video games and other multi-media
data and the increasing availability of products and services over the
Internet, together with the rise of bandwidth available to access and
download data from the
Internet.
|
Traditional
PC data generally includes documents, emails, financial information, software
programs and other electronic data. The data storage industry has grown
significantly over the last two decades as the PC has become a virtually
indispensable tool in the home and office, resulting in increasing amounts of
traditional PC data. As a result of these and other developments, traditional PC
data storage requirements have correspondingly increased.
Digital
entertainment data generally includes movies, music, photos, video games and
other multi-media data. For nearly two decades, music has been offered on CDs as
the prevailing standard. In the mid-to-late 1990s, the ability to copy CDs, and
to download, remix, and copy or “burn” music to a personalized CD began to gain
popularity and made the recordable CD drive, or “CD burner,” a desirable
component of the PC. With the continued growth of the Internet and the advent of
on-line music availability, the demand for on-line music has increased and as a
result, the demand for faster and easier data storage and retrieval has
grown.
We
believe that the increasing amount of traditional PC and digital entertainment
data that is being generated and used is stimulating increased demand for
products offering data storage, management, protection, security, retrieval and
transfer capability. We also believe that those products that offer flexibility
and high-capacity storage in a cost-effective, user-friendly and secure manner
are in highest demand.
We
believe that the introduction of netbooks in 2008 created a strong demand for
slim and compact CD/DVD players. According to Display Search, more than 33
million netbooks were sold in 2009 and shipments for 2010 are expected to reach
39 million.
A netbook
is a mini-laptop computer designed for mobility, wired and wireless Internet
online access, word processing and general office applications. Weighing in at
2-3 lbs. and featuring LCD screens between 6 and 10 inches, we believe that the
netbook is a perfect companion for people on the go who want connectivity
without carrying a much larger and heavier, full-sized laptop.
To
achieve the lightest weight and most compact size, netbooks do not have
integrated CD/DVD drives which may be necessary only for occasional use. Instead
most netbooks feature two or more USB ports, a video-out port, Secure Digital
card reader, integrated speakers and microphone and headphone jacks. Netbook
keyboards are 5% - 20% smaller than a standard notebook keyboard, and memory and
disk drive space vary, depending in part on the operating system installed.
Netbook battery life also varies between models, ranging from 2 to 7 hours.
Netbooks typically have less memory and smaller static drives, while many models
have internal storage on a static disk drive.
3
Key
Factors Driving Growth in the Data Storage Industry
We
believe that the following factors, among others, are driving and will continue
to drive growth in the data storage industry:
●
|
Continued growth of
Netbooks. With the introduction of netbooks in 2008, enabled by
versions of popular operating systems designed for netbooks, this category
of products creates a corresponding need for external devices for data
transfer and storage – especially high-capacity, compact, cost-effective
data transfer and storage
devices.
|
●
|
Increased use of the
Internet. As individuals and businesses continue to increase their
use of the Internet for communications, commerce and data retrieval, the
corresponding need to utilize data storage devices for storage,
management, protection, security, retrieval and transfer of data —
especially high-capacity, cost-effective data storage devices — will
continue to grow. In addition, bandwidth is increasing and is expected to
continue to increase. Increasing bandwidth allows faster data transfer
rates over the Internet and makes use of the Internet for data-intensive
activities more convenient and
cost-effective.
|
●
|
Growth in new types of
electronic data. The growth in new types of data such as movies,
music, photos, video games and other multi-media data, including
high-resolution audio and video data, requires far greater storage
capacity than traditional PC text data. We believe that individual
consumers and businesses increasingly depend on their abilities to store,
manage, protect, retrieve and transfer these types of data using data
storage devices.
|
●
|
Growth in the critical
importance of data. Business databases contain information about
customers, suppliers, competitors and industry trends that may be analyzed
and potentially transformed into a valuable asset and a competitive
advantage. Efficiently storing, managing, protecting, securing, retrieving
and transferring this information has become increasingly important to
many businesses.
|
●
|
Decrease in the cost of
storing electronic data. The cost of data storage per “byte”
continues to decrease with advances in technology and improved
manufacturing processes. This decrease in cost encourages and enables
individuals and businesses to purchase more data storage media and
devices.
|
Data
Storage Industry Challenges and Trends
We
believe that the challenges currently facing the data storage industry
include:
●
|
Need for high-capacity,
cost-effective and flexible media and related data storage devices.
We believe that, as a result of the rapid growth in electronic data and in
new applications requiring or using high data-content movies, music,
photos, video games and other multi-media content, the data storage
industry needs to offer higher capacities, more cost-effective and
flexible media and data storage devices. To meet this need, the data
storage industry has shifted its product offerings to DVD- and
Blu-Ray-based technologies as well as to compact and portable hard disk
drives.
|
4
●
|
Need to identify and satisfy
consumer demands and preferences. The data storage industry is
characterized in part by rapidly changing consumer demands and preferences
for higher levels of product performance and functionality. We believe
that to be successful, companies in this industry must closely identify
changes in consumer demands and preferences and introduce both new and
enhanced data storage products to provide higher levels of performance and
functionality than existing
products.
|
We
believe that one of the trends in the data storage industry includes the trend
toward higher capacity, smaller format optical storage media and related drives,
including the trend away from CD-based media and devices towards DVD- and
Blu-Ray-based media and devices. Blu-Ray technology expands single layer DVD
capacity up to ten-fold and dual layer DVD capacity up to five-fold and allows
the storage and retrieval of high definition videos and images for playback on
high-definition televisions and monitors. Blu-Ray has been accepted as the
dominant technology for super-high-capacity optical data storage devices and we
believe that the increased performance offered by this technology will likely
result in increased consumer demand for optical data storage devices.
Furthermore, we believe that we will be able to incorporate Blu-Ray technology
into our product offerings in much the same way as we do today with the large
number of format types ranging from recordable and rewritable CD-based products
to DVD-based products.
The I/OMagic Solution
We sell data storage products and other consumer
electronics products in the North American retail marketplace. We believe that
our current focus on optical data storage products will allow us to generate
positive gross margins. We also seek to identify consumer needs and preferences
and use our sales channels to sell new and enhanced products. We seek to offer
high-value products that combine performance, functionality and reliability at
competitive prices. We also seek to establish and maintain a large market
presence for our core product offerings resulting in significant market
share.
We work closely with our customers to promote our
products, monitor consumer demands and preferences and attempt to stay at the
forefront of the market for optical data storage products. We also work closely
with our subcontract manufacturers and suppliers and benefit from their
substantial research and development resources and economies of
scale. As a result of working with our customers, subcontract
manufacturers and suppliers, we believe that we are able to rapidly bring new
and enhanced optical data storage products to market in a cost-effective
manner.
We believe that the market intelligence we gain through
consultation with our customers, subcontract manufacturers and suppliers enables
us to deliver optical data storage products that combine the performance and
functionality demanded by the marketplace. Obtaining these products through our
subcontract manufacturers and suppliers, along with efficient management of our
supply chain, allows us to offer these products at competitive
prices.
Our
Strategy
Our
primary goal is to remain a leading provider of optical data storage products in
the North American marketplace. Our business strategy to achieve this goal
includes the following elements:
●
|
Continue to develop and
solidify our North American retail and distribution networks. We
have developed, and plan to continue to develop, broaden and solidify,
close working relationships with leading North American computer, consumer
electronics and office supply superstores, other retailers and electronics
distributors. These customers carry many of the products that we
sell.
|
5
●
|
Continue to develop and expand
our strategic subcontract and supply relationships. We have
developed, and plan to continue to develop and expand, strategic
relationships with subcontract manufacturers and suppliers. These
relationships allow us to enhance our product offerings and benefit from
these subcontract manufacturers’ and suppliers’ continued development of
new and improved data storage products and other consumer electronics
products. By continuing to subcontract manufacture and source our products
from third parties, we believe that we are able to sell products
incorporating new technology without having to make the substantial
investment in, or having to incur the fixed costs associated with, product
development and
manufacturing.
|
●
|
Continue to develop and offer
high value products. We intend to continue to work in conjunction
with our customers, subcontract manufacturers and suppliers to enhance
existing products and develop new products to satisfy consumer demands and
preferences. We believe that our target consumers seek high-value products
that combine performance, functionality and reliability at prices
competitive with other leading products offered in the
marketplace.
|
Our
Products
We have
two primary product categories: data storage products and other consumer
electronics products.
Data
Storage Products
Our
optical data storage products consist of a range of internal and external CD/DVD
and Blu-Ray drives that store traditional PC data as well as movies, music,
photos, video games and other multi-media data, such as:
●
|
Internal
and external optical data storage drives based on the following
technologies: CD-RW, DVD+R, DVD+RW, DVD-RAM, DVD+/-RW+/-;
and
|
●
|
Blu-Ray
RW.
|
We also
offer optical data storage products that use double-layer DVD technology, which
doubles DVD capacity to approximately 8.5 gigabytes, or 8,500 megabytes, on dual
layer discs, depending on the user’s operating system and other factors. We plan
to continue our efforts to enhance our optical data storage products by
increasing performance and functionality as well as reducing the size of their
drive units and enclosures to increase portability and ergonomics.
Other
Consumer Electronics Products
Our other
consumer electronics products include:
●
|
Accessories
for netbooks such as carrying cases for portable CD/DVD players;
and
|
●
|
Case
enclosures for 2.5” or 3.5” external or portable hard disk
drives.
|
We plan
to develop and sell other non-data storage consumer electronics products as we
are able to identify products that we can sell competitively. Our other consumer
electronics products, not including our data storage products, represent only a
minor product category. These products accounted for only approximately 1% of
our net sales during each of 2009 and 2008.
6
Product
Warranties
Our
products are subject to limited warranties of up to one year in duration. These
warranties cover only repair or replacement of the product. Our subcontract
manufacturers and suppliers provide us with warranties of a duration at least as
long as the warranties provided to consumers. The warranties provided by our
subcontract manufacturers and suppliers cover repair or replacement of the
product.
Product
Offerings
Our
product offerings are primarily directed toward satisfying the demands of the
North American retail marketplace for data storage products and other consumer
electronics products. We operate in industries that are subject to rapid
technological change, product obsolescence and rapid changes in consumer demands
and preferences. We attempt to anticipate and respond to these changes by
focusing on the following primary objectives:
●
|
Enhancement of existing
products. We seek to offer products with increased performance and
expanded functionality to satisfy existing and emerging consumer demands
and preferences. Our enhanced product offerings are directed toward, among
other things, enhanced user-friendliness and ease of product installation.
These product offerings are also focused on products with reduced
manufacturing costs to enable us to maintain and improve gross margins
while continuing to offer high-value products to
consumers.
|
●
|
Development of new
products. We seek to offer new products that, among other things,
use existing technology and adopt new technology to satisfy existing and
emerging consumer demands and preferences. Our new product offerings
typically focus on the implementation of existing technology to offer
products that are compatible with a wide range of media formats. For our
data storage products, these offerings also typically include
implementation of new technology to offer products that deliver better
solutions to the core needs of the data storage marketplace such as
high-capacity, cost-effective, flexible and portable data storage,
management, protection, security, retrieval and transfer. We believe that
we are able to quickly adopt new technologies and bring them to market
through our customers faster than many of our
competitors.
|
Our
customers, subcontract manufacturers and suppliers play an important role in the
enhancement of our existing products and the development of new products. We
work closely with our customers, subcontract manufacturers and suppliers to
identify existing market trends, predict future market trends and monitor the
sales performance of our products.
Many of
our customers are among the largest wholesale clubs, computer, consumer
electronics and office supply retailers and distributors in North America. Over
the past three years, our retailers have included Best Buy Canada/Future Shop,
Costco, Fred Myer Stores, Micro Center, Office Depot, OfficeMax, RadioShack,
Staples and Target while our distributors have included D&H Distributing,
Ingram Micro, GB Micro and Tech Data. Through their close contact with the
marketplace for data storage products, our customers are able to provide us with
important information about consumer demands and preferences.
Many of
our subcontract manufacturers and suppliers have substantial product development
resources and facilities in Asia, and are among the major component
manufacturers and suppliers in their product categories. These subcontract
manufacturers and suppliers expend substantial resources on research,
development and design of new technologies and efficient manufacturing
processes.
7
Our
corporate headquarters in Irvine, California houses a product development team
that coordinates and manages the subcontract logistics and product development
efforts of our subcontract manufacturers and suppliers in Asia. At our Irvine
facility, we also develop user manuals, product packaging and marketing
literature as well as installation guides and supplemental materials, including
software and hardware designed to permit user-friendly product
installation.
We do not
have a traditional research and development team. Instead, we work closely with
our customers, subcontract manufacturers and suppliers and conduct various other
activities in connection with the enhancement of our existing products and the
development of new products. We have not, in any reporting period, made any
material expenditures on research and development activities relating to the
development of new products, services or techniques or the improvement of
existing products, services or techniques. Our efforts are largely directed at
the evaluation of new products and enhancements to existing products rather than
the actual design and development of new products or product
enhancements.
Our
representatives meet frequently with our customers, subcontract manufacturers
and suppliers to identify and discuss emerging trends and to address the sales
performance of our products. We provide and receive product-related input to and
from our customers, subcontract manufacturers and suppliers. Much of the input
that we provide arises from our technical service department, which is
responsible for assisting end-users in installing and successfully utilizing our
products. Problems in the installation or utilization of our products are
reported to management by our technical service department and often provide the
basis for existing product enhancements. New products are developed and offered
by our subcontract manufacturers and suppliers, and offered by us and in turn by
our customers largely on the basis of market research and trends identified in
the data storage and consumer electronics industries. We also monitor industry
trade publications and technical papers to understand emerging trends and new
technologies and to plan for new product offerings.
We
believe that these activities assist us in attempting to achieve our goal of
being among the first-to-market with new and enhanced product offerings based on
established and emerging technologies.
Operations
We do not
directly manufacture any of the components incorporated into the products that
we sell. We subcontract manufacture the majority of our component products or
source from our suppliers our data storage and other consumer electronics
products and assemble, test and reassemble them in our Irvine facility. We
believe that by outsourcing the manufacturing of our component products to our
subcontract manufacturers or sourcing them from our suppliers, we benefit
from:
●
|
Lower overhead costs.
By subcontract manufacturing or sourcing our products from our suppliers
we believe that we benefit from lower overhead costs resulting from the
elimination of capital expenditures related to owning and operating
manufacturing facilities, such as expenditures related to acquiring a
manufacturing plant, property and equipment, and staffing, as well as the
ongoing cash requirements to fund such an
operation.
|
●
|
Economies of scale. By
subcontract manufacturing or sourcing our products from our suppliers with
some of the largest production facilities available in the industry, we
believe that we benefit from our subcontract manufacturers’ and suppliers’
economies of scale, which enable us to keep unit production costs low, our
supply chain management efficient and our expansion or contraction of
product orders flexible in response to changing consumer demands and
preferences.
|
8
●
|
Engineering and manufacturing
resources. By subcontract manufacturing our products we believe
that we benefit from our subcontract manufacturers’ substantial
engineering and manufacturing resources, which aid us in offering new and
enhanced products and enable us to rapidly bring them to market in a
cost-effective manner.
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Diversification of
manufacturing risks. By subcontract manufacturing to, or sourcing
our products from, a group of manufacturers or suppliers, we believe that
we are able to diversify the risks associated with employing a single
manufacturer or supplier. We also believe that we are potentially able to
expand our opportunities with respect to new products as they arise by
virtue of the varying expertise of those manufacturers and
suppliers.
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●
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Reduction of potential
liabilities. By subcontract manufacturing or sourcing our products
from our suppliers we believe that we reduce potential significant
liabilities associated with direct product manufacturing, including
environmental liabilities and liabilities resulting from warranty claims.
We believe that the reduction in potential liabilities decreases our
business risks and results in tangible economic benefits such as cost
savings related to insurance and the operation of compliance
programs.
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We
believe that the relatively low overhead costs resulting from subcontract
manufacturing or sourcing the products we offer for sale, the economies of scale
of our subcontract manufacturers and suppliers, and the engineering and
manufacturing resources of our subcontract manufacturers and suppliers enable us
to offer products combining high levels of performance, functionality and
reliability at prices competitive with other leading products offered in the
marketplace.
We
utilize a subcontract logistics and product development consultant located in
Taipei, Taiwan. Our consultant assists us in identifying new products,
qualifying prospective manufacturing facilities and coordinating product
purchases and shipments from some of our subcontract manufacturers and
suppliers. The majority of our products are shipped directly by our subcontract
manufacturers or suppliers to our assembly, packaging, storage and distribution
facility in Irvine, California. These products are then packaged and
shipped by us either directly to retail and distribution locations across North
America or to a centralized distribution center. Product shipments are primarily
made through major commercial carriers. We maintain a production staff in
Irvine, California, that assembles “quick turn” and pilot production runs and
repackages bulk quantities received from our subcontract manufacturers and
suppliers.
Quality
Control
Our
primary subcontract manufacturers and suppliers are among the major computer and
electronic component manufacturers and suppliers in Asia who we believe have
rigorous quality control and shipping guidelines. We regularly inspect and test
product samples, periodically tour our subcontract manufacturers’ and suppliers’
facilities, monitor defective product returns and test defective
products.
Sales
and Marketing
We sell
our products primarily through retailers and distributors who collectively
operate locations throughout North America. These include nationally-recognized
computer, consumer electronics and office supply superstores, wholesale clubs
and distributors. In addition, we sell our products through Internet retailers
and mail order catalogs.
9
We
cooperate with our customers to promote our products and brand names. We
participate in co-sponsored events with our customers and industry trade shows
such as CES®. We
participate in these events and trade shows in order to develop new
relationships with potential customers and maintain close relationships with our
existing customers. We also fund cooperative advertising campaigns, develop
custom product features and promotions, provide direct personal contact with our
sales representatives and develop and procure certain products as requested by
our customers. We cooperate with our retailers to use point-of-sale and mail-in
rebate promotions to increase sales of our products. We also utilize sales
circulars and our close working relationships with our significant retailers to
obtain national exposure for our products and our brands. We believe that these
marketing efforts help generate additional shelf-space for our products with our
major retailers, promote retail traffic and sales of our products, and enhance
our goodwill with these retailers.
We
maintain a large database containing information regarding many end-users of our
products. Through a targeted, direct marketing strategy, we may offer these
end-users other products to establish repeat end-users, increase our product
sales and promote brand loyalty. We currently sell and plan to continue to sell
products, conduct special promotions, and offer downloads on our websites to
existing and potential end-users. Our websites are located at
http://www.iomagic.com, http://www.dr-tech.com and
http://www.hival.com.
Competition
We
operate in highly-competitive market segments of the consumer electronics
industry.
We
believe that our data storage products compete with other types of data storage
devices such as internal, external and portable hard disk drives, magnetic tape
drives, floppy disk drives and flash memory devices, as well as internal and
external optical data storage products offered by other companies.
Companies
that offer products similar to our optical data storage products include
Hewlett-Packard, Lite-On, LG Electronics, Memorex, Pioneer, Philips Electronics,
Samsung Electronics and Sony. Additionally, original equipment manufacturers
such as Lite-On, LG Electronics and Samsung Electronics incorporate the
functionalities offered by our products directly into PCs. Companies that offer
products similar to our external mobile and desktop magnetic data storage
products include Acomdata, Iomega, LaCie, Simpletech and SmartDisk/Verbatim as
well as original equipment manufacturers such as Hitachi, Seagate
Technology/Maxtor and Western Digital. Over the past two years, we experienced
intense price competition from major competitors such as Western Digital and
Seagate Technology/Maxtor, which has significantly reduced selling prices and
eroded margins for our magnetic data storage products. Due to the intense price
competition for magnetic data storage products, we curtailed our marketing
efforts to develop new magnetic data storage products and focused on selling our
remaining magnetic data storage products inventory on hand and selling optical
data storage products. We are unable to predict whether the market for and
selling prices of magnetic data storage products will stabilize, increase or
further decline in the future, or whether we will be able to develop new
magnetic data storage products that will enable us to compete on a profitable
basis.
We
believe that our ability to compete in the data storage and other consumer
electronics markets depends on many factors, including the
following:
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Product value. The
performance, functionality, reliability and price of our products are
critical elements of our ability to compete. We believe that we offer, and
that our target consumers seek, products that combine higher levels of
performance, functionality and reliability at lower prices than other
leading products offered in the marketplace. We focus on offering these
high value products by positioning them as affordable alternatives to
products offered by our
competitors.
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10
●
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Market penetration.
Market penetration and brand recognition are critical elements of our
ability to compete. Most consumers purchase products similar to ours from
off-the-shelf retailers such as large computer, consumer electronics and
office supply superstores. Market penetration in the industries in which
we compete is typically based on the number of retailers who offer a
company’s products and the amount of shelf-space allocated to those
products. We believe that our broad-based, high value product offerings,
our retailer support, our consumer support and our cooperative marketing
and other promotional efforts promote close working relationships with our
retailers and improve our ability to obtain critical shelf-space which
enables us to establish, maintain and increase market
penetration.
|
Intellectual
Property
We
currently rely on a combination of contractual rights, copyrights, trademarks
and trade secrets to protect our proprietary rights. I/OMagic®,
Hi-Val® and
Digital Research Technologies® are
our registered trademarks. As we develop new products, we may file federal
trademark applications covering the trademarks under which we sell those
products. There can be no assurance that we will eventually secure a registered
trademark covering these products. We currently do not have any issued or
pending patents.
We own,
license or have otherwise obtained the right to use certain technologies
incorporated into our products. We may receive infringement claims from third
parties relating to our products and technologies. In those cases, we intend to
investigate the validity of the claims and, if we believe the claims have merit,
to respond through licensing or other appropriate actions. To the extent claims
relate to technology included in components purchased from third-party vendors
incorporated into our products, we would forward those claims to the appropriate
vendor. If we or our product manufacturers or suppliers are unable to license or
otherwise provide any necessary technology on a cost-effective basis, we could
be prohibited from marketing products containing that technology, incur
substantial costs in redesigning products incorporating that technology, or
incur substantial costs defending any legal action taken against
us.
We have
been, and may in the future be, notified of claims asserting that we may be
infringing certain patents, trademarks and other intellectual property rights of
third parties. We cannot predict the outcome of such claims and there can be no
assurance that such claims will be resolved in our favor. An unfavorable
resolution of such claims may have a material adverse effect on our business,
prospects, financial condition and results of operations. The consumer
electronics industry has been characterized by significant litigation relating
to infringement of patents and other intellectual property rights. We have in
the past been engaged in infringement litigation, both as plaintiff and
defendant. There can be no assurance that future intellectual property claims
will not result in litigation.
If
infringement is established, we may be required to pay substantial damages or we
may be enjoined from manufacturing and selling an infringing product. In
addition, the costs of engaging in the prosecution or defense of intellectual
property claims may be substantial regardless of the outcome.
A number
of our agreements with our customers provide that we will defend, indemnify and
hold them harmless from damages and costs that arise from product warranty
claims or claims for injury or damage resulting from defects in our products. If
such claims are asserted against us, our insurance coverage may not be adequate
to cover the costs associated with our defense of those claims or any resulting
liability we would incur if those claims are successful. A successful claim
brought against us for product defects that is in excess of, or excluded from,
our insurance coverage could have a material adverse affect on our business,
results of operations and financial condition.
11
Government
Regulation
Our
products are designed by our subcontract manufacturers and suppliers to comply
with a significant number of regulations and industry standards, some of which
are evolving as new technologies are deployed. We believe that we are currently
in compliance with each applicable regulation and industry standard. In the
United States, our products must comply with various regulations defined by the
United States Federal Communications Commission, or FCC, and Underwriters
Laboratories, or other nationally recognized test laboratories. We also must
comply with numerous import/export regulations. The regulatory process in the
United States can be time-consuming and can require the expenditure of
substantial resources. We cannot assure you that the FCC will grant the
requisite approvals for any of our products on a timely basis, or at all. The
failure of our products to comply, or delays in compliance, with the various
existing and evolving standards could negatively impact our ability to sell our
products. United States regulations regarding the manufacture and sale of data
communications devices are subject to future change. We cannot predict what
impact, if any, such changes may have upon our business.
Employees
As of
March 16, 2010, we had approximately 30 full-time employees. We have no
collective bargaining agreements with our employees. We believe that our
relationships with our employees is good.
Item
1A.
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Risk
Factors.
|
An
investment in our common stock involves a high degree of risk. In addition to
the other information in this Annual Report on Form 10-K and in our other
filings with the Securities and Exchange Commission, including our subsequent
reports on Forms 10-Q and 8-K, you should carefully consider the following risk
factors before deciding to invest in shares of our common stock or to maintain
or increase your investment in shares of our common stock. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial
may also affect our business, financial condition and operating results. If any
of the following risks, or any other risks not described below, actually occur,
it is likely that our business, financial condition and operating results could
be seriously harmed. As a result, the trading price of our common stock could
decline, and you could lose part or all of your investment.
Risks
Related to Our Business
We
have limited liquidity and only a small credit facility and therefore may be
unable to fully fund our operations for the next twelve months or
less.
As of
March 16, 2010, we had cash on hand of $667,000 and a credit facility limited to
$1,500,000. Accordingly, we have limited liquidity and access to
capital. If our capital requirements or cash flow vary materially
from our current projections, if we are unable to timely collect our accounts
receivable or unable to sell-through inventory currently in our sales channels
as anticipated, or if other unforeseen circumstances occur, we may have
insufficient liquidity to fully fund our operations for the next twelve months
or less.
Except
for 2009, we incurred significant losses and experienced negative operating cash
flow in the past and cannot provide any assurance that this will not happen
again. Future losses and negative operating cash flow will likely hamper our
business and may prevent us from sustaining our operations.
Except
for 2009, we have incurred net losses and, for the most part, experienced
negative operating cash flow in nine of the past ten years and have a
substantial accumulated deficit. We cannot provide any assurance that we will
not incur significant losses and experience negative operating cash flow in the
future. Future losses and negative operating cash flow will likely hamper our
business and may prevent us from sustaining our operations.
12
Our
independent registered public accounting firm has expressed substantial doubt
about our ability to continue as a going concern. This report may impair our
ability to raise additional financing and adversely affect the price of our
common stock.
The
report of our independent registered public accounting firm contained in our
financial statements as of and for the year ended December 31, 2009 includes a
paragraph that explains that we have incurred significant operating losses, have
serious liquidity concerns and may require additional financing in the
foreseeable future. The report concludes that these matters, among
others, raise substantial doubt about our ability to continue as a going
concern. Reports of independent auditors questioning a company’s
ability to continue as a going concern are generally viewed unfavorably by
analysts and investors. This report may make it difficult for us to
raise additional financing necessary to grow or operate our
business. We urge potential investors to review this report before
making a decision to invest in I/OMagic Corporation.
The
high concentration of our sales within the data storage industry could result in
a significant reduction in net sales and negatively affect our earnings if
demand for those products declines.
Sales of
our data storage products accounted for approximately 99% and 90% of our net
sales in 2009 and 2008, respectively, and are therefore highly concentrated
within the data storage industry. We expect data storage products to continue to
account for a significant proportion of our net sales for the foreseeable
future. As a result, our net sales and profitability would be significantly and
adversely impacted by a downturn in the demand for data storage
products.
The
consumer electronics industry is extremely competitive. All of our significant
competitors have greater financial and other resources than we do, and one or
more of these competitors could use their greater resources to gain market share
at our expense.
The
markets for data storage products are extremely competitive. All of our
significant competitors selling data storage products, including BenQ,
Hewlett-Packard, Hitachi, Lite-On, LG Electronics, Memorex, Philips Electronics,
Pioneer, Samsung Electronics and Sony have substantially greater production,
financial, research and development, intellectual property, personnel and
marketing resources than we do. As a result, each of these companies could
compete more aggressively and sustain that competition over a longer period of
time than we could. For example, throughout 2008 we experienced
intense price competition from major competitors for our magnetic data storage
products such as Western Digital and Seagate Technology/Maxtor, who are original
equipment manufacturers, which significantly reduced selling prices and eroded
our margins for our magnetic data storage products causing us to discontinue
sales of magnetic data storage products. Our lack of resources
relative to all of our significant competitors may cause us to fail to
anticipate or respond adequately to technological developments and changing
consumer demands and preferences, or may cause us to experience significant
delays in obtaining or introducing new or enhanced products. These failures or
delays could reduce our competitiveness and cause a decline in our market share,
sales and profitability.
13
The
consumer electronics industry is subject to significant fluctuations in the
availability of components and finished products. If we or our
subcontract manufacturers or suppliers do not properly anticipate the need for
critical components or finished products, we may be unable to meet the demands
of our customers and end-users, which could reduce our competitiveness, cause a
decline in our market share and have a material adverse effect on our results of
operations.
As the
availability of components and finished products decreases, the cost of
acquiring those components and finished products ordinarily
increases. If we or our subcontract manufacturers or suppliers fail
to procure adequate supplies of components or finished products in anticipation
of our customers’ orders or consumer demand, our gross margins may be negatively
impacted due to higher prices that we or our subcontract manufacturers or
suppliers are required to pay for components and products in short
supply. In addition, there are a limited number of manufacturers for
optical disk drives, all of whom are our competitors, and who can control our
ability to obtain product supplies in adequate quantities and at prices that
permit us to generate reasonable margins. Certain product categories have
experienced chronic shortages of components and finished products during periods
of exceptionally high demand. If we or our subcontract manufacturers or
suppliers do not properly anticipate the need for critical components or
finished products, we may be unable to meet the demands of our customers and
end-users, which could reduce our competitiveness, cause a decline in our market
share and have a material adverse effect on our results of
operations.
If
we fail to select high turnover products for our consignment sales channels, our
financing costs may exceed targeted levels, we may be unable to fund additional
purchases of inventory and we may be forced to reduce prices and accept lower
margins to sell consigned products, which would cause our sales, profitability
and financial resources to decline.
We retain
most risks of ownership of products in our consignment sales channels. These
products remain our inventory until sold by our customers. For example, both
Office Depot and OfficeMax returned substantial consigned inventory in the
fourth quarter of 2007 and the first quarter of 2008, respectively, each in
anticipation of discontinuing sales of our products. The return of
this inventory resulted in significant inventory valuation adjustments caused by
the declining value of the inventory, principally, our magnetic data storage
products, which was included in cost of sales for those periods.
In
addition, the turnover frequency of our inventory on consignment is critical to
generating regular cash flow in amounts necessary to keep financing costs to
targeted levels and to purchase additional inventory. If this inventory turnover
is not sufficiently frequent, our financing costs may exceed targeted levels and
we may be unable to generate regular cash flow in amounts necessary to purchase
additional inventory to meet the demand for other products. Also, as a result of
our products’ short life-cycles, which generate lower average selling prices as
the cycles mature, low inventory turnover levels may force us to reduce prices
and accept lower margins to sell consigned products. Additionally, if our
inventory turnover is not sufficiently frequent, the value of our consigned
inventory could decline significantly. For example, throughout 2008 we
experienced intense price competition from major competitors for our magnetic
data storage products such as Western Digital and Seagate Technology/Maxtor, who
are original equipment manufacturers, which significantly reduced selling prices
and eroded our margins for our magnetic data storage products causing us to
discontinue sales of these products.
As of
December 31, 2009 and 2008, we carried and financed inventory valued at
approximately $948,000 and $655,000, respectively, in our consignment sales
channels. Sales generated through consignment sales were approximately 51% and
35% of our total net sales in 2009 and 2008, respectively. If we fail to select
high turnover products for our consignment sales channels, our sales,
profitability and financial resources could decline.
14
We
depend on a small number of customers for the vast majority of our sales. A
reduction in business from any of these customers could cause a significant
decline in our sales and profitability.
The vast
majority of our sales are generated from a small number of customers. During
2009, net sales to our largest retailer, Staples, and our two largest
distributors, Tech Data and D&H Distributing, represented approximately 49%,
29% and 10%, respectively, of our total net sales. During 2008, net
sales to our largest distributor, Tech Data, and our two largest retailers,
Staples and Target, represented approximately 35%, 26% and 17%,
respectively, of our total net sales. We expect that we will continue
to depend upon a small number of customers for a significant majority of our
sales for the foreseeable future.
Our
agreements with these customers do not require them to purchase any specified
number of products or dollar amount of sales or to make any purchases
whatsoever. Therefore, we cannot assure you that, in any future period, our
sales generated from these customers, individually or in the aggregate, will
equal or exceed historical levels. We also cannot assure you that, if sales to
any of these customers cease or decline, we will be able to replace these sales
with sales to either existing or new customers in a timely manner, or at all. A
cessation or reduction of sales, or a decrease in the prices of products sold to
one or more of these customers has significantly reduced our net sales for one
or more reporting periods in the past and could, in the future, cause a
significant decline in our net sales and profitability.
Our
lack of long-term purchase orders and commitments could lead to a rapid decline
in our sales and profitability.
All of
our significant customers issue purchase orders solely in their own discretion,
often only one to two weeks before the requested date of shipment. Our customers
are generally able to cancel orders or delay the delivery of products on short
notice. In addition, our customers may decide not to purchase products from us
for any reason. Accordingly, we cannot assure you that any of our current
customers will continue to purchase our products in the future. As a result, our
sales volume and profitability could decline rapidly with little or no warning
whatsoever.
We cannot
rely on long-term purchase orders or commitments to protect us from the negative
financial effects of a decline in demand for our products. The limited certainty
of product orders can make it difficult for us to forecast our sales and
allocate our resources in a manner consistent with our actual sales. Moreover,
our expense levels are based in part on our expectations of future sales and, if
our expectations regarding future sales are inaccurate, we may be unable to
reduce costs in a timely manner to adjust for sales shortfalls. Furthermore,
because we depend on a small number of customers for the vast majority of our
sales, the magnitude of the ramifications of these risks is greater than if our
sales were less concentrated. As a result of our lack of long-term purchase
orders and purchase commitments we may experience a rapid decline in our sales
and profitability.
One
or more of our largest customers may directly import or private label products
that are identical or very similar to our products which could cause a
significant decline in our sales and profitability.
Data
storage products and other consumer electronics products are widely available
from manufacturers and other suppliers around the world. Our largest retailer is
Staples and our largest distributors are Tech Data and D&H Distributing.
Collectively, these customers accounted for 88% of our net sales in 2009. Each
of these customers has substantially greater resources than we do, and has the
ability to directly import or private-label data storage products and other
consumer electronics products from manufacturers and suppliers around the world,
including from some of our own subcontract manufacturers and suppliers. Our
customers may believe that higher profit margins can be achieved if they
implement a direct import or private-label program, excluding us from the sales
channel. Accordingly, one or more of our largest customers may stop buying
products from us in favor of a direct import or private-label program. As a
consequence, our sales and profitability could decline
significantly.
15
Historically,
a substantial portion of our assets has been comprised of accounts receivable
representing amounts owed by a small number of customers. We expect this to
continue in the future. If any of these customers fails to timely pay us amounts
owed, we could suffer a significant decline in cash flow and
liquidity.
Our
accounts receivable represented approximately 21% and 31% of our total assets as
of December 31, 2009 and 2008, respectively. As of December 31, 2009, 95% of our
accounts receivable represented amounts owed by one retailer and two
distributors, each of which represented over 10% of the total amount of our
accounts receivable. As of December 31, 2008, 92% of our accounts
receivable represented amounts owed by two retailers and one distributor, each
of which represented over 10% of the total amount of our accounts receivable. As
a result of the substantial amount and concentration of our accounts receivable,
if any of our major customers fails to timely pay us amounts owed, we could
suffer a significant decline in cash flow and liquidity.
We
rely heavily on our Chief Executive Officer, Tony Shahbaz. The loss of his
services could adversely affect our ability to source products from our key
subcontract manufacturers or suppliers and our ability to sell our products to
our customers.
Our
success depends, to a significant extent, upon the continued services of Tony
Shahbaz, who is our Chairman of the Board, President, Chief Executive Officer,
Secretary and Acting Chief Financial Officer. For example, Mr. Shahbaz has
developed key personal relationships with our customers, subcontract
manufacturers and suppliers. We greatly rely on these relationships in the
conduct of our operations and the execution of our business strategies. The loss
of Mr. Shahbaz could, therefore, result in the loss of our favorable
relationships with one or more of our customers, subcontract manufacturers and
suppliers. Although we have entered into an employment agreement with Mr.
Shahbaz, that agreement is of limited duration and is subject to early
termination by Mr. Shahbaz under certain circumstances. In addition, we do not
maintain “key person” life insurance covering Mr. Shahbaz or any other executive
officer. The loss of Mr. Shahbaz could significantly delay or prevent the
achievement of our business objectives. Consequently, the loss of Mr. Shahbaz
could adversely affect our business, financial condition and results of
operations.
If
we fail to accurately forecast the costs of our product rebate or other
promotional programs, we may experience a significant decline in cash flow and
our brand image may be adversely affected resulting in reduced sales and
profitability.
We have
historically relied heavily on product rebates and other promotional programs to
establish, maintain and increase sales of our products. If we fail to accurately
forecast the costs of these programs, we may fail to allocate sufficient
resources to these programs. For example, we may fail to have sufficient funds
available to satisfy mail-in product rebates. If we are unable to satisfy our
promotional obligations, such as providing cash rebates to consumers, our brand
image and goodwill with customers and end-users could be harmed, which may
result in reduced sales and profitability. In addition, our failure to
adequately forecast the costs of these programs may result in unexpected
liabilities causing a significant decline in cash flow and financial resources
with which to operate our business.
16
Consumer
electronics products are subject to rapid technological changes. If we fail to
accurately anticipate and adapt to these changes, the products we sell will
become obsolete, causing a decline in our sales and profitability.
Consumer
electronics products are subject to rapid technological changes which often
cause product obsolescence. Companies within the consumer electronics industry
are continuously developing new products with heightened performance and
functionality. This puts pricing pressure on existing products and constantly
threatens to make them, or causes them to be, obsolete. Our typical product’s
life cycle is extremely short, ranging from 6 to 12 months, generating lower
average selling prices as the cycle matures. If we fail to accurately anticipate
the introduction of new technologies, we may possess significant amounts of
obsolete inventory that can only be sold at substantially lower prices and
profit margins than we anticipated. In addition, if we fail to accurately
anticipate the introduction of new technologies, we may be unable to compete
effectively due to our failure to offer products most demanded by the
marketplace. If any of these failures occur, our sales, profit margins and
profitability will be adversely affected.
Our
indemnification obligations to our customers for product defects could require
us to pay substantial damages, which could have a significant negative impact on
our profitability and financial resources.
A number
of our agreements with our customers provide that we will defend, indemnify and
hold them and their customers harmless from damages and costs that arise from
claims for injury or damage resulting from defects in our products. If such
claims are asserted against us, our insurance coverage may not be adequate to
cover the costs associated with our defense of those claims or the cost of any
resulting liability we incur if those claims are successful. A successful claim
brought against us for a product defect that is in excess of, or excluded from,
our insurance coverage could adversely affect our profitability and financial
resources and could make it difficult or impossible for us to adequately fund
our day-to-day operations.
If
we are subjected to one or more intellectual property infringement claims, our
sales, earnings and financial resources may be adversely affected.
Our
products rely on intellectual property developed, owned or licensed by third
parties. From time to time, intellectual property infringement claims have been
asserted against us. We expect to continue to be subjected to such claims in the
future. Intellectual property infringement claims may also be asserted against
our customers as a result of selling our products. As a consequence, our
customers could assert indemnification claims against us. If any third party is
successful in asserting an infringement claim against us, we could be required
to acquire licenses, which may not be available on commercially reasonable
terms, if at all, to continue selling certain products, to pay substantial
monetary damages or to develop non-infringing technologies, none of which may be
feasible. Both infringement and indemnification claims could be time-consuming
and costly to defend or settle and would divert management’s attention and our
financial resources away from our business. In addition, we may lack sufficient
litigation defense resources, therefore, any one of these developments could
place substantial financial and administrative burdens on us and our sales,
profitability and financial resources may be adversely affected.
A
significant product defect or product recall could materially and adversely
affect our brand image, causing a decline in our sales and profitability, and
could reduce or deplete our financial resources.
A
significant product defect could materially harm our brand image and could force
us to conduct a product recall. This could damage our relationships with our
customers and reduce end-user loyalty. A product recall would be particularly
harmful to us because we have limited financial and administrative resources to
effectively manage a product recall and it would detract management’s attention
from implementing our core business strategies. As a result, a significant
product defect or product recall could cause a decline in our sales and
profitability, and could reduce or deplete our financial resources.
17
A
labor strike or congestion at a shipping port at which our products are shipped
or received could prevent us from taking timely delivery of inventory, which
could cause our sales and profitability to decline.
From time
to time, shipping ports experience labor strikes, work stoppages or congestion
that delay the delivery of imported products. The port of Long Beach,
California, through which most of our products are imported from Asia,
experienced a labor strike in September 2002 which lasted nearly two weeks. As a
result, there was a significant disruption in our ability to deliver products to
our customers, which caused our sales to decline. Any future labor strike, work
stoppage or congestion at a shipping port at which our products are shipped or
received would prevent us from taking timely delivery of inventory and cause our
sales to decline. In addition, many of our customers impose penalties for both
early and late product deliveries, which could result in significant additional
costs to us. In the event of a similar labor strike or work stoppage in the
future, or in the event of congestion, in order to meet our delivery obligations
to our customers and avoid penalties for missed delivery dates, we may be
required to arrange for alternative means of product shipment, such as air
freight, which could add significantly to our product costs. We would typically
be unable to pass these extra costs along to either our customers or to
end-users. Also, because the average selling prices of our products decline,
often rapidly, during their short product life cycle, delayed delivery of
products could yield significantly less than expected sales and
profits.
Failure
to adequately protect our trademark rights could cause us to lose market share
and cause our sales to decline.
We sell
our products primarily under our I/OMagic® and
Digital Research Technologies® brand
names and, from time to time, also sell products under our Hi-Val® brand
name. Each of these trademarks has been registered by us with the United States
Patent & Trademark Office. One of our key business strategies is to use our
brand and product names to successfully compete in the industries in which we
operate. We have expended significant resources promoting our brand and product
names and we have registered trademarks for our three brand names. However, we
cannot assure you that the registration of our brand name trademarks, or our
other actions to protect our non-registered product names, will deter or prevent
their unauthorized use by others. We also cannot assure you that other
companies, including our competitors, will not use our product names. If other
companies, including our competitors, use our brand or product names, consumer
confusion could result, meaning that consumers may not recognize us as the
source of our products. This would reduce the value of goodwill associated with
these brand and product names. This consumer confusion and the resulting
reduction in goodwill could cause us to lose market share, cause our sales to
decline and profitability and financial resources could be adversely
affected.
Consumer
acceptance of alternative sales channels may increase. If we are unable to adapt
to these alternative sales channels, sales of our products may
decline.
We are
accustomed to conducting business through traditional retail sales and
distribution channels. End-users purchase our products predominantly through a
small number of retailers and distributors. For example, during 2009, one
retailer and two distributors collectively accounted for 88% of our total net
sales. Similarly, during 2008, one of our distributors and two of our retailers
collectively accounted for 78% of our total net sales. We believe that many of
our target consumers are knowledgeable about technology and comfortable with the
use of the Internet for product purchases. End-users may increasingly prefer
alternative sales channels, such as direct mail order or direct purchase from
manufacturers. In addition, Internet commerce is accepted by end-users as a
convenient, secure and cost-effective method of purchasing data storage and
other consumer electronics products. The migration of consumer purchasing habits
from traditional retailers to Internet retailers could have a significant impact
on our ability to sell our products. We cannot assure you that we will be able
to predict and respond to increasing consumer preference of alternative sales
channels. If we are unable to adapt to alternative sales channels, sales of our
products may decline.
18
Our
operations are vulnerable because we have limited redundancy and backup
systems.
Our
internal order, inventory and product data management system is an electronic
system through which our customers place orders for our products and through
which we manage product pricing, shipments, returns and other matters. This
system’s continued and uninterrupted performance is critical to our day-to-day
business operations. Despite our precautions, unanticipated interruptions in our
computer and telecommunications systems have, in the past, caused problems or
stoppages in this electronic system. These interruptions, and resulting
problems, could occur in the future. We have extremely limited ability and
personnel to process purchase orders and manage product pricing and other
matters in any manner other than through this electronic system. Any
interruption or delay in the operation of this electronic system could cause a
significant decline in our sales and profitability.
Risks
Related to Our Common Stock
Our
common stock has a small public float and shares of our common stock eligible
for public sales could cause the market price of our stock to drop, even if our
business is doing well.
As of
March 16, 2010, there were approximately 4.5 million shares of our common stock
outstanding. Our executive officer, sole director and 10% stockholders
beneficially own approximately 2.9 million of these shares. Accordingly, our
common stock has a public float of approximately 1.6 million shares held by a
relatively small number of public investors. In addition, we have a registration
statement on Form S-8 in effect covering 133,334 shares of common stock issuable
upon exercise of options under our 2002 Stock Option Plan and a registration
statement on Form S-8 in effect covering 400,000 shares of common stock issuable
upon exercise of options under our 2003 Stock Option Plan. Currently, options
covering 9,300 shares of common stock are outstanding under our 2002 Stock
Option Plan and options covering 124,000 shares of common stock are outstanding
under our 2003 Stock Option Plan. The shares of common stock issued upon
exercise of these options will be freely tradable without restriction or further
registration, except to the extent purchased by one of our
affiliates.
We cannot
predict the effect, if any, that future sales of shares of our common stock into
the public market will have on the market price of our common stock. However, as
a result of our small public float, sales of substantial amounts of common
stock, including shares issued upon the exercise of stock options or warrants,
or anticipation that such sales could occur, may, materially and adversely
affect prevailing market prices for our common stock.
Our
stock price is highly volatile, which could result in substantial losses for
investors purchasing shares of our common stock and in litigation against
us.
The
market price of our common stock has fluctuated significantly in the past and
may continue to fluctuate significantly in the future. From January 1, 2009
through March 16, 2010, the high and low closing bid prices of a share of our
common stock were $1.00 and $0.10, respectively. The market price of our common
stock may continue to fluctuate in response to one or more of the following
factors, many of which are beyond our control:
●
|
changes
in market valuations of similar
companies;
|
19
●
|
stock
market price and volume
fluctuations;
|
●
|
economic
conditions specific to the consumer electronics
industry;
|
●
|
announcements
by us or our competitors of new or enhanced products or technologies or of
significant contracts, acquisitions, strategic relationships, joint
ventures or capital
commitments;
|
●
|
the
loss of one or more of our top customers or the cancellation or
postponement of orders from any of those
customers;
|
●
|
delays
in our introduction of new products or technological innovations or
problems in the functioning of these new products or
innovations;
|
●
|
disputes
or litigation concerning our rights to use third parties’ intellectual
property or third parties’ infringement of our intellectual
property;
|
●
|
changes
in our pricing policies or the pricing policies of our
competitors;
|
●
|
changes
in foreign currency exchange rates affecting our product costs and
pricing;
|
●
|
regulatory
developments or increased
enforcement;
|
●
|
fluctuations
in our quarterly or annual operating
results;
|
●
|
additions
or departures of key personnel;
and
|
●
|
future
sales of our common stock or other
securities.
|
The price
at which you purchase shares of our common stock may not be indicative of the
price that will prevail in the trading market. You may be unable to sell your
shares of common stock at or above your purchase price, which may result in
substantial losses to you.
In the
past, securities class action litigation has often been brought against a
company following periods of stock price volatility. Although we have not been
subject to such litigation, we may be the target of such litigation in the
future. Securities litigation could result in substantial costs and divert
management’s attention and our financial resources from our
business.
Any of
the risks described above could have an adverse effect on our business,
financial condition and results of operations and therefore on the price of our
common stock.
If
the ownership of our common stock continues to be highly concentrated, it may
prevent you and other stockholders from influencing significant corporate
decisions and may result in conflicts of interest that could cause our stock
price to decline.
As a
group, our executive officer, sole director, and 10% stockholders beneficially
own or control approximately 65% of our outstanding shares of common stock
(after giving effect to the exercise of all outstanding vested options
exercisable within 60 days from March 16, 2010). As a result, our
executive officer, sole director, and 10% stockholders, acting as a group, have
substantial control over the outcome of corporate actions requiring stockholder
approval, including the election of directors, any merger, consolidation or sale
of all or substantially all of our assets, or any other significant corporate
transaction. Some of these controlling stockholders may have
interests different than yours. For example, these stockholders may
delay or prevent a change in control of I/OMagic Corporation, even one that
would benefit our stockholders, or pursue strategies that are different from the
wishes of other investors. The significant concentration of stock ownership may
adversely affect the trading price of our common stock due to investors’
perception that conflicts of interest may exist or arise.
20
Our
articles of incorporation, our bylaws and Nevada law each contain provisions
that could discourage transactions resulting in a change in control of I/OMagic
Corporation, which may negatively affect the market price of our common
stock.
Our
articles of incorporation and our bylaws contain provisions that may enable our
board of directors to discourage, delay or prevent a change in the ownership of
I/OMagic Corporation or in our management. In addition, these provisions could
limit the price that investors would be willing to pay in the future for shares
of our common stock. These provisions include the following:
●
|
our
board of directors is authorized, without prior stockholder approval, to
create and issue preferred stock, commonly referred to as “blank check”
preferred stock, with rights senior to those of our common
stock;
|
●
|
our
stockholders are permitted to remove members of our board of directors
only upon the vote of at least two-thirds of the outstanding shares of
stock entitled to vote at a meeting called for such purpose or by written
consent; and
|
●
|
our
board of directors are expressly authorized to make, alter or repeal our
bylaws.
|
In
addition, we may be subject to the restrictions contained in Sections 78.378
through 78.3793 of the Nevada Revised Statutes which provide, subject to certain
exceptions and conditions, that if a person acquires a “controlling interest,”
which is equal to either one-fifth or more but less than one-third, one-third or
more but less than a majority, or a majority or more of the voting power of a
corporation, that person is an “interested stockholder” and may not vote that
person’s shares. The effect of these restrictions may be to discourage, delay or
prevent a change in control of I/OMagic Corporation.
We
cannot assure you that an active market for our shares of common stock will
develop or, if it does develop, will be maintained in the future. If an active
market does not develop, you may not be able to readily sell your shares of our
common stock.
On March
25, 1996, our common stock commenced trading on the OTC Bulletin Board. Since
that time, there has been extremely limited trading in our shares, at widely
varying prices, and the trading to date has not created an active market for our
shares. In December 2008, our common stock was removed from trading on the OTC
Bulletin Board and now trades on the OTC Pink Sheets. We cannot assure you that
an active market for our shares will be established or maintained in the future.
If an active market is not established or maintained, you may not be able to
readily sell your shares of our common stock.
Because
we are subject to “penny stock” rules, the level of trading activity in our
common stock may be reduced. If the level of trading activity is reduced, you
may not be able to readily sell your shares of our common stock.
Broker-dealer
practices in connection with transactions in “penny stocks” are regulated by
penny stock rules adopted by the Securities and Exchange Commission. Penny
stocks are, generally, equity securities with a price of less than $5.00 per
share that trade on the OTC Bulletin Board or the OTC Pink Sheets. The penny
stock rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document that provides information about penny stocks and the nature and level
of risks in investing in the penny stock market. The broker-dealer also must
provide the prospective investor with current bid and offer quotations for the
penny stock and the amount of compensation to be paid to the broker-dealer and
its salespeople in the transaction. Furthermore, if the broker-dealer is the
sole market maker, the broker-dealer must disclose this fact and the
broker-dealer’s presumed control over the market, and must provide each holder
of a penny stock with a monthly account statement showing the market value of
each penny stock held in the customer’s account. In addition, broker-dealers who
sell penny stocks to persons other than established customers and “accredited
investors” must make a special written determination that the penny stock is a
suitable investment for the prospective investor and receive the purchaser’s
written agreement to the transaction. These requirements may have the effect of
reducing the level of trading activity in a penny stock, such as our common
stock, and investors in our common stock may find it difficult to sell their
shares.
21
Item
1B.
|
Unresolved
Staff Comments.
|
None.
Item
2.
|
Properties.
|
Our
corporate headquarters is located in Irvine, California in a leased facility of
approximately 52,000 square feet. This facility contains all of our operations,
including sales, marketing, finance, administration, production, shipping and
receiving. The facility is leased under a non-cancelable operating lease
agreement expiring December 31, 2012. We have the right to
extend the lease for one three-year period under the same terms and conditions
upon providing 180 notice days prior to the expiration of the current lease
term, except that the base rent for each year during the option period is to
increase at the rate of three percent per annum.
On July
6, 2009, we entered into a sub-lease for approximately 30% of our facility with
a term of 18 months and an option to renew for an additional 22
months. The total amount of minimum rentals to be received under the
sub-lease for the initial 18 month period is $160,578. In addition to
the base rent, the sub-tenant is required to pay its proportionate share of the
monthly operating expenses related to the facility.
We
believe this facility is adequate for our anticipated business purposes for the
foreseeable future. We have no other leased or owned real property.
Item
3.
|
Legal
Proceedings.
|
We may be
involved in certain legal proceedings and claims which arise in the normal
course of business. Management does not believe that the outcome of any
currently pending matters will have a material effect on our financial position,
results of operations or cash flows.
Item
4.
|
(Removed
and Reserved).
|
PART
II
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities.
|
Market
Information
Our
common stock has traded on the OTC Pink Sheets under the symbol “IOMG” since
December 2008. Prior to that time, our common stock traded on the OTC Bulletin
Board under the symbol “IOMG” since December 20, 2002. Prior to that time, our
common stock traded on the OTC Bulletin Board under the symbol “IOMC” since
March 25, 1996. The table below shows for each fiscal quarter indicated the high
and low closing bid prices for shares of our common stock. This information has
been obtained from the OTC Bulletin Board. The prices shown reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions.
22
Price
Range
|
||||||||||
High
|
Low
|
|||||||||
2008:
|
||||||||||
First
Quarter
|
$ | 1.49 | $ | 1.15 | ||||||
Second
Quarter
|
$ | 0.65 | $ | 0.25 | ||||||
Third
Quarter
|
$ | 0.65 | $ | 0.25 | ||||||
Fourth
Quarter
|
$ | 0.25 | $ | 0.10 | ||||||
2009:
|
||||||||||
First
Quarter
|
$ | 0.50 | $ | 0.10 | ||||||
Second
Quarter
|
$ | 0.10 | $ | 0.10 | ||||||
Third
Quarter
|
$ | 1.00 | $ | 0.10 | ||||||
Fourth
Quarter
|
$ | 0.69 | $ | 0.25 |
Security
Holders
As of
March 16, 2010, we had 4,540,292 shares of common stock outstanding held of
record by approximately 100 stockholders. These holders of record include
depositories that hold shares of stock for brokerage firms which, in turn, hold
shares of stock for numerous beneficial owners.
Dividends
We have
not paid dividends on our common stock to date. We currently intend to retain
future earnings, if any, to fund our operations and the development and growth
of our business and, therefore, do not anticipate paying cash dividends on our
common stock within the foreseeable future. Any future payment of dividends on
our common stock will be determined by our board of directors and will depend on
our financial condition, results of operations, contractual obligations and
other factors deemed relevant by our board of directors.
Recent
Sales of Unregistered Securities
None.
Item
6.
|
Selected
Financial Data.
|
Not
applicable.
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The
following discussion should be read in conjunction with our consolidated
financial statements and the related notes and the other financial information
included elsewhere in this report. This discussion contains forward-looking
statements regarding the data storage and digital entertainment industries and
our expectations regarding our future performance, liquidity and financial
resources. Our actual results could differ materially from those expressed in
these forward-looking statements as a result of any number of factors, including
those set forth under “Risk Factors” and under other captions contained
elsewhere in this report.
Overview
We sell
data storage products and other consumer electronics products. We
also sold high-definition televisions, or HDTVs, utilizing liquid crystal
display, or LCD, technology, in the first quarter of 2008. We did not sell any
HDTVs in 2009. Our data storage products collectively accounted for
approximately 99% of our net sales in 2009 and our other consumer electronics
products collectively accounted for approximately 1% of our net sales in
2009.
23
Our data
storage products consist of a range of products that store traditional personal
computer data as well as movies, music, photos, video games and other
multi-media content. Our other consumer electronics products consist of a range
of products that focus on digital movies, music and photos.
We sell
our products through computer, consumer electronics and office supply
superstores, wholesale clubs, distributors, and other major North American
retailers. Our network of retailers enables us to offer products to consumers
across North America, including in every major metropolitan market in the United
States. We had no sales outside the United States in either 2009 or
2008. During 2009, our most significant retailer and distributors
were Staples, Tech Data and D&H Distributing. Collectively, this retailer
and these two distributors accounted for 88% of our net sales for 2009, or 49%,
29% and 10%, respectively. During 2008, our most significant
distributor and retailers were Tech Data, Staples and Target. Collectively, this
distributor and these two retailers accounted for 78% of our net sales for 2008,
or 35%, 26% and 17%, respectively.
We market
our products primarily under our I/OMagic® and
Digital Research Technologies® brand
names, but from time to time, we also market products under our Hi-Val® brand
name. We sell our data storage products primarily under our I/OMagic® brand
name, bundling various hardware devices with different software applications to
meet a range of consumer needs.
We do not
directly manufacture any of the components incorporated into products that we
sell. We subcontract the manufacturing of the majority of our products or source
our products from suppliers in Asia, predominantly Taiwan and China, which
allows us to offer products at highly competitive prices. Most of our
subcontract manufacturers and suppliers have substantial product development
resources and facilities, and are among the major component manufacturers and
suppliers in their product categories, which we believe affords us substantial
flexibility in offering new and enhanced products.
As of
March 16, 2010, we had $667,000 of cash on hand. Accordingly, we are presently
experiencing a lack of liquidity and may have insufficient capital to fund our
operations for the next twelve months or less. If our capital requirements or
cash flow vary materially from our current projections, if we are unable to
timely collect our accounts receivable or unable to sell-through inventory
currently in our sales channels as anticipated, or if unforeseen circumstances
occur, we may be unable to increase our liquidity. If we are unable to increase
our liquidity, we will experience a material adverse effect on our ability to
operate our business. These factors, among others, raise substantial doubt about
our ability to continue as a going concern and our independent registered public
accounting firm has issued a report expressing substantial doubt about our
ability to continue as a going concern.
Financial
Performance Summary
Our net
sales decreased by $3.0 million, or approximately 23%, to $10.3 million in 2009
from $13.3 million in 2008. Our gross profit increased by $3.4 million, or
approximately 7,168%, to $3.4 million in 2009 from $47,000 in 2008. Our net
income for 2009 was $407,156 as compared to a net loss of $4.3 million in 2008,
an increase of $4.7 million.
Net sales. The decrease in
our net sales in 2009 as compared to 2008 was primarily due to the following
combination of factors:
●
|
substantial
decreases in sales of our magnetic data storage products, HDTVs and other
consumer electronics products of 80%, 100% and 90%, respectively; the
substantial decrease in sales of our magnetic data storage products and
HDTVs resulted from our decision to discontinue sales of both products due
to the intense price competition from OEM
manufacturers;
|
24
●
|
a
decrease in the number of national retailers carrying our products;
and
|
●
|
a
decrease in the number of products
offered.
|
These
decreases were partially offset by:
●
|
a
13% increase in sales of our optical data storage products resulting
primarily from our new optical data storage products directed at the
market for netbooks; and
|
●
|
a
decrease in sales and price incentives to 7.0% of net sales in 2009 as
compared to 7.2% in 2008.
|
Gross Profit. Our gross
profit margin increased to 33.1% in 2009, as compared to 0.4% in 2008. This
increase is primarily due to the following combination of factors:
●
|
a
decrease in product material costs to 59% of net sales in 2009 as compared
to 86% of net sales in 2008, as a result of a change in product
mix;
|
●
|
a
decrease in inventory write-offs to 0.0% in 2009 as compared to 5.2% of
net sales in 2008 which resulted from write-downs of magnetic data storage
inventory in 2008; and
|
●
|
a
decrease in our production, shipping and handling costs to 7.1% of net
sales in 2009 as compared to 7.5% of net sales in
2008.
|
Operating Expenses. Our
operating expenses decreased by 29%, or $1.2 million, to 29% of net sales in
2009, as compared to 32% of net sales in 2008. The decrease in
operating expenses is primarily due to a decrease in our general and
administrative expenses by $539,000 to 22% of net sales in 2009 as compared to
21% of net sales in 2008 and a decrease in selling expenses of $377,000 to 6.5%
of net sales in 2009, as compared to 7.9% of net sales in 2008. Also, in 2008,
we recognized an impairment of trademarks of $244,000.
Other Expense. Our other
expense decreased by approximately $74,000. This decrease was due primarily to a
decrease in interest expense of approximately $91,000 which was partially offset
by a decrease in other income of $17,000. We recorded costs related to our
credit facility as financing costs which are included in general and
administrative expenses for 2009, whereas, borrowing costs for our prior credit
facility was recorded as interest expense in 2008.
Operating
Performance and Financial Condition
We focus
on numerous factors in evaluating our operating performance and our financial
condition. In particular, in evaluating our operating performance, we focus
primarily on net sales, net product margins, net customer margins, rebates and
sales incentives, and inventory turnover as well as operating expenses and net
income.
25
Net sales. Net sales is a key
indicator of our operating performance. We closely monitor overall net sales, as
well as net sales to individual customers, and seek to increase net sales by
expanding sales to additional customers and existing customers by increasing
sales of existing products and by introducing new products. Management monitors
net sales on a weekly basis, but also considers sales seasonality, promotional
programs and product life-cycles in evaluating weekly sales performance. As net
sales increase or decrease from period to period, it is critical for management
to understand and react to the various causes of these fluctuations, such as
successes or failures of particular products, promotional programs, product
pricing, customer decisions, seasonality and other causes. Where possible,
management attempts to anticipate potential changes in net sales and seeks to
prevent adverse changes and stimulate positive changes by addressing the
expected causes of adverse and positive changes. We believe that our good
working relationships with our customers enable us to closely monitor consumer
acceptance of particular products and promotional programs which in turn enables
us to better anticipate changes in market conditions.
Net product margins. Net
product margins, from product-to-product and across all of our products lines as
a whole, is an important measurement of our operating performance. We monitor
margins on a product-by-product basis to ascertain whether particular products
are profitable or should be phased out. In evaluating particular levels of
product margins on a product-by-product basis, we focus on attaining a level of
net product margin sufficient to contribute to normal operating expenses and to
provide a profit. The level of acceptable net product margin for a particular
product depends on our expected product sales mix. However, we occasionally sell
products for certain strategic reasons to, for example, provide a full line of
products within a product category or for promotional purposes, without a rigid
focus on historical product margins or contribution to operating expenses or
profitability.
Net customer margins. We seek
to manage profitability on a customer level, not solely on a product level.
Although we focus on net product margins on a product-by-product basis and
across all of our products lines, our primary focus is on attaining and building
profitability on a customer-by-customer level. For this reason, our mix of
products is likely to differ among our various customers. These differences
result from a number of factors, including customer differences, products
offered for sale and promotional programs.
Rebates and sales incentives.
Rebates and sales incentives offered to customers and end-users are an important
aspect of our business and are instrumental in obtaining and maintaining market
acceptance through competitive pricing in generating sales on a regular basis as
well as stimulating sales of slow moving products. We focus on rebates and sales
incentives costs as a proportion of our total net sales to ensure that we meet
our expectations of the costs of these programs and to understand how these
programs contribute to our profitability or result in unexpected
losses.
Inventory turnover. Our
typical product life-cycle ranges from 6 to 12 months, generating lower average
selling prices as the cycle matures. We attempt to keep our inventory levels at
amounts adequate to meet our customers’ needs while minimizing the danger of
rapidly declining average selling prices and inventory financing costs. By
focusing on inventory turnover rates, we seek to identify slow-moving products
and take appropriate actions such as implementation of rebates and sales
incentives to increase inventory turnover.
Our use
of a consignment sales model with certain customers results in increased amounts
of inventory that we must carry and finance. While our consignment sales model
results in greater exposure to declining average selling prices, this model
allows us to more quickly and efficiently implement promotional programs and
pricing adjustments to sell off slow-moving inventory and prevent further price
erosion.
26
Our
targeted inventory turnover rate for our combined sales models is 6 to 8 weeks
of inventory, which equates to an annual inventory turnover rate of
approximately 6.5 to 8.5 times. In 2009, our annualized inventory turnover was
3.7 times compared to 3.6 times in 2008 and 2.7 times in 2007, representing a
period-to-period increase of 3% and 33%, respectively. The increase in inventory
turnover in 2009 is primarily a result of the 23% decline in net sales from 2008
that was supported by inventory already in our sales channels at the beginning
of 2009. The increase in inventory turnover in 2008 is primarily a result of the
58% decline in sales from 2007 that was supported by inventory already in our
sales channels at the beginning of 2008.
Operating expenses. We focus
on operating expenses to keep these expenses within budgeted amounts in order to
achieve or exceed our targeted profitability. We budget certain of our operating
expenses in proportion to our projected net sales, including operating expenses
relating to production, shipping, technical support, and inside and outside
commissions and bonuses. However, most of our expenses relating to general and
administrative costs, product design and sales personnel are essentially fixed
over large sales ranges. Deviations that result in operating expenses in greater
proportion than budgeted signal to management that it must ascertain the reasons
for the unexpected increase and take appropriate action to bring operating
expenses back into budgeted proportion.
Net income. Net income is the
ultimate goal of our business. By managing the above factors, among others, and
monitoring our actual results of operations, our goal is to generate net income
at levels that meet or exceed our targets.
In
evaluating our financial condition, we focus primarily on cash on hand,
available trade lines of credit, available bank lines of credit and credit
facilities, anticipated near-term cash receipts, and accounts receivable as
compared to accounts payable. Cash on hand, together with our other sources of
liquidity, is critical to funding our day-to-day operations. Funds available
under our credit facility with Bay View Funding are also an important source of
liquidity and a measure of our financial condition. We use our credit facility
on a regular basis as a standard cash management procedure to purchase inventory
and to fund our day-to-day operations without interruption during periods of
slow collection of accounts receivable. Anticipated near-term cash receipts are
also regarded as a short-term source of liquidity, but are not regarded as
immediately available for use until receipt of funds actually
occurs.
The
proportion of our accounts receivable to our accounts payable and the expected
maturity of these balance sheet items is an important measure of our financial
condition. We attempt to manage our accounts receivable and accounts payable to
focus on cash flows in order to generate cash sufficient to fund our day-to-day
operations and satisfy our liabilities. Typically, we prefer that accounts
receivable are matched in duration to, or collected earlier than, accounts
payable. If accounts payable are either out of proportion to, or due in advance
of, the expected collection of accounts receivable, we will likely have to use
our cash on hand or our credit facility to satisfy our accounts payable
obligations, which could reduce our ability to purchase and sell inventory and
may impact our ability, at least in the short-term, to fund other parts of our
business.
Sales
Models
We employ
three primary sales models: standard terms, consignment sales and
special terms. We generally use one of these three primary sales
models, or some combination of these sales models, with each of our
customers. See “—Critical Accounting Policies and Estimates” below
for a description of our sales models.
Currently,
a majority of our net sales are on consignment, and for the years ended
December 31, 2009 and 2008, sales under our consignment sales model
accounted for 51% and 32% of our net sales, respectively.
27
Use of
our consignment sales model is based in part on the preferences of some of our
customers. Some customers prefer the benefits resulting from our consignment
sales model over our standard terms sales model. These benefits include payment
by a customer only in the event of the sale of a consigned product, resulting in
less risk borne by the customer of price erosion due to competition and
technological obsolescence. Deferring payment until following the sale of a
consigned product also enables a customer to avoid having to finance the
purchase of that product by using cash on hand or by borrowing funds and
incurring borrowing costs. In addition, some of our customers also often operate
under budgetary constraints on purchases of certain products or product
categories. As a result of these budgetary constraints, the purchase by a
customer of certain products typically will cause reduced purchasing power for
other products. Products consigned to a retailer ordinarily fall outside of
these budgetary constraints and do not cause reduced purchasing power for other
products. As a result of these benefits, we believe that we are able to sell
more products by using our consignment sales model than by using only our
standard terms sales model.
Managing
an appropriate level of consignment inventory is an important challenge. As
noted above, the payment period for products sold on consignment is based on the
day consigned products are sold by a customer, and the payment period for
products sold on a standard terms basis is based on the day the product is sold
initially to the customer, independent of the date of resale of the product.
Accordingly, we generally prefer that higher-turnover inventory is sold on a
consignment basis while lower-turnover inventory is sold on a standard terms
basis. Management focuses closely on consignment sales to manage our cash flow
to maximize liquidity as well as net sales. Close attention is directed toward
our inventory turnover rates to ensure they are sufficiently frequent to
maintain appropriate liquidity. If we identify a decline in inventory turnover
rates for products in our consignment sales channels, we can implement price
modifications more quickly and efficiently as compared to implementation of
sales incentives in connection with our standard terms sales model. This affords
us more flexibility to take action to attain our targeted inventory turnover
rates.
We retain
most risks of ownership of products in our consignment sales channels. These
products remain our inventory until their sale by our customer. The turnover
frequency of our inventory on consignment is critical to generating regular cash
flow in amounts necessary to keep financing costs to targeted levels and to
purchase additional inventory. If inventory turnover is not sufficiently
frequent, our financing costs may exceed targeted levels and we may be unable to
generate regular cash flow in amounts necessary to purchase additional inventory
to meet the demand for other products. In addition, as a result of our products’
short life-cycles, which generate lower average selling prices as the cycles
mature, low inventory turnover levels may force us to reduce prices and accept
lower margins to sell consigned products or to reduce the carrying value of the
slow-moving products. If we fail to select high turnover products for our
consignment sales channels, our sales, profitability and financial resources may
decline.
Customers
Historically,
a limited number of customers have accounted for a significant percentage of our
net sales. During 2009 and 2008, our six largest customers
collectively accounted for approximately 96% and 93%, respectively, of our total
net sales. We expect that sales of our products to a limited number of customers
will continue to account for a majority of our sales in the foreseeable
future. We do not have long-term purchase agreements with any of our
customers. If we were to lose any of our major customers or experience any
material reduction in orders from any of them, and were unable to replace our
sales to that customer, it could have a material adverse effect on our business
and results of operations.
Seasonality
Our sales
have historically been seasonal. The seasonality of our sales is in direct
correlation to the seasonality experienced by our customers and the seasonality
of the consumer electronics industry in general. After adjusting for the
addition of new customers, our fourth quarter has historically generated the
strongest sales, which correlates to well-established consumer buying patterns
during the Thanksgiving through Christmas holiday season. Our first and third
quarters have historically shown some strength from time to time based on
post-holiday season sales in the first quarter and back-to-school sales in the
third quarter. Our second quarter has historically been our weakest quarter for
sales, again following well-established consumer buying patterns. The
impact of seasonality on our future results will be affected by our product mix,
which will vary from quarter to quarter.
28
Pricing
Pressures
We face
downward pricing pressures within our market segments that arise from a number
of factors. The products we sell are subject to rapid technological change and
obsolescence. Companies within the consumer electronics industry are
continuously developing new products with heightened performance and
functionality. This puts downward pricing pressures on existing products and
constantly threatens to make them, or causes them to be, obsolete. Our typical
product life-cycle is extremely short and ranges from 6 to 12 months, generating
lower average selling prices as the cycle matures. See
“Business—Competition.”
Additionally,
our customers pressure us to offer products to them at attractive prices. We
generally do not believe that the overall goal of our customers is to increase
their margins on these products. Instead, we believe that our customers pressure
us to offer products to them at attractive prices in order to increase sales
volume and consumer traffic, as well as to compete more effectively with other
sellers of similar products. Additional downward pricing pressure and our
pricing decisions with regard to certain products are influenced by the ability
of our customers to directly import or private-label identical or similar
products. Therefore, we constantly seek to maintain prices that are highly
attractive to our customers and that offer less incentive to our customers to
commence or maintain direct import or private-label programs.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments 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 amount of net sales and expenses for each period.
The following represents a summary of our critical accounting policies, defined
as those policies that we believe are the most important to the portrayal of our
financial condition and results of operations and that require management’s most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effects of matters that are inherently
uncertain.
Going
Concern Assumption
We have
based our financial statements on the assumption that our operations will
continue as a going concern. As a result, we continue to depreciate
fixed assets and show certain debts as long-term. As of December 31,
2009, we had a working capital deficit of approximately $2.1 million and cash
and cash equivalents of $445,675 and had incurred cumulative net losses of
approximately $33.7 million. As of March 16, 2010, we had cash on hand of
$667,000. See “—Liquidity and Capital Resources.” These
factors, among others, raise substantial doubt about our ability to continue as
a going concern. Our plans for correcting these deficiencies include
negotiating extended payment terms with our suppliers, timely collection of
existing accounts receivable, and sell-through of inventory currently in our
sales channels. Our consolidated financial statements do not include
any adjustments relating to the recoverability and classification of the
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue our existence.
29
Revenue
Recognition
We
recognize revenue in accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) topic 605 (“ASC 605”), Revenue Recognition When Right of
Return Exists, which states that revenue should be recognized when
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the seller’s price to a buyer is fixed or determinable, and
collectability is reasonably assured. Transfer of title occurs and risk of
ownership passes to a customer at the time of shipment or delivery, depending on
the terms of our agreement with a particular customer. For transactions not
satisfying the conditions for revenue recognition under ASC 605, product revenue
is deferred until the conditions are met, net of an estimate for cost of
sales.
ASC 605
further states that revenue from sales transactions where the buyer has the
right to return the product shall be recognized at the time of sale only if the
seller's price to the buyer is substantially fixed or determinable at the date
of sale, the buyer has paid the seller, or the buyer is obligated to pay the
seller and the obligation is not contingent on resale of the product, the
buyer's obligation to the seller would not be changed in the event of theft or
physical destruction or damage of the product, the buyer acquiring the product
for resale has economic substance apart from that provided by the seller, the
seller does not have significant obligations for future performance to directly
bring about resale of the product by the buyer, and the amount of future returns
can be reasonably estimated. Therefore, consignment sales are recognized when
our customers sell our products to end-users, at which point the customer incurs
an obligation to pay us.
Revenue
is recognized net of sales tax.
Product
Returns
We
account for sales returns in accordance with ASC 605, Revenue Recognition When Right of
Return Exists, by establishing an accrual in an amount equal to its
estimate of sales recorded for which the related products are expected to be
returned. We determine the estimate of the sales return accrual primarily based
on historical experience regarding sales returns, but also by considering other
factors that could impact sales returns. Upon sale, we estimate an allowance for
future product returns. We may provide additional reserves for contemporaneous
events that were not known and knowable at the time of shipment. In order to
reasonably estimate future returns, we analyze both quantitative and qualitative
information including, but not limited to, actual return rates.
Vendor
Consideration Received
We
account for consideration received from our vendors in accordance with ASC
subtopic 605-50, Revenue
Recognition, Customer Payments and Incentives, because we did not receive
an identifiable benefit, we reduce our product revenue for marketing promotions,
market development funds and cooperative advertising costs.
We
recognize revenue under three primary sales models: standard terms,
consignment sales and special terms. We generally use one of these three primary
sales models, or some combination of these sales models, with each of our
customers. Under each of these sales models our payment terms are explicitly
stated and agreed to by us and the customer before goods are shipped, thereby
making our fee fixed or determinable before revenue is recognized.
30
Standard
Terms
Under our
standard terms sales model, a customer is obligated to pay us for products sold
to it within a specified number of days from the date that title to the products
is transferred to the customer. Our standard terms are typically net 45 days for
distributors and net 60 days for retailers from the transfer of title to the
products to the customer. We typically collect payment from a
customer within 60 to 75 days from the transfer of title to the products to the
customer. Transfer of title occurs and risk of ownership passes to the customer
at the time of shipment or delivery, depending on the terms of our agreement
with a particular customer. The sale price of our products is
substantially fixed or determinable at the date of sale based on purchase orders
generated by a customer and accepted by us. A customer’s obligation
to pay us for products sold to it under our standard terms sales model is not
contingent upon the resale of those products. We recognize revenue
for standard terms sales at the time title to products is transferred to the
customer, net of an estimate for sales incentives, rebates and
returns.
Consignment
Under our
consignment sales model, a customer is obligated to pay us for products sold to
it within a specified number of days following notification to us by the
customer of the sale of those products through delivery of weekly or monthly
sell-through reports. A weekly or monthly sell-through report details
sales of consigned products in the prior week or month,
respectively. The period for payment to us by customers relating to
their sale of consigned products corresponding to these sell-through reports
varies. For sell-through reports generated weekly, we typically
collect payment from a customer within 30 to 45 days of the receipt of those
reports. For sell-through reports generated monthly, we typically
collect payment from a customer within 15 days of the receipt of those
reports. At the time of a customer’s sale of a product, title is
transferred directly to the end-user. Risk of theft or damage of a
product, however, passes to a customer upon delivery of that product to the
customer. The sale price of our products is substantially fixed or
determinable at the date of sale based on a product sell-through report
generated by a customer and delivered to us. Except in the case of
theft or damage, a customer’s obligation to pay us for products transferred
under our consignment sales model is entirely contingent upon the sale of those
products. Products held by a customer under our consignment sales
model are recorded as our inventory at offsite locations until their sale by the
customer. Because we retain title to products in our consignment
sales channels until their sale by a customer, revenue is not recognized until
the time of sale. Accordingly, price modifications to inventory
maintained in our consignment sales channels do not have an effect on the timing
of revenue recognition.
Special
Terms
Under our
special terms sales model, the payment terms for the purchase of our products
are negotiated on a case-by-case basis and typically cover a specified quantity
of a particular product. The result of our negotiations is a special
agreement with a customer that defines how and when transfer of title occurs and
risk of ownership shifts to the customer.
We
ordinarily do not offer any rights of return or rebates for products sold under
our special terms sales model. A customer is obligated to pay us for
products sold to it within a specified number of days from the date that title
to the products is transferred to the customer, or as otherwise agreed to by
us. Our payment terms are ordinarily shorter under our special terms
sales model than under our standard terms or consignment sales models and we
typically require payment in advance, at the time of transfer of title to the
products or shortly following the transfer of title to the products to a
customer. Transfer of title occurs and risk of ownership passes to a
customer at the time of shipment, delivery, receipt of payment or the date of
invoice, depending on the terms of our agreement with the
customer. The sale price of our products is substantially fixed or
determinable at the date of sale based on our agreement with a
customer. A customer’s obligation to pay us for products sold to it
under our special terms sales model is not contingent on the sale of those
products. We recognize revenue for special terms sales at the time
title to products is transferred to a customer.
31
Sales
Incentives
We enter
into agreements with certain customers regarding price decreases that are
determined by us in our sole discretion. These agreements allow those
customers, subject to certain limitations, a credit equal to the difference
between our current price and our new reduced price on units in the customers’
inventories or in transit to the customers on the date of the price
decrease.
We record
an estimate of sales incentives based on our actual sales incentive rates over a
trailing twelve-month period, adjusted for any known variations, which are
charged to operations and offset against gross sales at the time products are
sold. We also record a corresponding accrual for our estimated sales
incentive liability. This accrual is reduced by deductions on future payments
taken by our customers relating to actual sales incentives. Our
estimated sales incentive liability is offset against accounts
receivable.
At the
end of each quarterly period, we analyze our existing sales incentive reserve
and apply any necessary adjustments based upon actual or expected deviations in
sales incentive rates from our applicable historical sales incentive
rates. The amount of any necessary adjustment is based upon the
amount of our remaining field inventory, which is calculated by reference to our
actual field inventory last conducted, plus inventory-in-transit and less
estimated product sell-through. The amount of our sales incentive
liability for each product is equal to the amount of remaining field inventory
for that product multiplied by the difference between our current price and our
new reduced price to our customers for that product. This data,
together with all data relating to all sales incentives granted on products in
the applicable period, is used to adjust our sales incentive reserve established
for the applicable period.
In 2009,
we did not sponsor any sales incentives as compared to sales incentives of
$103,835, or 0.7% of gross sales, in 2008, all of which were offset against
gross sales.
Market
Development Funds and Cooperative Advertising Costs, Rebate Promotion Costs and
Slotting Fees
Market
development funds and cooperative advertising costs, rebate promotion costs, new
store opening fees and slotting fees are offset against gross sales in
accordance with Financial Accounting Standards Board Accounting Standards
Codification (ASC) 605-50 Revenue Recognition, Customer
Payments and Incentives, because we do not receive an identifiable
benefit. Market development funds and cooperative advertising costs and rebate
promotion costs are each promotional costs. Slotting fees are fees
paid directly to customers for allocation of shelf-space in retail locations and
new store opening fees are paid to assist in promoting the customer’s new store
openings. In 2009, our market development funds and cooperative advertising
costs, rebate promotion costs, new store opening fees and slotting fees were
$799,000, or 7% of gross sales, all of which were offset against gross sales, as
compared to market development funds and cooperative advertising costs, rebate
promotion costs, new store opening fees and slotting fees of $934,000, or 6% of
gross sales, in 2008, all of which were offset against gross sales. Our accrued
market development funds, cooperative advertising costs and cross-dock fees are
offset against accounts receivable.
Consideration
generally given by us to a customer is presumed to be a reduction of selling
price, and therefore, a reduction of gross sales. However, if we receive an
identifiable benefit that is sufficiently separable from our sales to that
customer, such that we could have paid an independent company to receive that
benefit and we can reasonably estimate the fair value of that benefit, then the
consideration is characterized as an expense. We estimate the fair value of the
benefits we receive by tracking the advertising done by our customers on our
behalf and calculating the value of that advertising using a comparable rate for
similar publications.
32
Inventory
Obsolescence Allowance
Our
warehouse supervisor, production supervisor and purchasing manager physically
review our warehouse inventory for slow moving and obsolete
products. All products of a material amount are reviewed quarterly
and all other products are reviewed annually. We consider products
that have not been sold within six months to be slow moving. Products
that are no longer compatible with current hardware or software are considered
obsolete. The potential for sale of slow moving and obsolete
inventories is considered through market research, analysis of our customers’
current needs, and assumptions about future demand and market
conditions. The recorded cost of both slow-moving and obsolete
inventories is then reduced to its lower of cost or market value based on
current market pricing for similar products. We utilize the Internet
to provide indications of market value from competitors’ pricing, third party
inventory liquidators and auction websites. The recorded costs of our
slow moving and obsolete products are reduced to current market prices when the
recorded costs exceed such market prices. All adjustments, which are
included in cost of sales, establish a new cost basis for inventory as we
believe such reductions are permanent declines in the market price of our
products. Generally, obsolete inventory is sold to companies that
specialize in the liquidation of such items while we continue to market
slow-moving inventories until they are sold or become obsolete. As
obsolete or slow moving inventory is sold, we reduce the reserve by proceeds
from the sale of the products. The allowance for obsolete and slow-moving
inventory is offset against inventory.
Our
warehouse supervisor, production supervisor and purchasing manager physically
review our warehouse inventory for obsolete or damaged inventory-related items
on a monthly basis. Inventory-related items (such as sleeves, manuals
or broken products no longer under warranty from our subcontract manufacturers
and suppliers) that are considered obsolete or damaged are reviewed by these
personnel together with our Controller or Chief Financial Officer. At
the discretion of our Controller or Chief Financial Officer, these items are
physically disposed of and we make corresponding accounting adjustments
resulting in inventory adjustments. In addition, on a monthly basis,
our detail inventory report and its general ledger are reconciled by our
Controller and any variances result in a corresponding inventory
adjustment.
Our
consignment inventory is reviewed by our Controller or our Chief Financial
Officer to ensure that recorded costs are not impacted by current market prices
for similar products. If it is determined that recorded costs exceed
current costs or market values, the recorded costs are reduced to current market
prices to establish a new cost basis.
Lower-of-cost-or-market
Reserve
Our
component parts and our finished goods, both corporate and consigned inventories
are reviewed by our Controller or our Chief Financial Officer to ensure that
recorded costs are not impacted by current market prices for similar
products. If it is determined that recorded costs exceed current
costs or market values, the recorded costs are reduced to current market prices
to establish a new cost basis and the difference is charged to cost
of sales.
33
Accounts
Receivable and Allowance for Doubtful Accounts
Trade
accounts receivable are primarily from national retailers and distributors and
are recorded at the invoiced amount and do not accrue interest. The
allowance for doubtful accounts reflects management’s best estimate of probable
credit losses inherent in the accounts receivable balance. We
determine the allowance based on historical experience, specifically identified
nonpaying accounts and other currently available evidence. We review
our allowance for doubtful accounts monthly with focus on significant individual
past due balances over 90 days. All other balances are reviewed on a
pooled basis. Account balances are charged off against the allowance
after all means of collection have been exhausted and the potential for recovery
is considered remote. Since our current customers are primarily
national retailers and distributors with good payment histories with us, our
allowance for doubtful accounts is not significant. We do not have
any off-balance sheet credit exposure related to our customers. The allowance
for doubtful accounts is offset against accounts receivable.
In
dealing with our customers, we occasionally have, and expect that we will
continue to have in the foreseeable future, disagreements with them relating to
the valuation and completeness of accounts receivable which may result in a
contingent gain or loss to us.
Product
Returns
We have a
limited 90-day to one year time period for product returns from
end-users. However, our customers generally have return policies that
allow their customers to return products within only 14 to 90 days after
purchase. We allow our customers to return damaged or defective
products to us following a customary return merchandise authorization
process. We have no informal return policies. We utilize
actual historical return rates to determine our allowance for returns in each
period. Gross sales are reduced by estimated returns and cost of
sales is reduced by the estimated cost of those sales. We record a
corresponding allowance for the estimated liability associated with the
estimated returns. This estimated liability is based on the gross
margin of the products corresponding to the estimated returns. This
allowance is offset each period by actual product returns.
Our
current estimated weighted average future product return rate is approximately
10%. As noted above, our return rate is based upon our past history
of actual returns and we estimate amounts for product returns for a given period
by applying this historical return rate and reducing actual gross sales for that
period by a corresponding amount. Our historical return rate for a
particular product is our trailing 18-month return rate of similar
products. We believe that using a trailing 18-month return rate takes
two key factors into consideration, specifically, an 18-month return rate
provides us with a sufficient period of time to establish recent historical
trends in product returns for each product category, and provides us with a
period of time that is short enough to account for recent technological shifts
in our product offerings in each product category. If an unusual
circumstance exists, such as a product category that has begun to show
materially different actual return rates as compared to our trailing 18-month
return rates, we will make appropriate adjustments to our estimated return
rates. Factors that could cause materially different actual return
rates as compared to our trailing 18-month return rates include product
modifications that simplify installation, or a new product line within a product
category that needs time to better reflect its return performance and other
factors. This allowance is recorded against accounts
receivable.
Although
we have no specific statistical data on this matter, we believe that our
practices are reasonable and consistent with those of our industry.
Our
warranty terms under our arrangements with our suppliers are that any product
that is returned by a customer or end-user as defective within the applicable
warranty period may be returned by us to the subcontract manufacturer or
supplier for full credit against the original purchase price. We incur only
minimal shipping costs to our subcontract manufacturers and suppliers in
connection with the satisfaction of our warranty obligations.
34
Results
of Operations
The
tables presented below, which compare our results of operations from one period
to another, present the results for each period, the change in those results
from one period to another in both dollars and percentage change and the results
for each period as a percentage of net sales. The columns present the
following:
●
|
The
first two data columns in each table show the dollar results for each
period presented.
|
●
|
The
columns entitled “Dollar Variance” and “Percentage Variance” show the
change in results, both in dollars and percentages. These two columns show
favorable changes as positive and unfavorable changes as negative. For
example, when our net sales increase from one period to the next, that
change is shown as a positive number in both columns. Conversely, when
expenses increase from one period to the next, that change is shown as a
negative in both columns.
|
●
|
The
last two columns in each table show the results for each period as a
percentage of net sales.
|
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Year
Ended December
31, |
Dollar
Variance
Favorable
|
Percentage
Variance
Favorable
|
Results
as a Percentage of Net Sales
for |
|||||||||||||||||||||
2009
|
2008
|
(Unfavorable)
|
(Unfavorable)
|
2009
|
2008
|
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Net
sales
|
$ | 10,332 | $ | 13,364 | $ | (3,032 | ) | (22.7 | )% | 100.0 | % | 100.0 | % | |||||||||||
Cost
of sales
|
6,916 | 13,317 | 6,401 | 48.1 | % | 66.9 | % | 99.6 | % | |||||||||||||||
Gross
profit
|
3,416 | 47 | 3,369 | 7,168.1 | % | 33.1 | % | 0.4 | % | |||||||||||||||
Selling,
marketing and advertising
expenses
|
676 | 1,053 | 377 | 35.8 | % | 6.5 | % | 7.9 | % | |||||||||||||||
General
and administrative expenses
|
2,275 | 2,814 | 539 | 19.2 | % | 22.0 | % | 21.1 | % | |||||||||||||||
Depreciation
and amortization
|
53 | 129 | 76 | 58.9 | % | 0.5 | % | 1.0 | % | |||||||||||||||
Impairment
of trademarks
|
- | 224 | 224 | 100.0 | % | - | 1.7 | % | ||||||||||||||||
Operating
income (loss)
|
412 | (4,173 | ) | 4,585 | 109.9 | % | 4.0 | % | 31.2 | % | ||||||||||||||
Net
interest expense
|
- | (91 | ) | 91 | 100.0 | % | - | 0.7 | % | |||||||||||||||
Other
income (expense)
|
(4 | ) | 13 | (17 | ) | (130.8 | )% | - | 0.1 | % | ||||||||||||||
Income
(loss) from operations before provision for income taxes
|
408 | (4,251 | ) | 4,659 | 109.6 | % | 3.9 | % | 31.8 | % | ||||||||||||||
Provision
for income taxes
|
1 | 1 | - | - | - | - | ||||||||||||||||||
Net
income (loss)
|
$ | 407 | $ | (4,252 | ) | $ | 4,659 | 109.6 | % | 3.9 | % | 31.8 | % |
Net Sales. The
$3.0 million decrease in net sales in 2009 as compared to 2008 was primarily the
result of a substantial decline in sales of our magnetic data storage products
resulting from intense pricing pressures and substantial declines in sales of
our HDTVs and other consumer electronics products, which were partially offset
by an increase in sales of our optical data storage products. We have
discontinued sales of both our magnetic data storage products and HDTVs. We did
not sell any HDTVs in 2009. For 2008, sales of HDTVs were
approximately $1.3 million, or 9.7%, of our total net sales.
Net sales
of our optical data storage products increased by $1.1 million, or 12.8%, to
$9.7 million in 2009 as compared to $8.6 million in 2008, and our average unit
sales price for our optical data storage products increased to $56.74 in 2009,
or 4%, from $54.60 in 2008. The increase in sales of our optical data storage
products resulted from the introduction of our new products directed at the
market for netbooks. Total optical data storage units sold were 170,000 in 2009
as compared to 157,000 in 2008, an increase of approximately 8%.
35
Net sales
of our magnetic data storage products decreased by $2.7 million, or 80.5%, to
$670,000 in 2009 as compared to $3.4 million in 2008, and our average unit sales
price for our magnetic data storage products decreased to $30.71 in 2009, or
37.5%, from $49.14 in 2008. The declines in sales of our magnetic data storage
products and our average unit sales price are attributable to intense price
competition experienced throughout 2009. Total magnetic data storage units sold
were 21,000 in 2009, as compared to 70,000 in 2008, a decrease of
70.0%.
Gross Profit. Our gross
profit increased $3.4 million, or 7,168.1%, to $3.4 million in 2009 as compared
to $47,000 in 2008. Our gross profit margin increased to 33.1% in 2009 as
compared to 0.4% in 2008. The increases in gross profit and our gross profit
margin are primarily attributable to the increase in net sales of our optical
data storage products and substantially reduced sales of our magnetic data
storage products that realized negative gross margins in 2008, which included
valuation adjustments for consigned inventory due to intense price
competition.
For 2009,
total sales incentives and market development funds and cooperative advertising
costs, rebate promotion costs and slotting fees decreased by $254,000 to
$783,000, or 7.0% of gross sales, as compared to $1.0 million, or 7.2% of gross
sales in 2008.
At
December 31, 2008, we realized inventory valuation adjustments to our consigned
inventories for lower-of-cost-or-market of approximately $24,000, which is
included in cost of sales.
Our
inventory obsolescence, shrinkage and scrap expenses, which are included in cost
of sales, were a recovery of approximately $29,000 in 2009 as compared to
expense of $695,000 in 2008. These expenses are a result of our adjustment of
the value of slow-moving and obsolete inventory.
Selling, Marketing and Advertising
Expenses. The decrease in selling, marketing and advertising expenses of
$377,000, or 35.8%, is primarily due to decreases of $175,000 in shipping and
handling expenses, $89,000 in wages and benefits, $46,000 in sales and customer
expenses, $34,000 in trade show expenses, $25,000 in system support expenses and
$14,000 in outside sales commissions, all of which were partially offset by
increases of $4,000 in travel expenses and $1,000 in other
expenses.
General and Administrative
Expenses. The decrease in general and administrative expenses of $539,000
is primarily due to decreases of $249,000 in wages and benefits, $97,000 in
facilities costs, $70,000 in insurance premiums, $49,000 in bad debt expenses
recognized in 2008, $34,000 in financial relations expenses, $33,000 in
temporary help expenses, $30,000 in miscellaneous expenses, $27,000 in bank
charges, $24,000 in directors expenses, $12,000 in outside services expenses,
$9,000 in travel and entertainment expenses, $9,000 in system support expenses
and $6,000 in miscellaneous supplies and expenses, all of which were partially
offset by increases of $55,000 in finance charges, $48,000 in legal expenses,
$4,000 in audit fees and $4,000 in product design expenses.
Other Expense. Our other
expense increased by approximately $17,000. This increase was due to a decrease
of $13,000 in other income and an increase in other expenses of
$4,000.
36
Liquidity
and Capital Resources
Overview
Our
principal sources of liquidity have historically been cash provided by
operations and borrowings under our bank and trade credit
facilities. Our principal uses of cash have been to provide working
capital, finance capital expenditures and to satisfy our debt service
requirements. We anticipate that these sources and uses will continue
to be our principal sources and uses of cash in the foreseeable future. As of
December 31, 2009, we had a working capital deficit of $2.1 million, an
accumulated deficit of $33.7 million, $445,675 in cash and cash equivalents and
$654,582 in net accounts receivable. This compares to a working capital deficit
of $2.5 million, an accumulated deficit of $34.1 million, $425,495 in cash and
cash equivalents and $1.0 million in net accounts receivable as of December 31,
2008.
As of
March 16, 2010, we had $667,000 of cash on hand. Accordingly, we are presently
experiencing a lack of liquidity and may have insufficient capital to fund our
operations for the next twelve months or less.
Our
condensed consolidated financial statements as of and for the year ended
December 31, 2009, have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. As discussed in this report and in Note 1
to our consolidated financial statements included elsewhere in this report, we
have incurred significant recurring losses, have working capital and
stockholders’ deficits, have serious liquidity concerns and may require
additional financing in the foreseeable future. These factors, among
others, raise substantial doubt about our ability to continue as a going
concern. The consolidated financial statements included in this
report do not include any adjustments that might result from the outcome of this
uncertainty.
Our plans
for correcting these deficiencies include ongoing efforts to bring new products
to market and explore other products with our customers, subcontract
manufacturers and suppliers to sell through our sales channels, negotiating
suitable repayment terms for outstanding obligations owed to a related-party
supplier, seeking new equity capital and new vendor partnerships, timely
collection of existing accounts receivable, and sell-through of inventory
currently in our sales channels. If our capital requirements or cash
flow vary materially from our current projections, if we are unable to
successfully negotiate suitable repayment terms for outstanding obligations owed
to a related-party supplier, if we are unable to timely collect our accounts
receivable or unable to sell-through inventory currently in our sales channels
as anticipated, or if unforeseen circumstances occur, we may be unable to
increase our liquidity and may require additional financing to sustain our
operations. In addition, if we are unable to bring successful new
products to market soon, we may be forced to substantially curtail our
operations.
If our
net losses continue or increase, we could experience significant additional
shortages of liquidity and our ability to purchase inventory and to operate our
business may be significantly impaired, which could lead to further declines in
our results of operations and financial condition.
Cash
Flows
The
following table summarizes our cash flows for the periods
presented:
Year
Ended
|
||||||||||
December
31,
|
||||||||||
2009
|
2008
|
|||||||||
Net
cash provided by (used in):
|
||||||||||
Operating
activities
|
$ | 22,381 | $ | 2,487,316 | ||||||
Investing
activities
|
(2,201 | ) | 339,999 | |||||||
Financing
activities
|
− | (3,864,942 | ) | |||||||
Net
increase (decrease) in cash and cash equivalents
|
$ | 20,180 | $ | (1,037,627 | ) |
37
Cash provided by operating
activities. The $2.5 million in cash provided by our operating
activities for 2008 does not accurately reflect the underlying weakness we
experienced in our business during 2008. Moreover, the decline in
cash provided by our operating activities for 2009 as compared to 2008 does not
accurately reflect the strengthening in our business during 2009.
Our
business in 2008 was characterized in large part by the sale of excess
inventory, both magnetic data storage products and HDTVs, at negative gross
margins resulting in a $4.2 million net loss. However, we generated
significant cash from these sales in 2008 but did not have corresponding cash
outflows associated with this inventory as the payments for this inventory were
either made in prior periods or did not occur as to much of this inventory as we
stopped making payments to our related party supplier in 2008 and as of December
31, 2008, we owed the related party $4.6 million. See “—Trade Credit
Facilities” below.
Our
business strengthened in 2009 as we focused on our new optical data storage
products and generated positive gross margins resulting in net income of
$407,000. The $22,000 in cash provided by our operating activities
for 2009 primarily resulted from net income of $407,000 generated in large part
from new products sold at positive gross margins and continued implementation of
operational initiatives, which were commenced in 2008 and continued into 2009,
to improve our inventory management and reduce overall inventory
levels. Also, we continued the successful collection of outstanding
accounts receivable in accordance with our normal sales and collection cycles
and we made no payments to our related party supplier in 2009. As of
December 31, 2009, we owed the related party $4.4 million. The
$200,000 reduction from the $4.6 million owed to the related party as of
December 31, 2008 arose solely due to offsets from products we returned to the
related party in 2009. See “—Trade Credit Facilities” below.
Cash provided by (used in) investing
activities. The $342,000 decline in cash provided by our
investing activities in 2009 resulted from a decrease of $342,000 in restricted
cash as of December 31, 2007 that was released in 2008.
Cash used in financing
activities. The $3.9 million decline in cash used in our
financing activities in 2009 resulted from $3.9 million in net payments on our
credit facility with Silicon Valley Bank for 2008, whereas as our credit
facility with Bay View Funding is a factoring relationship and therefore does
not impact cash provided by or used in our financing activities.
Credit
Facility — Silicon Valley Bank
On
January 29, 2007, we entered into a Loan and Security Agreement with Silicon
Valley Bank which provided for a new credit facility. Our credit
facility with Silicon Valley Bank was initially used to pay off our outstanding
loan balance with GMAC Commercial Finance in the approximate amount of $5.0
million. On April 18, 2008, we entered into a new Loan and Security
Agreement with Silicon Valley Bank which provided for a credit facility based on
our accounts receivable. The Loan and Security Agreement amended and
restated our prior Loan and Security Agreement dated January 29, 2007 with
Silicon Valley Bank. On April 18, 2008, we also entered into an
Amendment to Loan Documents with Silicon Valley Bank, which provided that the
ancillary loan documents executed in connection with our prior credit facility
with Silicon Valley Bank would apply to the new Loan and Security
Agreement.
The new
credit facility allowed us to finance our accounts receivable and borrow up to a
maximum aggregate amount of $7.0 million; provided, that we could only borrow up
to a limit of 60% of each eligible account or such other percentage as Silicon
Valley Bank established. The credit facility was to expire on
January 29, 2009. Advances under the credit facility bore
interest at a floating rate equal to the prime rate of interest published from
time to time by Silicon Valley Bank plus 2.5%. The credit facility
required that we pay a collateral handling fee of $2,000 per month and other
customary fees and expenses.
38
Our
obligations under the new Loan and Security Agreement were secured by
substantially all of our assets and were guaranteed by our subsidiary under a
Cross-Corporate Continuing Guaranty. Our obligations and the
guarantee obligations of our subsidiary were also secured under Intellectual
Property Security Agreements executed by us and our subsidiary.
On July
31, 2008, we paid off our obligations under the Loan and Security Agreement
dated April 18, 2008 with Silicon Valley Bank and terminated the Loan and
Security Agreement.
Credit
Facility — Bay View Funding
On
October 29, 2008, we entered into a Sale of Accounts and Security Agreement, or
the Agreement, dated as of October 24, 2008 with Rexford Funding, LLC, which was
subsequently acquired by Bay View Funding on November 11, 2009, which provides
for an accounts receivable-based credit facility.
The
credit facility allows us to sell accounts receivable to Bay View Funding
subject to a maximum amount equal to $1.5 million. The purchase price
for each purchased account is to equal the net invoice amount less Bay View
Funding’s commission. Bay View Funding is entitled to a factoring
commission equal to 0.033% of the gross invoice amount of each purchased account
receivable and an additional 0.033% for each day the account receivable remains
outstanding and unpaid.
Bay View
Funding, in its sole and absolute discretion, may from time to time advance us
funds against the purchase price of the accounts receivable in an amount of up
to 75% (except as to accounts receivable of Staples which shall be up to 60%) of
the aggregate purchase price of the purchased accounts receivable, subject to
customary reductions, including those based on (i) disputed accounts receivable,
(ii) any accounts receivable from a customer whom Bay View Funding deems not
credit worthy, (iii) any accounts receivable unpaid in excess of 60 days, (iv)
any accounts receivable from a past-due customer when 25% or more accounts
receivable from that customer are unpaid in excess of 60 days, (v) any accounts
receivable which Bay View Funding deems, in its sole and absolute discretion,
are ineligible, and (vi) any fees, actual or estimated, that are chargeable to
our reserve account as to the credit facility. Bay View Funding is
entitled to interest charges on all advances at a rate equal to the Prime Rate
plus 1.00%, but in no case less than 5.50%.
The
Agreement has an initial term through April 30, 2009 with automatic six month
extensions unless either party terminates the Agreement at least 60 but not more
than 90 days prior to the end of the initial term or any renewal term. At all
times Bay View Funding has the right to terminate the Agreement upon 30 days
prior notice. In August 2009, we modified the Agreement to include a
month-to-month term.
If we
terminate the Agreement prior to the end of the initial term or any renewal
term, we will be subject to an early termination fee equal to Bay View Funding’s
average monthly commission and/or deficiency charges for the preceding six month
period, or the entire period from the date of the Agreement if the preceding
period is less than six months, multiplied by the number of months remaining in
the initial term or applicable renewal term.
Our
obligations under the Agreement are secured by our accounts receivable and all
proceeds thereof and, with respect thereto, all chattel paper, commercial tort
claims, deposit accounts, documents, general intangibles, goods, letters of
credit, letter of credit rights and all supporting obligations.
39
Trade
Credit Facility
In
February 2003, we entered into a Warehouse Services and Bailment Agreement with
BTC USA. Under the terms of the agreement, BTC USA agreed to supply and store at
our warehouse up to $10.0 million of inventory on a consignment basis. We were
responsible for insuring the consigned inventory, storing the consigned
inventory for no charge, and furnishing BTC USA with weekly statements
indicating all products received and sold and the current level of consigned
inventory. The agreement also provided us with a trade line of credit of up to
$10.0 million with payment terms of net 60 days, without interest. The agreement
could be terminated by either party upon 60 days’ prior written notice to the
other party. BTC USA is a subsidiary of Behavior Tech Computer Corp., one of our
significant stockholders. Mr. Steel Su, a former director of I/OMagic
Corporation, is the Chief Executive Officer of Behavior Tech Computer Corp.
During the year ended December 31, 2008, we purchased $723,600 of inventory
under this arrangement. As of December 31, 2009, there were $4,388,253 in trade
payables outstanding under this arrangement. As of March 16, 2010, we
were out of compliance with the payment terms of the agreement with BTC USA and
we are in continued negotiations with BTC USA to satisfy our obligations on a
basis that is acceptable to both parties.
BTC USA
provided us with significantly preferential trade credit terms. These terms
included extended payment terms, substantial trade lines of credit and other
preferential buying arrangements. We believe that these terms were substantially
better terms than we could likely obtain from other subcontract manufacturers or
suppliers. We do not currently utilize this trade credit facility as
BTC USA is either not able to supply certain products we currently sell, or in
some cases, we are able to source certain products at better prices directly
from other third-party manufacturers. Additionally, due to substantial
outstanding obligations owed to BTC USA, it is highly unlikely that we will be
able to obtain additional inventory supplies from BTC USA unless, and at least
until, we are able to negotiate repayment terms acceptable to BTC USA. Even if
we are able to negotiate repayment terms acceptable to BTC USA, we may be unable
to obtain additional inventory supplies from BTC USA on the same terms as
before, on satisfactory terms, or at all.
Liquidity
Impact of Consignment Sales Model
We retain
most risks of ownership of our consignment inventory. These products
remain our inventory until their sale by our customers. For example, both Office
Depot and OfficeMax returned substantial consigned inventory in the fourth
quarter of 2007 and the first quarter of 2008, respectively, each in
anticipation of discontinuing sales of our products. The return of
this inventory resulted in significant inventory valuation adjustments caused by
the declining value of the inventory, principally, our magnetic data storage
products. For the year ended December 31, 2009, no adjustments were
made for lower-of-cost-or-market as compared to $24,000 of inventory valuation
adjustments to lower-of-cost-or-market for 2008, which was included in cost of
sales. In addition, the turnover frequency of our inventory on consignment is
critical to generating regular cash flow in amounts necessary to keep financing
costs to targeted levels and to purchase additional inventory. If
this inventory turnover is not sufficiently frequent, our financing costs may
exceed targeted levels and we may be unable to generate regular cash flow in
amounts necessary to purchase additional inventory to meet the demand for other
products. In addition, as a result of our products’ short
life-cycles, which generate lower average selling prices as the cycles mature,
low inventory turnover levels may force us to reduce prices and accept lower
margins to sell consigned products. If we fail to select high
turnover products for our consignment inventory model, our sales, profitability
and financial resources will likely decline.
40
Backlog
Our
backlog at December 31, 2009 and 2008 was $428,000 and $769,000, respectively.
The substantial decrease in backlog is a function of customer inventory levels
based on near-term inventory restocking requirements. Based on historical
trends, we anticipate that our December 31, 2009 backlog may be reduced by
approximately 10%, or approximately $42,000, to a net amount of $386,000 as a
result of returns and reclassification of certain expenses as reductions to net
sales. Our backlog may not be indicative of our actual sales beyond a rotating
six-week cycle. The amount of backlog orders represents revenue that we
anticipate recognizing in the future, as evidenced by purchase orders and other
purchase commitments received from customers. The shipment of these orders for
non-consignment customers or the sell-through of our products by consignment
customers causes recognition of the purchase commitments as revenue. However,
there can be no assurance that we will be successful in fulfilling such orders
and commitments in a timely manner, that customers will not cancel purchase
orders, or that we will ultimately recognize as revenue the amounts reflected as
backlog based upon industry trends, historical sales information, returns and
sales incentives.
In
September 2009, the Financial Accounting Standards Board, or FASB, issued
Accounting Standards Codification, or ASC, 605-25, Revenue Recognition -
Multiple-Deliverable Revenue Arrangements. This guidance addresses
how to separate deliverables and how to measure and allocate consideration to
one or more units of accounting. Specifically, the guidance requires that
consideration be allocated among multiple deliverables based on relative selling
prices. The guidance establishes a selling price hierarchy of
(1) vendor-specific objective evidence, (2) third-party evidence, and
(3) estimated selling price. This guidance is effective for annual periods
beginning after December 15, 2009 but may be early adopted as of the
beginning of an annual period. We are currently evaluating the effect that this
guidance will have on our financial position and results of
operations.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162, now referred to as ASC 105-10,
Generally Accepted Accounting
Principles. The FASB Accounting Standards Codification, or the
Codification, has become the source of authoritative United States generally
accepted accounting principles recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission under authority of federal securities laws are also sources
of authoritative United States generally accepted accounting principles for
Securities and Exchange Commission registrants. On the effective date of this
statement, the Codification will supersede all then-existing non-Securities and
Exchange Commission accounting and reporting standards. All other
non-grandfathered non-Securities and Exchange Commission accounting literature
not included in the Codification will become non-authoritative. This statement
is effective for financial statements issued for interim and annual periods
ending after September 30, 2009. The adoption of this statement did not
have a material effect on our financial statements.
In June
2009, the FASB issued SFAS No. 165, later codified in ASC 855-10, Subsequent Events. ASC 855-10
establishes general standards for the evaluation, recognition and disclosure of
events and transactions that occur after the balance sheet date. Although there
is new terminology, the standard is based on the same principles as those that
currently exist in the auditing standards. The standard, which includes a new
required disclosure of the date through which an entity has evaluated subsequent
events, is effective for interim or annual periods ending after June 15, 2009.
The adoption of ASC 855-10 did not have a material effect on our financial
statements.
In April
2009, the FASB issued FASB Staff Position No. 107-1 and APB Opinion
No. 28-1 (FSP 107-1 and APB 28-1), later codified in ASC
825-10-65-1, Interim
Disclosures about Fair Value of Financial Instruments. FSP 107-1 and
APB 28-1 require fair value disclosures in both interim, as well as annual,
financial statements in order to provide more timely information about the
effects of current market conditions on financial instruments. FSP 107-1 and
APB 28-1 and their adoption did not have a material impact on our financial
statements.
41
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
Not
applicable.
Item
8.
|
Financial
Statements and Supplementary
Data.
|
Reference
is made to the consolidated financial statements and accompanying notes included
in this report, which begin on page F-1.
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
None.
Item
9A.
|
Controls
and Procedures.
|
Evaluation
of Disclosure Controls and Procedures
We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Acting Chief Financial
Officer of the effectiveness of the design and operation of our disclosure
controls and procedures. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other
procedures of a company that 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 Securities and Exchange Commission’s rules and
forms. Disclosure controls and procedures also include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure. Based on this evaluation, our Chief
Executive Officer and Acting Chief Financial Officer concluded as of December
31, 2009 that our disclosure controls and procedures were effective at the
reasonable assurance level.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management, including our Chief Executive Officer and Acting Chief Financial
Officer, is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our
financial statements for external reporting purposes in accordance with United
States generally accepted accounting principles. Internal control over financial
reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of a company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with United States generally
accepted accounting principles, and that receipts and expenditures of a company
are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial
statements. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with policies or procedures may deteriorate.
42
Management,
with the participation of our Chief Executive Officer and Acting Chief Financial
Officer, conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal
Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that our internal control over financial reporting was
effective as of December 31, 2009.
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 rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
annual report.
Changes
in Internal Control over Financial Reporting
There was
no change during our most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act.
Item
9A(T).
|
Controls
and Procedures.
|
Not
applicable.
Item
9B.
|
Other
Information.
|
None.
43
PART
III
Item
10.
|
Directors,
Executive Officers and Corporate
Governance.
|
Directors
and Executive Officers
The name,
age and position held by our sole executive officer and director as of March 16,
2010 and his business experience is as follows:
Name
|
Age
|
Titles
|
Tony
Shahbaz
|
47
|
Chairman
of the Board, President, Chief Executive Officer, Acting Chief Financial
Officer, Secretary and Sole
Director
|
_______________
Tony Shahbaz is a founder of
I/OMagic Corporation and has served as our Chairman of the Board, President,
Chief Executive Officer, Secretary and as a director since September 1993, and
as our Chief Financial Officer from September 1993 to October 2002. Mr. Shahbaz
was appointed as our Acting Chief Financial Officer effective December 2008.
Prior to founding I/OMagic Corporation, Mr. Shahbaz was employed by Western
Digital Corporation from September 1986 to March 1993. During his tenure at
Western Digital Corporation, Mr. Shahbaz held several positions including Vice
President of Worldwide Sales for its Western Digital Paradise division, and
Regional Director of Asia Pacific Sales and Marketing Operations.
As noted
above, Mr. Shahbaz has significant experience with I/OMagic Corporation and
Western Digital Corporation. Mr. Shahbaz’s experience extends from
management experience encompassing operations, sales and marketing, and finance
and accounting with I/OMagic Corporation to his leadership sales positions with
Western Digital Corporation. Mr. Shahbaz is also a significant
stockholder of I/OMagic Corporation, holding in excess of 50% of our outstanding
shares of common stock. Although our Nominating Committee, which does
not presently have any members inasmuch as Mr. Shahbaz is our only director and
is not independent, has not taken any nominating actions since 2007, we believe
that Mr. Shahbaz’s extensive experience and substantial shareholdings qualifies
him to act as one of our directors.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers, directors and persons who beneficially own more than 10% of a
registered class of our equity securities, or reporting persons, to file initial
reports of ownership and reports of changes in ownership of our common stock and
other equity securities with the Securities and Exchange Commission. The
reporting persons are required by the Securities and Exchange Commission
regulations to furnish us with copies of all reports that they
file.
Based
solely upon a review of copies of the reports furnished to us during our fiscal
year ended December 31, 2009 and thereafter, or any written representations
received by us from reporting persons that no other reports were required, we
believe that all Section 16(a) filing requirements applicable to our reporting
persons during 2009 were complied with.
44
Corporate
Governance
Our board
of directors believes that good corporate governance is paramount to ensure that
I/OMagic Corporation is managed for the long-term benefit of our
stockholders. Our board of directors has adopted corporate governance
guidelines that guide its actions with respect to, among other things, the
composition of the board of directors and its decision making processes, board
of director meetings and involvement of management, the board of director’s
standing committees and procedures for appointing members of the committees, and
its performance evaluation for our Chief Executive Officer.
Our board
of directors has adopted a Code of Business Conduct and Ethics that applies to
all of our directors, officers and employees and an additional Code of Business
Ethics that applies to our Chief Executive Officer and senior financial
officers. The Codes of Ethics, as applied to our principal executive
officer, principal financial officer and principal accounting officer
constitutes our “code of ethics” within the meaning of Section 406 of the
Sarbanes-Oxley Act of 2002.
Director
Independence
Our
corporate governance guidelines provide that a majority of the board of
directors and all members of the Audit, Compensation and Nominating Committees
of the board of directors will be independent. On an annual basis,
each director and executive officer is asked to complete a Director and Officer
Questionnaire that requires disclosure of any transactions with I/OMagic
Corporation in which a director or executive officer, or any member of his or
her immediate family, have a direct or indirect material
interest. Following completion of these questionnaires, the board of
directors, with the assistance of the Nominating Committee, is to make an annual
determination as to the independence of each director using the current
standards for “independence” established by the Securities and Exchange
Commission and NASDAQ, additional criteria set forth in our corporate governance
guidelines and consideration of any other material relationship a director may
have with I/OMagic Corporation.
Our board
of directors has determined that its sole director, Mr. Shahbaz, who serves
full-time as our President, Chief Executive Officer and Acting Chief Financial
Officer, is not independent under these standards.
Board
of Directors, Committees and Meetings
Our
business, property and affairs are managed under the direction of our board of
directors. Directors are kept informed of our business through discussions with
our executive officers, by reviewing materials provided to them and by
participating in meetings of our board of directors and its committees. Our
bylaws provide that our board of directors shall consist of at least six
directors.
During
2009, our board of directors held no meetings.
Our board
of directors has established Audit, Compensation and Nominating Committees. Each
committee has a written charter that is to be reviewed and revised as
appropriate.
45
Audit
Committee
Our Audit
Committee selects our independent registered public accounting firm, reviews the
results and scope of the audit and other services provided by our independent
registered public accounting firm and reviews our financial statements for each
interim period and for our year end. Mr. Shahbaz was appointed to the
Audit Committee effective December 15, 2008. The Audit Committee held
four meetings during 2009. Mr. Shahbaz is neither a financial
expert nor is Mr. Shahbaz “independent” as defined in NASD Marketplace Rule
4200(a)(15). As a small company, it has been exceedingly difficult
for us to attract an independent member of our board of directors who would
qualify as an Audit Committee financial expert. We plan to form an
Audit Committee consisting solely of one or more independent members of our
board of directors, at least one of whom will qualify as an Audit Committee
financial expert under the rules and regulations of the Securities and Exchange
Commission, once we are able to identify and attract a suitable candidate. The
Audit Committee operates pursuant to a charter approved by our board of
directors and the Audit Committee, according to the rules and regulations of the
Securities and Exchange Commission.
Compensation
Committee
Our
Compensation Committee does not presently have any members. The Compensation
Committee held no meetings during 2009. The Compensation Committee is
to operate pursuant to a charter approved by our board of directors and the
Compensation Committee.
Our
Compensation Committee is responsible for establishing and administering our
overall policies on compensation and the compensation to be provided to our
executive officers, including, among other things, annual salaries and bonuses,
stock options, stock grants, other stock-based awards, and other incentive
compensation arrangements. In addition, the Compensation Committee is to review
the philosophy and policies behind the salary, bonus and stock compensation
arrangements for all other employees. Although our Compensation
Committee is to make all compensation decisions as to our executive officers,
our Chief Executive Officer would make recommendations to our Compensation
Committee regarding compensation for the other named executive
officers. Our Compensation Committee is to have the authority to
administer our stock option plans with respect to grants to executive officers
and directors, and also is to have authority to make equity awards under those
plans to all other eligible individuals. However, our board of
directors may retain, reassume or exercise from time to time the power to
administer our stock option directors plans. Equity awards made to
members of the Compensation Committee are to be authorized and approved by a
disinterested majority of our board of directors.
The
Compensation Committee is to evaluate both performance and compensation to
ensure that the total compensation paid to our executive officers is fair,
reasonable and competitive so that we can attract and retain superior employees
in key positions. Compensation packages offered to our executives,
including the named executive officers, should include both cash and
equity-based compensation that reward performance as measured against
established goals. The Compensation Committee is to have the
authority to retain consultants and other advisors. In making
compensation decisions, our Compensation Committee is to compare each element of
total compensation against market data and other factors it deems
relevant. The Compensation Committee would expect to set total
compensation for the named executive officers at the median of compensation paid
to similarly situated executives of comparable companies.
Nominating
Committee
Our
Nominating Committee is to select nominees for our board of directors. Our
Nominating Committee does not presently have any members. The Nominating
Committee is to utilize a variety of methods in an attempt to identify and
evaluate nominees for director, including candidates that may be referred by
stockholders. Stockholders that desire to recommend candidates for
evaluation may do so by contacting I/OMagic Corporation in writing, identifying
the potential candidate and providing background information. Candidates may
also come to the attention of the Nominating Committee through current board
members, professional search firms and other persons. In evaluating
potential candidates, the Nominating Committee is to take into account a number
of factors, including, among others, the following:
●
|
independence
from management;
|
46
●
|
relevant
business experience and industry
knowledge;
|
●
|
judgment,
skill, integrity and
reputation;
|
●
|
existing
commitments to other
businesses;
|
●
|
corporate
governance background;
|
●
|
financial
and accounting background, to enable the Nominating Committee to determine
whether the candidate would be suitable for Audit Committee membership;
and
|
●
|
the
size and composition of our board of
directors.
|
The
Nominating Committee held no meetings during 2009. The Nominating
Committee is to operate pursuant to a charter approved by our board of directors
and the Nominating Committee.
Stockholder
Communications with our Board of Directors
Our board
of directors has established a process to receive communications from security
holders. Security holders and other interested parties may contact any member or
all members of the board of directors, or any independent directors as a group,
any committee of the board of directors or any chair of any such committee, by
mail. To communicate with the board of directors, any individual
director or any group or committee of directors, correspondence should be
addressed to the board of directors or any such individual director or group or
committee of directors by either name or title. All such
correspondence should be sent “c/o Secretary” at 4 Marconi, Irvine, California
92618.
All
communications received as set forth in the preceding paragraph will be opened
by the Secretary for the sole purpose of determining whether the contents
represent a message to one or more directors. Any contents that are not in the
nature of advertising, promotions of a product or service, patently offensive
material or matters deemed inappropriate for the board of directors will be
forwarded promptly to the addressee. In the case of communications to
the board of directors or any group or committee of directors, our Secretary
will make sufficient copies of the contents to send to each director who is a
member of the group or committee to which the envelope is
addressed.
Item
11.
|
Executive
Compensation
|
Summary
Compensation Table
The
following table sets forth summary information concerning the compensation of
our principal executive officer and our principal financial officer
(collectively, the “named executive officer”), for all services rendered in all
capacities to us for the years ended December 31, 2009 and 2008.
Name
and
Principle
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Option
Awards
($)(1)
|
All
Other
Compensation
($)(2)
|
Total
($)
|
||||||||||||||||
Tony
Shahbaz(3)
|
|
|||||||||||||||||||||
President,
Chief Executive Officer, Acting Chief Financial Officer and
Secretary
|
2009 2008 |
$
$
|
198,500
198,500
|
$
$
|
32,000
—
|
(4)
|
$
$
|
13,582
24,594
|
$
$
|
—
—
|
(5)
(5)
|
$
$
|
244,082
223,094
|
_______________
(1)
|
Amounts
shown do not reflect compensation actually received by the named executive
officer. Instead, the amounts shown are the aggregate grant
date fair value computed in accordance with the provisions of FASB ASC
Topic 718. The assumptions used to calculate the value of stock and stock
option awards are set forth under Note 14 of the Notes to Consolidated
Financial Statements included elsewhere in this report. The
options were issued under our 2002 and 2003 Stock Option
Plans. Information regarding the vesting schedule for Mr.
Shahbaz is included in the footnotes to the “Outstanding Equity Awards at
Fiscal Year-End” table below.
|
47
(2)
|
The
value of perquisites and other personal benefits was less than $10,000 in
aggregate for Mr. Shahbaz.
|
(3)
|
Mr.
Shahbaz was appointed as Acting Chief Financial Officer effective December
15, 2008.
|
(4)
|
Amount
represents cash bonus payable to Mr. Shahbaz pursuant to his employment
agreement in respect of our quarterly net income in 2009. This
amount was accrued but unpaid as of December 31,
2009.
|
(5)
|
Mr.
Shahbaz is entitled to an automobile allowance in the amount of $1,200 per
month under his Employment Agreement. However, in lieu of this
allowance, Mr. Shahbaz used until December 2006, an automobile we
purchased in August 2005 for $84,597. In December 2006, we traded this
automobile in against another automobile that Mr. Shahbaz uses. We
purchased, for Mr. Shahbaz’s use, the second automobile for $68,034, not
including the trade-in value of the first
vehicle.
|
Employment
Agreement
Tony
Shahbaz
On
October 15, 2002, we entered into an employment agreement with Tony
Shahbaz. Under the terms of the employment agreement, which was
retroactively effective as of January 1, 2002, Mr. Shahbaz serves as our
President and Chief Executive Officer and is entitled to receive an initial
annual salary of $198,500 and is eligible to receive quarterly bonuses equal to
7% of our quarterly net income. Mr. Shahbaz is also entitled to a
monthly car allowance equal to $1,200. The initial term of the employment
agreement concluded on October 15, 2007, but the employment agreement was
automatically renewed for an additional year and will continue to automatically
renew for successive one year periods unless expressly terminated by either
party. Under the terms of the employment agreement, if Mr. Shahbaz is terminated
for cause, he is entitled to receive four times his annual salary and any and
all warrants and options granted to him shall be extended an additional seven
years from date of termination and upon termination without cause, he is
entitled to receive his remaining salary and other benefits for the remaining
term of the employment agreement. Mr. Shahbaz’s employment agreement
further provides that the agreement shall not be terminated without the prior
written consent of Mr. Shahbaz in the event of a merger, transfer of assets, or
dissolution of I/OMagic Corporation, and that the rights, benefits, and
obligations under the employment agreement shall be assigned to the surviving or
resulting corporation or the transferee of our assets.
Grants
of Plan-Based Awards
There
were no grants of plan-based awards made to the named executive officer during
the year ended December 31, 2009.
48
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth information about outstanding equity awards held by
our named executive officer as of December 31, 2009.
Option
Awards
|
|||||||||||||
Number
of
Securities
|
Number
of
Securities
|
||||||||||||
Underlying
Unexercised
Options
(#)
Exercisable
|
Underlying
Unexercised
Options
(#)
Unexercisable
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
||||||||||
Tony
Shahbaz
|
105,000 | (1) | — | $ | 2.75 |
7/14/2010
|
___________________
(1)
|
The
option vested as to 50% of the underlying shares immediately with the
balance vesting in equal amounts in each of the 48 months following the
July 14, 2005 grant date.
|
Compensation
of Directors
Our
director did not receive any cash compensation for his services as a member of
our board of directors; however, a director is entitled to reimbursement of his
reasonable expenses incurred in attending meetings of our board of directors. We
do not have a predetermined or automatic annual or other periodic program for
grants of equity compensation to our directors. Equity compensation
is granted as and when determined appropriate by our Compensation Committee or
our full board.
Compensation
of Employee Director
Mr.
Shahbaz was compensated as a full-time employee and officer but received no
additional compensation for service as a board member during
2009. Information regarding the compensation awarded to Mr. Shahbaz
is included in the “Summary Compensation Table” above.
Indemnification
of Directors and Officers
Our
amended and restated articles of incorporation, or Articles, and our amended and
restated bylaws, or Bylaws, provide that we shall, to the fullest extent
permitted by Section 78.751 of the Nevada Revised Statutes, indemnify all
persons that we have power to indemnify against all expenses, liabilities or
other matters covered by Section 78.751. This indemnification is not exclusive
of any other indemnification rights to which those persons may be entitled and
must cover action both in an official capacity and in another capacity while
holding office. Indemnification continues as to a person who has ceased to be a
director, officer, employee or agent and extends to the benefit of the heirs,
executors and administrators of that person. Section 78.751 provides that the
expenses of our officers and directors incurred in defending a civil or criminal
action, suit or proceeding must be paid by us as they are incurred and in
advance of the final disposition of the action, suit or proceeding, upon receipt
of an undertaking by or on behalf of the director or officer to repay the amount
if it is ultimately determined by a court of competent jurisdiction that the
director or officer is not entitled to indemnification.
49
Our
Articles also provide that a director of I/OMagic Corporation shall not be
liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent exemption from limitation or liability
is not permitted under the Nevada Revised Statutes. Any amendment, modification
or repeal of this provision by our stockholders would not adversely affect any
right or protection of a director of I/OMagic Corporation in respect of any act
or omission occurring prior to the time of the amendment, modification or
repeal. Our Articles do not, however, eliminate or limit a director’s liability
for any act or omission involving intentional misconduct, fraud or a knowing
violation of law, or the payment of unlawful distributions to stockholders.
Furthermore, they do not limit liability for claims against a director arising
out of the director’s responsibilities under the federal securities laws or any
other law. However, we have purchased directors and officers’ liability
insurance to protect our directors and executive officers against liability
under circumstances specified in the policy.
Section
2115 of the California General Corporation Law, or the California Code, provides
that corporations such as I/OMagic Corporation that are incorporated in
jurisdictions other than California and that meet various tests are subject to
several provisions of the California Code, to the exclusion of the law of the
jurisdiction in which the corporation is incorporated. We believe that as of
December 31, 2009, we met the tests contained in Section 2115.
Consequently, we are subject to, among other provisions of the California Code,
Section 317 which governs indemnification of directors, officers and others.
Section 317 generally eliminates the personal liability of a director for
monetary damages in an action brought by or in the right of I/OMagic Corporation
for breach of a director’s duties to I/OMagic Corporation or our stockholders
except for liability:
●
|
for
acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law;
|
●
|
for
acts or omissions that a director believes to be contrary to the best
interests of I/OMagic Corporation or our stockholders or that involve the
absence of good faith on the part of the
director;
|
●
|
for
any transaction from which a director derived an improper personal
benefit;
|
●
|
for
acts or omissions that show a reckless disregard for the director’s duty
to I/OMagic Corporation or our stockholders in circumstances in which the
director was aware, or should have been aware, in the ordinary course of
performing a director’s duties, of a risk of serious injury to I/OMagic
Corporation or our
stockholders;
|
●
|
for
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director’s duty to I/OMagic Corporation or
our stockholders; and
|
●
|
for
engaging in transactions described in the California Code or California
case law which result in liability, or approving the same kinds of
transactions.
|
We may
enter into separate indemnification agreements with each of our directors and
executive officers that provide the maximum indemnity allowed to directors and
executive officers by applicable law and which allow for certain procedural
protections. We also maintain directors and officers insurance to insure such
persons against certain liabilities.
These
indemnification provisions and the indemnification agreements that may be
entered into between us and our directors and executive officers may be
sufficiently broad to permit indemnification of our directors and executive
officers for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
50
To the
extent indemnification for liabilities arising under the Securities Act may be
extended to directors, officers and controlling persons of I/OMagic Corporation
under the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities is asserted by any director, officer or controlling person in
connection with the securities being registered (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether the
proposed indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the court’s final adjudication of the
issue.
The
inclusion of the above provisions in our Articles and Bylaws and in our
indemnification agreements with our officers and directors may have the effect
of reducing the likelihood of derivative litigation against our directors and
may discourage or deter stockholders or management from bringing a lawsuit
against our directors for breach of their duty of care, even though the action,
if successful, might otherwise have benefited us and our stockholders. At
present, there is no litigation or proceeding pending involving any of our
directors as to which indemnification is being sought, nor are we aware of any
threatened litigation that may result in claims for indemnification by any of
our directors.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
As of
March 16, 2010, a total of 4,540,292 shares of our common stock were
outstanding. The following table sets forth information as of that
date regarding the beneficial ownership of our common stock by:
●
|
each
person known by us to own beneficially more than 5%, in the aggregate, of
the outstanding shares of our common stock as of the date of the
table;
|
●
|
our
sole director;
|
●
|
our
sole executive officer; and
|
●
|
our
sole director and executive officer as a
group.
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Except as indicated in the footnotes to the table, we
believe each security holder possesses sole voting and investment power with
respect to all of the shares of common stock owned by such security holder,
subject to community property laws where applicable. In computing the number of
shares beneficially owned by a security holder and the percentage ownership of
that security holder, shares of common stock subject to options, warrants or
preferred stock held by that person that are currently exercisable or
convertible or are exercisable or convertible into shares of common stock within
60 days after the date of the table are deemed outstanding. Those shares,
however, are not deemed outstanding for the purpose of computing the percentage
ownership of any other person or group.
51
Name and Address of Beneficial Owner(1)
|
Title
of Class
|
Amount and
Nature
of
Beneficial
Ownership
of Class
|
Percent
of
Class
|
||||
Tony
Shahbaz
|
Common
|
2,444,759(2) | 52.6% | ||||
Steel
Su
|
Common
|
573,461(3) | 12.6% | ||||
Sung
Ki Kim
|
Common
|
375,529(4) | 8.3% | ||||
Citrine
Group Limited
|
Common
|
340,818(5) | 7.5% | ||||
All
directors and executive officers as a group (1 person)
|
Common
|
2,444,759(6) | 52.6% |
______________
(1)
|
Unless
otherwise indicated, the address of each person in this table is c/o
I/OMagic Corporation, 4 Marconi, Irvine, California 92618. Mr. Shahbaz is
an executive officer and the sole director of I/OMagic
Corporation.
|
(2)
|
Consists
of: (i) 493,462 shares of common stock and 105,000 shares of common stock
underlying options held individually by Mr. Shahbaz; (ii) 1,240,423 shares
of common stock held by Susha, LLC, a California limited liability
company, or Susha California; (iii) 566,668 shares of common stock held by
Susha, LLC, a Nevada limited liability company, or Susha Nevada; and (iv)
39,206 shares of common stock held by King Eagle Enterprises, Inc., a
California corporation. Mr. Shahbaz has sole voting and sole investment
power over all of the shares held by Susha California and Susha Nevada.
Mr. Shahbaz and Behavior Tech Computer Corp. are equal owners of the
membership interests in Susha California and Susha
Nevada.
|
(3)
|
Consists
of 406,794 shares of common stock held individually by Mr. Su and 166,667
shares of common stock held by Behavior Tech Computer Corp. Mr. Su is the
Chief Executive Officer of Behavior Tech Computer Corp. and has sole
voting and sole investment power over the shares held by Behavior Tech
Computer Corp.
|
(4)
|
Represents
375,529 shares of common stock held by BTC Korea Co., Ltd., or BTC Korea.
Since October 22, 2003, Mr. Kim has served as Chief Executive Officer and
President of BTC Korea and has sole voting and sole investment power over
the shares held by BTC Korea. The address for Mr. Kim is c/o BTC Korea
Co., Ltd., 160-5, Kajwa-Dong Seo-Ku, Incheon City,
Korea.
|
(5)
|
Consists
of 340,818 shares of common stock held by Citrine Group Limited, a wholly
owned subsidiary of Ritek Corporation. Mr. Dar Cheng has sole voting
and sole investment power over the shares held by Citrine Group
Limited. The address for Mr. Cheng is c/o Citrine Group Limited, No.
42, Kuanfu N. Road, 30316 R.O.C., HsinChu Industrial Park,
Taiwan.
|
(6)
|
Includes
105,000 shares of common stock underlying
options.
|
Equity
Compensation Plan Information
The
following table provides information about our common stock that may be issued
upon the exercise of options, warrants and rights under all of our existing
equity compensation plans as of December 31, 2009.
Plan
Category
|
Number
of
Securities
to be
Issued
Upon Exercise of Outstanding,
Options,
Warrants
and
Rights
|
Weighted-Average
Exercise
Price of Outstanding Options, Warrants
and
Rights
|
Number
of
Securities
Remaining Available
for
Future Issuance Under Equity Compensation
Plans
|
|||||||||
Equity
Compensation Plans Approved by Security Holders
|
133,300 | $ | 2.77 | 400,034 | ||||||||
Equity
Compensation Plans Not Approved by Security Holders
|
— | $ | — | — |
52
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Policies
and Procedures for Approval of Related Party Transactions
Our board
of directors has the responsibility to review and discuss with management and
approve interested transactions with related parties. During this
process, the material facts as to the related party’s interest in a transaction
are disclosed to all board members or an applicable committee. Our
board of directors is to review each interested transaction with a related party
that requires approval and either approve or disapprove of the entry into the
interested transaction. An interested transaction is any transaction
in which we are a participant and any related party has or will have a direct or
indirect interest. Transactions that are in the ordinary course of
business and would not require disclosure pursuant to Item 404(a) of Regulation
S-K or approval of the board of directors or an independent committee of the
board of directors would not be deemed interested transactions. Mr.
Shahbaz, our sole director who serves full-time as our President, Chief
Executive Officer, Acting Chief Financial Officer and Secretary, is not
“independent” as defined in NASD Marketplace Rule 4200(a)(15). No
director may participate in any approval of an interested transaction with
respect to which he or she is a related party. Our board of directors
intends to approve only those related party transactions that are in the best
interests of I/OMagic Corporation and our stockholders.
General
Other
than as described below or elsewhere in this report, since January 1, 2008 there
has not been a transaction or series of related transactions to which I/OMagic
Corporation was or is a party involving an amount in excess of $120,000 and in
which any director, executive officer, holder of more than 5% of any class of
our voting securities, or any member of the immediate family of any of the
foregoing persons, had or will have a direct or indirect material
interest. None of the below transactions were separately approved by
our board of directors as they occurred prior to our adoption of our policies
and procedures for approval of related party transactions.
We are or
have been a party to employment and compensation arrangements with related
parties, as more particularly described above. We have entered into
an indemnification agreement with our sole director and executive
officer. The indemnification agreement and our certificate of
incorporation and bylaws require us to indemnify our directors and officers to
the fullest extent permitted by Nevada law.
BTC
USA
In
February 2003, we entered into a Warehouse Services and Bailment Agreement with
BTC USA. Under the terms of the agreement, BTC USA agreed to supply and store at
our warehouse up to $10.0 million of inventory on a consignment basis. We were
responsible for insuring the consigned inventory, storing the consigned
inventory for no charge, and furnishing BTC USA with weekly statements
indicating all products received and sold and the current level of consigned
inventory. The agreement also provided us with a trade line of credit of up to
$10.0 million with payment terms of net 60 days, without interest. The agreement
could be terminated by either party upon 60 days’ prior written notice to the
other party. BTC USA is a subsidiary of Behavior Tech Computer Corp., one of our
significant stockholders. Mr. Steel Su, a former director of I/OMagic
Corporation, is the Chief Executive Officer of Behavior Tech Computer
Corp. For the year ended December 31, 2008, we purchased inventory
from BTC USA in amounts totaling $723,600. During the year ended
December 31, 2009, we made no purchases of inventory but returned approximately
$200,000 in products under this arrangement, which amount offset trade payables
owed to BTC USA. As of December 31, 2009 and 2008, there were
$4,400,000 and $4,600,000, respectively, in trade payables outstanding to BTC
USA. As of March 16, 2010, we were out of compliance with the payment
terms of the agreement with BTC USA and we are in continued negotiations with
BTC USA to satisfy our obligations on a basis that is acceptable to both
parties.
53
BTC USA
provided us with significantly preferential trade credit terms. These terms
included extended payment terms, substantial trade lines of credit and other
preferential buying arrangements. We believe that these terms were substantially
better terms than we could likely obtain from other subcontract manufacturers or
suppliers. We do not currently utilize this trade credit facility as
BTC USA is either not able to supply certain products we currently sell, or in
some cases, we are able to source certain products at better prices directly
from other third-party manufacturers. Additionally, due to substantial
outstanding obligations owed to BTC USA, it is highly unlikely that we will be
able to obtain additional inventory supplies from BTC USA unless, and at least
until, we are able to negotiate repayment terms acceptable to BTC USA. Even if
we are able to negotiate repayment terms acceptable to BTC USA, we may be unable
to obtain additional inventory supplies from BTC USA on the same terms as
before, on satisfactory terms, or at all.
Item
14.
|
Principal
Accounting Fees and Services.
|
The
following table presents the aggregate fees paid by us for professional audit
services rendered by Simon & Edward, LLP for the years ended December 31,
2009 and 2008. We appointed Simon & Edward, LLP as our
independent registered public accounting firm on July 21, 2008.
2009
|
2008
|
|||||||||
Audit
Fees
|
$ | 193,908 | $ | 53,333 | ||||||
Audit-Related
Fees
|
— | — | ||||||||
Tax
Fees
|
3,482 | — | ||||||||
All
Other Fees
|
— | — | ||||||||
Total
|
$ | 197,390 | $ | 53,333 |
The
following table presents the aggregate fees paid by us for professional audit
services rendered by Swenson Advisors, LLP for the years ended December 31, 2009
and 2008. We appointed Swenson Advisors, LLP as our independent
registered public accounting firm on December 12, 2006. We dismissed
Swenson Advisors, LLP as our independent registered public accounting firm on
June 27, 2008.
2009
|
2008
|
|||||||||
Audit
Fees
|
$ | — | $ | 130,575 | ||||||
Audit-Related
Fees
|
— | — | ||||||||
Tax
Fees
|
— | 10,000 | ||||||||
All
Other Fees
|
— | — | ||||||||
Total
|
$ | — | $ | 140,575 |
Audit Fees. Audit
Fees consist of amounts billed for professional services rendered for the audit
of our annual consolidated financial statements included in our Annual Reports
on Forms 10-K, and reviews of our interim consolidated financial statements
included in our Quarterly Reports on Forms 10-Q and incorporated by
reference into our Registration Statements on Form S-8.
Audit-Related
Fees. Audit-Related Fees consist of fees billed for
professional services that are reasonably related to the performance of the
audit or review of our consolidated financial statements but are not reported
under “Audit Fees.”
54
Tax Fees. Tax Fees
consist of fees billed for professional services for tax compliance activities,
including the preparation of federal and state tax returns and related
compliance matters.
All Other
Fees. All Other Fees consist of fees billed for services other
than those noted above.
Our Audit
Committee has determined that all non-audit services provided by Simon &
Edward, LLP or Swenson Advisors, LLP are and were compatible with maintaining
that firm’s audit independence.
Our Audit
Committee is responsible for approving all audit, audit-related, tax and other
services. The Audit Committee pre-approves all auditing services and
permitted non-audit services, including all fees and terms to be performed for
us by our independent registered public accounting firm at the beginning of the
fiscal year. Non-audit services are reviewed and pre-approved by
project at the beginning of the fiscal year. Any additional non-audit
services contemplated by us after the beginning of the fiscal year are submitted
to the Audit Committee chairman for pre-approval prior to engaging the
independent auditor for such services. These interim pre-approvals
are reviewed with the full Audit Committee at its next meeting for
ratification. During 2009 and 2008, all services performed by Simon
& Edward, LLP and Swenson Advisors, LLP were pre-approved by our Audit
Committee in accordance with these policies and applicable Securities and
Exchange Commission regulations.
55
PART
IV
Item
15.
|
Exhibits,
Financial Statement
Schedules.
|
(a)(1),
(a)(2) and (c) Financial Statements and
Financial Statement Schedules
Reference
is made to the financial statements and financial statement schedule listed on
and attached following the Index to Consolidated Financial Statements and
Supplemental Information contained on page F-1 of this report.
(a)(3)
and (b) Exhibits
Reference
is made to the exhibits listed on the Index to Exhibits that follows the
financial statements and financial statement schedule.
56
I/OMAGIC
CORPORATION AND SUBSIDIARY
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
AND
SUPPLEMENTAL INFORMATION
Page | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-2 |
CONSOLIDATED FINANCIAL STATEMENTS | |
Consolidated Balance Sheets as of December 31, 2009 and 2008 | F-3 |
Consolidated
Statements of Operations for the Years Ended December
31, 2009 and 2008
|
F-4
|
Consolidated
Statements of Stockholders’ Equity (Deficit) for the Years Ended
December
31, 2009 and 2008
|
F-5
|
Consolidated
Statements of Cash Flows for the Years Ended December
31, 2009 and 2008
|
F-6
|
Notes to Consolidated Financial Statements | F-7 |
SUPPLEMENTAL INFORMATION | |
Schedule II – Valuation and Qualifying Accounts | F-32 |
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
I/OMagic
Corporation and Subsidiary
We have
audited the accompanying consolidated balance sheets of I/OMagic Corporation and
Subsidiary as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity and cash flows for each of the
years in the two-year period ended December 31, 2009. Our audits also
include the financial statement Schedule II. I/OMagic Corporation and
Subsidiary’s management is responsible for these consolidated financial
statements. Our responsibility is to express an opinion on these consolidated
financial statements 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 audit 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 also 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 I/OMagic Corporation and
Subsidiary as of December 31, 2009 and 2008, and the results of its operations
and its cash flows for the years ended December 31, 2009 and 2008 in conformity
with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
Schedule II, 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.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred significant
operating losses, has serious liquidity concerns and may require additional
financing in the foreseeable future. These matters, among others, raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ SIMON
& EDWARD, LLP
City of
Industry, California
March 19,
2010
F-2
I/OMAGIC
CORPORATION AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
December
31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 445,675 | $ | 425,495 | ||||
Accounts
receivable, net
|
654,582 | 1,039,595 | ||||||
Inventory,
net
|
1,682,022 | 1,524,719 | ||||||
Prepaid
expenses and other current assets
|
197,404 | 101,695 | ||||||
Total
current assets
|
2,979,683 | 3,091,504 | ||||||
Equipment,
net
|
139,089 | 189,719 | ||||||
Other
assets
|
37,503 | 41,928 | ||||||
Total
assets
|
$ | 3,156,275 | $ | 3,323,151 | ||||
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable, accrued expenses and other
|
$ | 570,107 | $ | 852,994 | ||||
Accounts
payable - related party
|
4,388,253 | 4,604,138 | ||||||
Deferred
revenue
|
- | 26,400 | ||||||
Capital
lease obligations – current portion
|
13,704 | 54,942 | ||||||
Accrued
mail-in rebates
|
4,375 | 24,080 | ||||||
Total
current liabilities
|
4,976,439 | 5,562,554 | ||||||
Long-Term
Liabilities
|
||||||||
Sub-lease deposit | 9,703 | - | ||||||
Capital
lease obligations
|
- | 13,704 | ||||||
Total
long-term liabilities
|
9,703 | 13,704 | ||||||
Total
liabilities
|
4,986,142 | 5,576,258 | ||||||
Stockholders’
deficit
|
||||||||
Preferred
stock, $0.001 par value, 10,000,000 shares authorized
|
||||||||
Series
A, 1,000,000 shares authorized, no shares issued and
outstanding
|
- | - | ||||||
Series
B, 1,000,000 shares authorized, no shares issued and
outstanding
|
- | - | ||||||
Common
stock, $0.001 par value, 100,000,000 shares authorized, 4,540,292 and
4,540,292 shares issued and outstanding, respectively
|
4,541 | 4,541 | ||||||
Additional
paid-in capital
|
31,858,651 | 31,842,567 | ||||||
Accumulated
deficit
|
(33,693,059 | ) | (34,100,215 | ) | ||||
Total
stockholders’ deficit
|
(1,829,867 | ) | (2,253,107 | ) | ||||
Total
liabilities and stockholders’ deficit
|
$ | 3,156,275 | $ | 3,323,151 |
See
accompanying notes to these consolidated financial statements
F-3
I/OMAGIC
CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
sales
|
$ | 10,331,740 | $ | 13,364,118 | ||||
Cost
of sales
|
6,916,337 | 13,317,501 | ||||||
Gross
profit
|
3,415,403 | 46,617 | ||||||
Operating
expenses
|
||||||||
Selling,
marketing, and advertising
|
675,956 | 1,053,324 | ||||||
General
and administrative
|
2,275,014 | 2,813,841 | ||||||
Depreciation
and amortization
|
52,830 | 128,659 | ||||||
Impairment
of trademarks
|
- | 224,088 | ||||||
Total
operating expenses
|
3,003,800 | 4,219,912 | ||||||
Income
(loss) from operations
|
411,603 | (4,173,295 | ) | |||||
Other
income (expense)
|
||||||||
Interest
expense
|
(1,169 | ) | (91,591 | ) | ||||
Currency
transaction loss
|
(2,762 | ) | (600 | ) | ||||
Other
income
|
284 | 13,874 | ||||||
Total
other income (expense)
|
(3,647 | ) | (78,317 | ) | ||||
Income
(loss) before provision for income taxes
|
407,956 | (4,251,612 | ) | |||||
Provision
for income taxes
|
800 | 800 | ||||||
Net
income (loss)
|
$ | 407,156 | $ | (4,252,412 | ) | |||
Basic
and diluted income (loss) per share
|
$ | 0.09 | $ | (0.94 | ) | |||
Basic
and diluted weighted-average shares outstanding
|
4,540,292 | 4,540,292 |
See
accompanying notes to these consolidated financial statements
F-4
I/OMAGIC CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Common
Stock
|
Additional
Paid-In
|
Treasury | Accumulated |
Total
Stockholders’
|
||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Stock
|
Deficit
|
Deficit
|
|||||||||||||||||||
Balances
at December 31, 2007
|
4,540,292 | $ | 4,541 | $ | 31,794,655 | $ | - | $ | (29,847,803 | ) | $ | 1,951,393 | ||||||||||||
Share-based
compensation expense
|
- | - | 47,912 | - | - | 47,912 | ||||||||||||||||||
Net
loss
|
- | - | - | - | (4,252,412 | ) | (4,252,412 | ) | ||||||||||||||||
Balances
at December 31, 2008
|
4,540,292 | $ | 4,541 | $ | 31,842,567 | $ | - | $ | (34,100,215 | ) | $ | (2,253,107 | ) | |||||||||||
Share-based
compensation expense
|
- | - | 16,084 | - | - | 16,084 | ||||||||||||||||||
Net
income
|
- | - | - | - | 407,156 | 407,156 | ||||||||||||||||||
Balances
at December 31, 2009
|
4,540,292 | $ | 4,541 | $ | 31,858,651 | $ | - | $ | (33,693,059 | ) | $ | (1,829,867 | ) |
See accompanying notes to these consolidated financial
statements
F-5
I/OMAGIC
CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
income (loss)
|
$ | 407,156 | $ | (4,252,412 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided by
(used in) operating activities:
|
||||||||
Depreciation
and amortization
|
52,830 | 59,732 | ||||||
Amortization
of trademarks
|
- | 68,928 | ||||||
Impairment
of trademarks
|
- | 224,088 | ||||||
Allowance
for doubtful accounts
|
(1,053 | ) | (145,075 | ) | ||||
Allowance
for product returns
|
(8,607 | ) | (85,958 | ) | ||||
Reserve
for sales incentives
|
(23,831 | ) | 16,489 | |||||
Accrued
point-of-sale rebates
|
(116,705 | ) | 37,822 | |||||
Accrued
market development funds, cooperative advertising costs
and cross-dock fees
|
(36,470 | ) | (314,042 | ) | ||||
Allowance
for obsolete inventory
|
(292,177 | ) | (79,072 | ) | ||||
Share
based compensation expense
|
16,084 | 47,912 | ||||||
Changes
in assets and liabilities (net of dispositions and
acquisitions):
|
||||||||
Accounts
receivable
|
571,679 | 6,393,025 | ||||||
Inventory
|
134,874 | 4,047,199 | ||||||
Prepaid
expenses and other current assets
|
(95,709 | ) | 5,346 | |||||
Other
assets
|
4,425 | - | ||||||
Accounts
payable, accrued expenses and other
|
(282,887 | ) | (300,194 | ) | ||||
Accounts
payable – related party
|
(215,885 | ) | (2,810,074 | ) | ||||
Deferred
revenue
|
(26,400 | ) | 26,400 | |||||
Capital
leases
|
(54,942 | ) | (44,832 | ) | ||||
Accrued
mail-in rebates
|
(19,705 | ) | (407,966 | ) | ||||
Sub-lease
deposit
|
9,703 | - | ||||||
Net
cash provided by operating activities
|
22,380 | 2,487,316 | ||||||
Cash
flows from investing activities
|
||||||||
Restricted
cash
|
- | 341,899 | ||||||
Equipment
additions
|
(2,200 | ) | (1,900 | ) | ||||
Net
cash (used in) provided by investing activities
|
(2,200 | ) | 339,999 | |||||
Cash
flows from financing activities
|
||||||||
Net
payments on line of credit
|
- | (3,864,942 | ) | |||||
Net
cash used in financing activities
|
- | (3,864,942 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
20,180 | (1,037,627 | ) | |||||
Cash
and cash equivalents at beginning of year
|
425,495 | 1,463,122 | ||||||
Cash
and cash equivalents at end of year
|
$ | 445,675 | $ | 425,495 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid
|
$ | 1,169 | $ | 91,591 | ||||
Income
taxes paid
|
$ | 800 | $ | 800 |
See accompanying notes to these consolidated financial statements
F-6
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 –
ORGANIZATION AND BUSINESS
Nature of
Business
I/OMagic
Corporation (the “Company”), a Nevada corporation, develops, manufactures
through subcontractors or obtains from suppliers, markets and sells electronic
data storage products and other consumer electronics products. The Company sells
its products in the United States and Canada to retailers and distributors
(referred to collectively as the Company’s “customers”).
Liquidity and Going
Concern
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. This contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. The Company earned net income of $407,156 for the year
ended December 31, 2009, but experienced net losses for the years ended December
31, 2008 and 2007, of $4.3 million and $4.8 million, respectively, and
experienced net losses in each of the prior seven years. These
matters, among others, raise substantial doubt about the Company’s liquidity and
ability to fund future operations.
At
December 31, 2009, the Company had cash and cash equivalents of $445,676. As of
March 16, 2010, the Company had $667,000 of cash on hand.
On March
7, 2008, the Company received notice from Silicon Valley Bank under a Loan and
Security Agreement dated February 2, 2007 between the Company, IOM Holdings,
Inc. and Silicon Valley Bank that the Company was in default of its tangible net
worth financial covenant. As of that date, the Company owed Silicon
Valley Bank $1,598,461, all of which was due and payable upon demand by Silicon
Valley Bank. The Company was also unable to obtain advances under its
line of credit. The Company sought a waiver of the default of its
tangible net worth financial covenant and received a Forbearance Agreement from
Silicon Valley Bank in that regard.
On April
18, 2008, the Company entered into a Loan and Security Agreement dated as of
April 18, 2008 with Silicon Valley Bank, which provided for a credit facility
based on the Company’s accounts receivable. The Loan and Security
Agreement served to amend and restated a previous Loan and Security Agreement
dated January 29, 2007 among the parties. The credit facility allowed the
Company to finance its accounts receivable and borrow up to a maximum aggregate
amount of $7.0 million; provided, that the Company was only permitted to borrow
up to a limit of 60% of each eligible account or such other percentage as
Silicon Valley Bank established. The line of credit was to expire on
January 29, 2009. Advances on the line of credit bore interest
at a floating rate equal to the prime rate published from time to time by
Silicon Valley Bank plus 2.5%. The credit facility required that the
Company pay a collateral handling fee of $2,000 per month and other customary
fees and expenses. On July 31, 2008, the Company paid off its obligations owed
to Silicon Valley Bank under the Loan and Security Agreement dated April 18,
2008 and terminated the Loan and Security Agreement.
On
October 29, 2008, the Company entered into a Sale of Accounts and Security
Agreement dated as of October 24, 2008 with Rexford Funding, LLC, which was
acquired by Bay View Funding on November 11, 2009, which provides for an
accounts receivable-based credit facility. The credit facility allows the
Company to sell accounts receivable to Bay View Funding subject to a maximum
amount equal to $1.5 million. The purchase price for each purchased
account is to equal the net invoice amount less Bay View Funding’s
commission. Bay View Funding is entitled to a factoring commission
equal to 0.033% of the gross invoice amount of each purchased account receivable
and an additional 0.033% for each day the account receivable remains outstanding
and unpaid. The Sale of Accounts and Security Agreement has an initial term
through April 30, 2009 with automatic six month extensions unless either party
terminates the Sale of Accounts and Security Agreement at least 60 but not more
than 90 days prior to the end of the initial term or any renewal term. At all
times Bay View Funding has the right to terminate the Sale of Accounts and
Security Agreement upon 30 days prior notice. In August 2009, the Company
modified the Agreement to include a month-to-month term.
F-7
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As of the
date of filing of this report, the Company had serious liquidity concerns and
may require additional financing in the foreseeable future. The
Company presently may not have sufficient capital to fund its operations for the
next twelve months or less.
The
Company’s plans for correcting these deficiencies include the timely collection
of existing accounts receivable, and sell-through of inventory currently in the
Company’s sales channels. If, however, the Company’s capital
requirements or cash flow vary materially from its current projections, if the
Company is unable to timely collect its accounts receivable or unable to
sell-through inventory currently in its sales channels as anticipated, or if
unforeseen circumstances occur, the Company may be unable to increase its
liquidity and may require additional financing to sustain
operations.
The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the inability
of the Company to continue as a going concern.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of
Consolidation
The
consolidated financial statements include the accounts of I/OMagic Corporation
and its wholly-owned subsidiary, IOM Holdings, Inc. All material intercompany
accounts and transactions have been eliminated. In February 2009, IOM Holdings,
Inc. was merged with and into I/OMagic Corporation.
Estimates
The
preparation of financial statements 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
period. Actual results could differ from those estimates.
Reclassifications
Certain
prior year amounts may have been reclassified to conform to the current
presentation. Such reclassification had no effect on the net loss reported in
the consolidated statements of operations.
Cash and Cash
Equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three months or
less to be cash equivalents.
F-8
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial
Instruments
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
topic 820, Fair Value
Measurements and Disclosures defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting
principles. For certain of the Company’s financial instruments, including cash
and cash equivalents, accounts receivable, inventory, prepaid expenses and other
current assets, line of credit, accounts payable, accrued expenses and other,
accounts payable-related parties and accrued mail-in rebates, the carrying
amounts approximate fair value due to their short maturities.
Accounts Receivable and
Allowance for Doubtful Accounts
Trade
accounts receivable are primarily from national retailers and distributors and
are recorded at the invoiced amount and do not accrue interest. The allowance
for doubtful accounts reflects management’s best estimate of probable credit
losses inherent in the accounts receivable balance. The Company determines the
allowance based on historical experience, specifically identified nonpaying
accounts and other currently available evidence. The Company reviews its
allowance for doubtful accounts monthly with focus on significant individual
past due balances over 90 days. All other balances are reviewed on a pooled
basis. Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. Since the Company’s current customers are primarily national retailers
and distributors with good payment histories with the Company, its allowance for
doubtful accounts is minimal. The Company does not have any off-balance sheet
credit exposure related to its customers.
The
Company occasionally has, and it expects that it will continue to have in the
foreseeable future, disagreements with its customers relating to the valuation
and completeness of accounts receivable which may result in a contingent gain or
loss to the Company.
Sales Incentive
Reserve
The
Company enters into agreements with certain customers regarding price decreases
that are determined by the Company in its sole discretion. These agreements
allow those customers, subject to certain limitations, a credit equal to the
difference between the Company’s current price and its new reduced price on
units in the customers’ inventories or in transit to the customers on the date
of the price decrease.
In
accordance ASC subtopic 605-50, Revenue Recognition, Customer
Payments and Incentives, consideration given to customers or resellers
under a rebate program, the Company records an estimate of sales incentives
based on its actual sales incentive rates over a trailing twelve-month period,
adjusted for any known variations, which are charged to operations and offset
against gross sales at the time products are sold. The Company also records a
corresponding accrual for its estimated sales incentive liability. This accrual
is reduced by deductions on future payments taken by the Company’s customers
relating to actual sales incentives. The Company’s estimated sales incentive
liability is offset against accounts receivable.
At the
end of each quarterly period, the Company analyzes its existing sales incentive
reserve and applies any necessary adjustments based upon actual or expected
deviations in sales incentive rates from the Company’s applicable historical
sales incentive rates. The amount of any necessary adjustment is based upon the
amount of the Company’s remaining field inventory, which is calculated by
reference to the Company’s actual field inventory last conducted, plus
inventory-in-transit and less estimated product sell-through. The amount of the
Company’s sales incentive liability for each product is equal to the amount of
remaining field inventory for that product multiplied by the difference between
the Company’s current price and its new reduced price to its customers for that
product. This data, together with all data relating to all sales incentives
granted on products in the applicable period, is used to adjust the Company’s
sales incentive reserve established for the applicable period.
F-9
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Point-of-Sale Rebate
Promotions Accruals
The
Company periodically offers point-of-sale rebate promotions to certain customers
that are in turn provided to the customers’ end-user customers. In accordance
with ASC subtopic 605-50, Revenue Recognition, Customer
Payments and Incentives, as to consideration given to customers or
resellers under a rebate program, during the period of the rebate promotion, the
Company reduces sales by the estimated amount of the rebate promotion with a
corresponding accrual for the estimated liability. Estimates for rebate
promotions are based on a number of variable factors that depend on the specific
program or product. These variables include the length of the rebate promotion
and the estimated sales during the promotion based on historical experience.
These accruals are offset against accounts receivable.
Market Development
Funds/Cooperative Advertising Accruals
The
Company has agreements with certain customers under which the customer is
allowed to use a specified percentage of its net purchases of the Company’s
products for various marketing purposes. The purpose of these agreements is to
encourage advertising and promotional events to promote the sale of the
Company’s products. Each period the Company reduces sales by the estimated
amounts to be deducted by the customers on future payments. These accruals are
offset against accounts receivable.
Product
Returns
The
Company has a limited 90-day to one year time period for product returns from
end-users. However, its customers generally have return policies that allow
their customers to return products within only 14 to 30 days after purchase. The
Company allows its customers to return damaged or defective products to it
following a customary return merchandise authorization process. The Company has
no informal return policies. In accordance with ASC subtopic 605-15, Revenue Recognition, Products, When
Right of Return Exists, the Company utilizes actual historical return
rates to determine its allowance for returns in each period. Gross sales are
reduced by estimated returns and cost of sales is reduced by the estimated cost
of those sales. The Company records a corresponding allowance for the estimated
liability associated with the estimated returns. This estimated liability is
based on the gross margin of the products corresponding to the estimated
returns. This allowance is offset each period by actual product
returns.
As noted
above, the Company’s return rate is based upon its past history of actual
returns and the Company estimates amounts for product returns for a given period
by applying this historical return rate and reducing actual gross sales for that
period by a corresponding amount. The Company’s historical return
rate for a particular product is its trailing 18-month return rate of similar
products. The Company believes that using a trailing 18-month return
rate takes two key factors into consideration, specifically, an 18-month return
rate provides the Company with a sufficient period of time to establish recent
historical trends in product returns for each product category, and provides the
Company with a period of time that is short enough to account for recent
technological shifts in its product offerings in each product
category. If an unusual circumstance exists, such as a product
category that has begun to show materially different actual return rates as
compared to the Company’s trailing 18-month return rates, the Company will make
appropriate adjustments to its estimated return rates. Factors that
could cause materially different actual return rates as compared to the
Company’s trailing 18-month return rates include product modifications that
simplify installation, or a new product line within a product category that
needs time to better reflect its return performance and other
factors. This allowance is offset against accounts
receivable.
F-10
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory
The
Company’s inventories are stated at the lower-of-cost-or-market
price. The Company provides for a lower-of-cost-or-market adjustment
against gross inventory values. The Company had no
lower-of-cost-or-market adjustments to its consigned inventories for the year
ended December 31, 2009, and approximately $24,000 for the year ended December
31, 2008, which was included in cost of sales. The December 31, 2008 adjustment
was attributable to inventory in the Company’s consignment sales channels at
that date.
Inventory Obsolescence
Allowance
The
Company’s warehouse supervisor, production supervisor and purchasing manager
physically review the Company’s warehouse inventory for slow moving and obsolete
products. All products of a material amount are reviewed quarterly and all
products of an immaterial amount are reviewed annually. The Company considers
products that have not been sold within six months to be slow moving. Products
that are no longer compatible with current hardware or software are considered
obsolete. The potential for sale of slow moving and obsolete inventories is
considered through market research, analysis of the Company’s customers’ current
needs, and assumptions about future demand and market conditions. The recorded
cost of both slow-moving and obsolete inventories is then reduced to its
estimated market value based on current market pricing for similar products. The
Company utilizes the Internet to provide indications of market value from
competitors’ pricing, third party inventory liquidators and auction websites.
The recorded costs of the Company’s slow moving and obsolete products are
reduced to current market prices when the recorded costs exceed such market
prices. All adjustments establish a new cost basis for inventory as the Company
believes such reductions are permanent declines in the market price of its
products. Generally, obsolete inventory is sold to companies that specialize in
the liquidation of such items while the Company continues to market slow-moving
inventories until they are sold or become obsolete. As obsolete or slow moving
inventory is sold, the Company reduces the reserve by the sales
proceeds.
The
Company’s warehouse supervisor, production supervisor and purchasing manager
physically review the Company’s warehouse inventory for damaged
inventory-related items on a monthly basis. Inventory-related items (such as
sleeves, manuals or broken products no longer under warranty from the Company’s
subcontract manufacturers and suppliers) that are considered obsolete or damaged
are reviewed by these personnel together with the Company’s Controller or Chief
Financial Officer. At the discretion of the Company’s Controller or Chief
Financial Officer, these items are physically disposed of and the Company makes
corresponding accounting adjustments resulting in inventory adjustments. In
addition, on a monthly basis, the Company’s detail inventory report and its
general ledger are reconciled by the Company’s Controller and any variances
result in a corresponding inventory adjustment.
The
Company’s consignment inventory is reviewed by its Controller or its Chief
Financial Officer to ensure that recorded costs are not impacted by current
market prices for similar products. If it is determined that recorded costs
exceed current costs or market values, the recorded costs are reduced to current
market prices to establish a new cost basis.
F-11
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Equipment
Equipment
is recorded at cost, less accumulated depreciation and amortization.
Depreciation and amortization are calculated using the straight-line method over
estimated useful lives as follows:
Computer
equipment and software
|
5
years
|
||
Warehouse
equipment
|
7
years
|
||
Office
furniture and equipment
|
5
to 7 years
|
||
Equipment
under capital leases
|
5
years
|
||
Vehicles
|
5
years
|
||
Leasehold
improvements
|
Estimated
useful life or lease term, whichever is shorter
|
Expenditures
for major renewals and betterments that extend the useful lives of equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation expense on assets acquired under capital leases is
included with depreciation expense.
ASC
360-10 Property, Plant, and
Equipment, requires that long-lived assets be evaluated for impairment
based on undiscounted future cash flows of the assets at the lowest level for
which there are identifiable cash flows. As such, the Company evaluates for
impairment for the individual asset at the end of each reporting
period.
Intangible
Assets
In
accordance with ASC subtopic 350-10, Intangibles, Goodwill and
Others, the goodwill impairment analysis compares the fair value of each
reporting unit to its carrying value, including goodwill. The Company evaluates
the remaining useful life of an intangible asset that is being amortized each
reporting period to determine whether events and circumstances warrant a
revision to the remaining period of amortization.
Accounting for the
Impairment of Long-Lived Assets
ASC
subtopic 360-10-40, Property,
Plant, and Equipment, Impairment of Disposal of Long-Lived Assets,
requires that long-lived assets, such as property and equipment and purchased
intangibles subject to amortization, be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of the asset is measured by comparison of its
carrying amount to undiscounted future net cash flows the asset is expected to
generate. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the asset
exceeds its fair market value. Estimates of expected future cash flows represent
our best estimate based on currently available information and reasonable and
supportable assumptions. Any impairment recognized in accordance with ASC
360-10-40 is permanent and may not be restored. For the year ended
December 31, 2009, the Company did not recognize any impairment of
long-lived assets in connection with ASC 360-10-40 based on its
reviews.
Accrued
Mail-in-Rebates
The
Company periodically offers mail-in rebates to end-user customers as sales
incentives. During the period of the mail-in rebates, the Company reduces sales
by the estimated amount of the mail-in rebate with a corresponding accrual for
the estimated liability. Estimates for mail-in rebate promotions are based on a
number of variable factors that depend on the specific program or product. These
variables include the length of the mail-in rebate promotion, the estimated
sales during the promotion and the anticipated redemption rate of the program
based on historical experience.
F-12
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue
Recognition
The
Company recognizes revenue in accordance with FASB ASC topic 605 (“ASC 605”)
Revenue Recognition When Right
of Return Exists, which states that revenue should be recognized when
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the seller’s price to the buyer is fixed or determinable,
and collectability is reasonably assured. Transfer of title occurs and risk of
ownership passes to a customer at the time of shipment or delivery, depending on
the terms of our agreement with a particular customer. For transactions not
satisfying the conditions for revenue recognition under ASC 605, product revenue
is deferred until the conditions are met, net of an estimate for cost of
sales.
ASC 605
further states that revenue from sales transactions where the buyer has the
right to return the product shall be recognized at the time of sale only if the
seller's price to the buyer is substantially fixed or determinable at the date
of sale, the buyer has paid the seller, or the buyer is obligated to pay the
seller and the obligation is not contingent on resale of the product, the
buyer's obligation to the seller would not be changed in the event of theft or
physical destruction or damage of the product, the buyer acquiring the product
for resale has economic substance apart from that provided by the seller, the
seller does not have significant obligations for future performance to directly
bring about resale of the product by the buyer, and the amount of future returns
can be reasonably estimated. Therefore, consignment sales are recognized when
our customers sell our products to end-users, at which point the customer incurs
an obligation to pay us.
Revenue
is recognized net of sales tax.
Product
Returns
The
Company accounts for sales returns in accordance with ASC 605, Revenue Recognition When Right of
Return Exists, by establishing an accrual in an amount equal to its
estimate of sales recorded for which the related products are expected to be
returned. The Company determines the estimate of the sales return accrual
primarily based on historical experience regarding sales returns, but also by
considering other factors that could impact sales returns. Upon sale, the
Company estimates an allowance for future product returns. The Company may
provide additional reserves for contemporaneous events that were not known and
knowable at the time of shipment. In order to reasonably estimate future
returns, the Company analyzes both quantitative and qualitative information
including, but not limited to, actual return rates.
Vendor
Consideration Received
The
Company accounts for consideration received from its vendors in accordance with
ASC subtopic 605-50, Revenue
Recognition, Customer Payments and Incentives, because we did not receive
an identifiable benefit, it reduces its product revenue for marketing
promotions, market development funds and cooperative advertising
costs.
The
Company recognizes revenue under three primary sales models: standard terms,
consignment sales and special terms. The Company generally uses one of these
three primary sales models, or some combination of these sales models, with each
of its customers. Under each of these sales models the Company’s payment terms
are explicitly stated and agreed to by the Company and the customer before goods
are shipped, thereby making the Company’s fee fixed or determinable before
revenue is recognized.
F-13
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Standard
Terms
Under the
Company’s standard terms sales model, a customer is obligated to pay the Company
for products sold to it within a specified number of days from the date that
title to the products is transferred to the customer. The Company’s standard
terms are typically net 45 days for distributors and net 60 days for retailers
from the transfer of title to the products to the customer. The Company
typically collects payment from a customer within 60 to 75 days from the
transfer of title to the products to the customer. Transfer of title occurs and
risk of ownership passes to a customer at the time of shipment or delivery,
depending on the terms of the Company’s agreement with a particular customer.
The sale price of the Company’s products is substantially fixed or determinable
at the date of sale based on purchase orders generated by a customer and
accepted by the Company. A customer’s obligation to pay the Company for products
sold to it under the Company’s standard terms sales model is not contingent upon
the resale of those products. The Company recognizes revenue for standard terms
sales at the time title to products is transferred to a customer, net of an
estimate for sales incentives, rebates and returns.
Consignment
Under the
Company’s consignment sales model, a customer is obligated to pay the Company
for products sold to it within a specified number of days following notification
to the Company by the customer of the sale of those products through delivery of
weekly or monthly sell-through reports. A weekly or monthly sell-through report
details sales of consigned products in the prior week or month, respectively.
The period for payment to the Company by customers relating to their sale of
consigned products corresponding to these sell-through reports varies. For
sell-through reports generated weekly, the Company typically collects payment
from a customer within 30 days of the receipt of those reports. For sell-through
reports generated monthly, the Company typically collects payment from a
customer within 15 to 45 days of the receipt of those reports. At the time of a
customer’s sale of a product, title is transferred directly to the customer.
Risk of theft or damage of a product, however, passes to a customer upon
delivery of that product to the customer. The sale price of the Company’s
products is substantially fixed or determinable at the date of sale based on a
product sell-through report generated by a customer and delivered to the
Company. Except in the case of theft or damage, a customer’s obligation to pay
the Company for products transferred under the Company’s consignment sales model
is entirely contingent upon the sale of those products. Products held by a
customer under the Company’s consignment sales model are recorded as the
Company’s inventory at offsite locations until their sale by the customer.
Because the Company retains title to products in its consignment sales channels
until their sale by a customer, revenue is not recognized until the time of
sale. Accordingly, price modifications to inventory maintained in the Company’s
consignment sales channels do not have an effect on the timing of revenue
recognition. The Company recognizes revenue for consignment sales in the period
during which the sale occurs.
Special
Terms
Under the
Company’s special terms sales model, the payment terms for the purchase of the
Company’s products are negotiated on a case-by-case basis and typically cover a
specified quantity of a particular product. The result of the Company’s
negotiations is a special agreement with a customer that defines how and when
transfer of title occurs and risk of ownership shifts to that
customer.
F-14
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company ordinarily does not offer any rights of return or rebates for products
sold under its special terms sales model. A customer is obligated to pay the
Company for products sold to it within a specified number of days from the date
that title to the products is transferred to that customer, or as otherwise
agreed to by the Company. The Company’s payment terms are ordinarily shorter
under its special terms sales model than under its standard terms or consignment
sales models and the Company typically requires payment in advance, at the time
of transfer of title to the products or shortly following the transfer of title
to the products to a customer. Transfer of title occurs and risk of ownership
passes to a customer at the time of shipment, delivery, receipt of payment or
the date of invoice, depending on the terms of the Company’s agreement with the
customer. The sale price of the Company’s products is substantially fixed or
determinable at the date of sale based on the Company’s agreement with a
customer. A customer’s obligation to pay the Company for products sold to it
under the Company’s special terms sales model is not contingent on the sale of
those products. The Company recognizes revenue for special terms sales at the
time title to products is transferred to a customer.
Product
Warranties
The
Company’s products are subject to limited warranties ranging in duration of up
to one year. These warranties cover only repair or replacement of the product.
The Company’s subcontract manufacturers and suppliers provide the Company with
warranties of a duration at least as long as the warranties provided by the
Company to consumers. The warranties provided by the Company’s subcontract
manufacturers and suppliers cover repair or replacement of the product. The
Company has a specific right of offset against amounts owed to its subcontract
manufacturers and suppliers for defective products, therefore, the amount of the
Company’s warranty claims is not material. The Company incurs only minimal
shipping costs to its subcontract manufacturers and suppliers in connection with
the satisfaction of its warranty obligations.
Advertising
Costs
The
Company expenses advertising costs as incurred. There were no advertising costs
for the years ended December 31, 2009 and 2008.
Shipping and Handling
Costs
Shipping
and handling costs incurred in a sales transaction to ship products to a
customer are included in selling, marketing and advertising
expenses. For the years ended December 31, 2009 and 2008, shipping
and handling costs were approximately $327,000 and $502,000, respectively.
Amounts billed to customers for shipping and handling are included in revenues.
For the years ended December 31, 2009 and 2008, there were no shipping and
handling costs billed to customers.
Share-Based
Compensation
For
stock-based awards granted, the Company records stock-based compensation cost
based on the fair value estimated in accordance with ASC topic 718, Compensation, Stock
Compensation, over the requisite service periods for the individual
awards, which generally equals the vesting period. The vesting of stock-based
award grants may be based on time, performance, market conditions or a
combination of performance and market conditions. The fair values of restricted
stock awards with time-based vesting, including restricted stock and restricted
stock units, are generally based on the intrinsic values of the awards at the
date of grant. As permitted under ASC topic 718, the Company generally uses the
Black-Scholes valuation option pricing model to estimate the fair value of stock
option grants with time-based vesting. The Black-Scholes valuation model relies
on a number of key assumptions to calculate estimated fair values. The assumed
dividend yield of zero is based on the fact that the Company has never paid cash
dividends and has no present intention to pay cash dividends. The expected
stock-price volatility assumption is based on the expected term of the awards,
and actual and projected employee stock option exercise behaviors.
F-15
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company expenses share-based compensation in cost of goods sold, selling,
marketing and advertising or general and administrative expenses depending on
the job function of the employee.
Comprehensive
Income
The
Company applies FASB ASC topic 220, Comprehensive Income. This
statement establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities.
Foreign
Currency
Gains and
losses from foreign currency transactions, such as those resulting from the
settlement of foreign receivables, are included in the consolidated statement of
operations.
Income
Taxes
The
Company accounts for income taxes under ASC topic 740, Income Taxes, ASC topic 740
defines an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company’s financial statements or tax
returns. ASC topic 740 further requires that a tax position must be more likely
than not to be sustained before being recognized in the financial statements, as
well as the accrual of interest and penalties as applicable on unrecognized tax
positions.
Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each period end, based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized. The provision
for income taxes represents the tax payable for the period, if any, and the
change during the period in deferred tax assets and liabilities.
Computation of Net Income
(Loss) Per Common Share
The
Company calculates income/loss per share in accordance with FASB ASC topic 260,
Earnings Per Share.
Basic income/loss per share is computed by dividing the net income/loss
available to common stockholders by the weighted-average number of common shares
outstanding. Diluted income/loss per share is computed similar to basic 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.
For the
year ended December 31, 2009 a total of 133,300 stock options outstanding were
not included in the computations of diluted net income per share because the
effect would have been anti-dilutive. For the year ended December 31,
2008, a total of 286,824, stock options and warrants outstanding were excluded
from the computations of diluted net loss per share because the effect would
have been anti-dilutive.
F-16
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting
Pronouncements
In
September 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Codification (“ASC”) 605-25, Revenue Recognition -
Multiple-Deliverable Revenue Arrangements. This guidance addresses
how to separate deliverables and how to measure and allocate consideration to
one or more units of accounting. Specifically, the guidance requires that
consideration be allocated among multiple deliverables based on relative selling
prices. The guidance establishes a selling price hierarchy of
(1) vendor-specific objective evidence, (2) third-party evidence, and
(3) estimated selling price. This guidance is effective for annual periods
beginning after December 15, 2009 but may be early adopted as of the
beginning of an annual period. The Company is currently evaluating the effect
that this guidance will have on its financial position and results of
operations.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162, now referred to as ASC 105-10,
Generally Accepted Accounting
Principles. The FASB Accounting Standards Codification (“Codification”)
has become the source of authoritative United States generally accepted
accounting principles recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission under authority of federal securities laws are also sources of
authoritative United States generally accepted accounting principles for
Securities and Exchange Commission registrants. On the effective date of this
statement, the Codification will supersede all then-existing non-Securities and
Exchange Commission accounting and reporting standards. All other
non-grandfathered non-Securities and Exchange Commission accounting literature
not included in the Codification will become non-authoritative. This statement
is effective for financial statements issued for interim and annual periods
ending after September 30, 2009. The adoption of this statement did not
have a material effect on the Company’s financial statements.
In June
2009, the FASB issued SFAS No. 165, later codified in ASC 855-10, Subsequent Events. ASC 855-10
establishes general standards for the evaluation, recognition and disclosure of
events and transactions that occur after the balance sheet date. Although there
is new terminology, the standard is based on the same principles as those that
currently exist in the auditing standards. The standard, which includes a new
required disclosure of the date through which an entity has evaluated subsequent
events, is effective for interim or annual periods ending after June 15, 2009.
The adoption of ASC 855-10 did not have a material effect on the Company’s
financial statements.
In April
2009, the FASB issued FASB Staff Position No. 107-1 and APB Opinion
No. 28-1 (FSP 107-1 and APB 28-1), later codified in ASC 820-10,
Interim Disclosures about Fair
Value of Financial Instruments. FSP 107-1 and APB 28-1 require
fair value disclosures in both interim, as well as annual, financial statements
in order to provide more timely information about the effects of current market
conditions on financial instruments. FSP 107-1 and APB 28-1 and their
adoption did not have a material impact on the Company's financial
statements.
F-17
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – FINANCIAL
INSTRUMENTS AND FAIR VALUE MEASUREMENTS
The
following table presents the Company’s financial instruments at December 31,
2009 and 2008:
2009
|
2008
|
|||||||||||||||
Carrying
|
Fair
|
Measurement
|
Carrying
|
Fair
|
||||||||||||
Value
|
Value
|
Approach
|
Value
|
Value
|
||||||||||||
Cash
and cash equivalents
|
$ | 445,675 | $ | 445,675 |
Level
1
|
$ | 425,495 | $ | 425,495 | |||||||
Accounts
receivable
|
654,582 | 654,582 |
Level
1
|
1,039,595 | 1,039,595 | |||||||||||
Inventory
|
1,682,022 | 1,682,022 |
Level
1
|
1,524,719 | 1,524,719 | |||||||||||
Prepaid
expenses and other current assets
|
197,404 | 197,404 |
Level
1
|
101,695 | 101,695 | |||||||||||
Accounts
payable, accrued expenses and other
|
570,107 | 570,107 |
Level
1
|
852,994 | 852,994 | |||||||||||
Accounts
payable - related party
|
4,388,253 | 4,388,253 |
Level
1
|
4,604,138 | 4,604,138 | |||||||||||
Deferred
revenue
|
- | - | 26,400 | 26,400 | ||||||||||||
Capital
lease obligations - current portion
|
13,704 | 13,704 |
Level
1
|
54,942 | 54,942 | |||||||||||
Accrued
mail-in rebates
|
4,375 | 4,375 |
Level
1
|
24,080 | 24,080 | |||||||||||
Sub-lease
deposit
|
9,703 |
Level
1
|
- | - | ||||||||||||
Capital
lease obligations
|
- | - |
Level
1
|
13,704 | 13,704 |
Level 1. The Company utilizes
the market approach to determine the fair value of its assets and liabilities
under Level 1 of the fair value hierarchy. The market approach pertains to
transactions in active markets involving identical or comparable assets or
liabilities.
Level 2. The fair values
determined through Level 2 of the fair value hierarchy are derived principally
from or corroborated by observable market data. Inputs include quoted prices for
similar assets, liabilities (risk adjusted), and market-corroborated inputs,
such as market comparables, interest rates, yield curves, and other items that
allow value to be determined.
Level 3. The fair values
determined through Level 3 of the fair value hierarchy are derived principally
from unobservable inputs to the extent that observable inputs are not available,
thereby allowing for situations in which there is little, if any, market
activity for the asset (or similar assets) at the measurement date. As of
December 31, 2009, no fair value measurements for assets or liabilities under
Level 3 were recognized in the Company’s consolidated financial
statements.
The
Company adopted SFAS No. 157 effective January 1, 2008. The adoption of SFAS No.
157 had no impact on the Company’s accounting or disclosure as to its assets and
liabilities at December 31, 2009, and did not materially affect the Company’s
financial position, results of operations or cash flows for the year ended
December 31, 2009. The Company will continue to make an evaluation of the fair
value of its assets and liabilities as of the end of each future reporting
period.
There
were no changes in the Company’s valuation techniques during the year ended
December 31, 2009.
The
Company is not exposed to changes in interest rates which could result in cash
flow risks.
NOTE
4 – CONCENTRATION OF RISK
Cash and Cash
Equivalents
The
Company maintains its cash and cash equivalent balances in several banks and a
financial institution located in Southern California that from time to time
exceed amounts insured by the Federal Deposit Insurance Corporation up to
$250,000 and $100,000 per bank and by the Securities Investor Protection
Corporation up to $500,000 per financial institution. As of December
31, 2009 and 2008, balances totaling $141,213 and $163,214, respectively, were
uninsured. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
F-18
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts
Receivable
As of
December 31, 2009, the Company had a retailer and two distributors that
collectively represented 94.8% of accounts receivable. The amounts due from the
retailer and two distributors were 41.7%, 33.5% and 19.6% of gross accounts
receivable, respectively.
As of
December 31, 2008, the Company had a distributor and two retailers that
collectively represented 92.3% of accounts receivable. The amounts due from the
distributor and two retailers were 49.5%, 31.4% and 11.4% of gross accounts
receivable, respectively.
Retailers and
Distributors
For the
year ended December 31, 2009, the Company’s most significant retailer and
distributors were Staples, Tech Data and D&H Distributing. Collectively,
this retailer and these two distributors accounted for 88% of the Company’s net
sales for 2009. For the year ended December 31, 2008, the Company’s most
significant distributor and retailers were Tech Data, Staples and Target.
Collectively, this distributor and these two retailers accounted for 78% of the
Company’s net sales in 2008.
Related
Parties
For the
year ended December 31, 2009, the Company had no inventory purchases from a
related party.
For the
year ended December 31, 2008, the Company purchased inventory from BTC USA in
amounts totaling $723,600, which represented 10% of total inventory purchases
during the year.
As of
December 31, 2009 and 2008, there were $4.4 million and $4.6 million,
respectively, in trade payables outstanding to BTC USA, an affiliate of BTC,
which is a stockholder of the Company.
Segment
Information
ASC 280
requires companies to report information about operating segment in interim and
annual financial statements. It also requires segment disclosures about products
and services geographic and major customers. The Company has determined that it
does not have any separately reportable operating segments.
F-19
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 – ACCOUNTS RECEIVABLE
Accounts
receivable as of December 31, 2009 and 2008, consisted of the
following:
2009
|
2008
|
|||||||||
Accounts
receivable
|
$ | 1,282,029 | $ | 1,853,708 | ||||||
Less:
Allowance for doubtful accounts
|
- | (1,053 | ) | |||||||
Allowance for product
returns
|
(305,703 | ) | (314,310 | ) | ||||||
Reserve for sales
incentives
|
(33,646 | ) | (57,477 | ) | ||||||
Accrued point-of-sale
rebates
|
(181,646 | ) | (298,351 | ) | ||||||
Accrued
market development funds, cooperative advertising costs and cross-dock
fees
|
(106,452 | ) | (142,922 | ) | ||||||
Total
|
$ | 654,582 | $ | 1,039,595 |
NOTE 6 – INVENTORY
Inventory
as of December 31, 2009 and 2008, consisted of the following:
2009
|
2008
|
|||||||||
Component
parts
|
$ | 48,176 | $ | 154,697 | ||||||
Finished
goods—warehouse
|
696,496 | 1,076,194 | ||||||||
Finished
goods—consigned
|
947,997 | 596,652 | ||||||||
1,692,669 | 1,827,543 | |||||||||
Less:Allowance
for obsolete and slow–moving inventory
|
(10,647 | ) | (302,824 | ) | ||||||
Total
|
$ | 1,682,022 | $ | 1,524,719 |
Consigned
inventory is located at the stores and distribution centers of certain customers
with which the Company has consignment agreements. The inventory is owned by the
Company until sold by a customer.
The
Company realized no lower-of-cost-or-market adjustments to its consigned
inventories for the year ended December 31, 2009, but realized approximately
$24,000 in lower-of-cost-or-market adjustments to its consigned inventories
which are included in cost of sales for the year ended December 31,
2008.
F-20
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 – EQUIPMENT
Equipment
as of December 31, 2009 and 2008, consisted of the following:
2009
|
2008
|
|||||||||
Computer
equipment and software
|
$ | 979,623 | $ | 977,423 | ||||||
Warehouse
equipment
|
138,065 | 138,065 | ||||||||
Office
furniture and equipment
|
281,155 | 281,155 | ||||||||
Vehicles
|
74,742 | 74,742 | ||||||||
Leasehold
improvements
|
106,633 | 106,633 | ||||||||
1,580,218 | 1,578,018 | |||||||||
Less:Accumulated
depreciation
|
(1,441,129 | ) | (1,388,299 | ) | ||||||
Total
|
$ | 139,089 | $ | 189,719 |
For the
years ended December 31, 2009 and 2008, depreciation and amortization expense
(including capital leases) was $52,830 and $59,732, respectively. Included in
equipment are the following capital leases:
2009
|
2008
|
|||||||||
Computer
equipment and software
|
$ | 38,281 | $ | 38,281 | ||||||
Warehouse
equipment
|
69,052 | 69,052 | ||||||||
Office
furniture and equipment
|
40,148 | 40,148 | ||||||||
147,481 | 147,481 | |||||||||
Less:Accumulated
depreciation
|
(67,118 | ) | (44,155 | ) | ||||||
Total
|
$ | 80,363 | $ | 103,326 |
NOTE
8 –
TRADEMARKS
Trademarks
as of December 31, 2009 and 2008, consisted of the following:
2009
|
2008
|
|||||||||
Trademarks
|
$ | 499,800 | $ | 499,800 | ||||||
Less:
Amortization
|
(499,800 | ) | (499,800 | ) | ||||||
Total
|
$ | - | $ | - |
Amortization
expense on these intangible assets was $68,928 for the year ended December 31,
2008. In accordance with SFAS No. 142, the Company performed its
required valuation on its Hi-Val® and Digital Research Technologies® trademarks
for possible impairment as of December 31, 2008. Based on this valuation, the
Company determined that there had been a significant impairment in the value of
the trademarks due to no sales of product under the Hi-Val® brand and very
limited sales under the Digital Research Technologies® brand and no sales
forecast by the Company in subsequent periods. Therefore, the Company recorded
an impairment of the total remaining value of the trademarks of $224,088 as of
December 31, 2008.
F-21
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – LINES OF
CREDIT
Silicon Valley
Bank
On
January 29, 2007, the Company entered into a Loan and Security Agreement with
Silicon Valley Bank which provided for a credit facility that was initially used
to pay off the Company’s outstanding loan balance as of January 29, 2007 with
GMAC Commercial Finance, which balance was approximately $5.0 million, and was
also used to pay $62,000 of the Company’s closing fees in connection with
securing the credit facility.
On April
18, 2008, the Company entered into a new Loan and Security Agreement with
Silicon Valley Bank which provided for a credit facility based on the Company’s
accounts receivable. The Loan and Security Agreement served to amend
and restate the Company’s prior Loan and Security Agreement dated January 29,
2007 with Silicon Valley Bank. On April 18, 2008, the Company also
entered into an Amendment to Loan Documents with Silicon Valley Bank, which
provided that the ancillary loan documents executed in connection with the
Company’s prior credit facility with Silicon Valley Bank would apply to the new
Loan and Security Agreement.
The new
credit facility allowed the Company to finance its accounts receivable and
borrow up to a maximum aggregate amount of $7.0 million; provided, that the
Company could only borrow up to a limit of 60% of each eligible account or such
other percentage as Silicon Valley Bank established. The credit facility was to
expire on January 29, 2009. Advances under the credit facility bore
interest at a floating rate equal to the prime rate published from time to time
by Silicon Valley Bank plus 2.5%. The credit facility required that the Company
pay a collateral handling fee of $2,000 per month and other customary fees and
expenses.
The
Company’s obligations under the Loan and Security Agreement were secured by
substantially all of its assets and were guaranteed by IOM Holdings, Inc. under
a Cross-Corporate Continuing Guaranty. The Company’s obligations and the
guarantee obligations of IOM Holdings, Inc. were also secured under Intellectual
Property Security Agreements executed by the Company and IOM Holdings,
Inc.
On July
31, 2008, the Company paid off its obligations owed under its Loan and Security
Agreement dated April 18, 2008 with Silicon Valley Bank and terminated the Loan
and Security Agreement.
Bay View
Funding
On
October 29, 2008, the Company entered into a Sale of Accounts and Security
Agreement (the “Agreement”) dated as of October 24, 2008 with Rexford Funding,
LLC, which was acquired by Bay View Funding (“Lender”) on November 11, 2009,
which provides for an accounts receivable-based credit facility.
The
credit facility allows the Company to sell accounts receivable to Lender subject
to a maximum amount equal to $1.5 million. The purchase price for
each purchased account is to equal the net invoice amount less Lender’s
commission. Lender is entitled to a factoring commission equal to
0.033% of the gross invoice amount of each purchased account receivable and an
additional 0.033% for each day the account receivable remains outstanding and
unpaid.
F-22
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Lender,
in its sole and absolute discretion, may from time to time advance the Company
funds against the purchase price of the accounts receivable in an amount of up
to 75% (except as to accounts receivable of Staples which shall be up to 60%) of
the aggregate purchase price of the purchased accounts receivable, subject to
customary reductions, including those based on (i) disputed accounts receivable,
(ii) any accounts receivable from a customer whom Lender deems not credit
worthy, (iii) any accounts receivable unpaid in excess of 60 days, (iv) any
accounts receivable from a past-due customer when 25% or more accounts
receivable from that customer are unpaid in excess of 60 days, (v) any accounts
receivable which Lender deems, in its sole and absolute discretion, are
ineligible, and (vi) any fees, actual or estimated, that are chargeable to the
Company’s reserve account as to the credit facility. Lender is
entitled to interest charges on all advances at a rate equal to the Prime Rate
plus 1.00%, but in no case less than 5.50%.
The
Agreement has an initial term through April 30, 2009 with automatic six month
extensions unless either party terminates the Agreement at least 60 but not more
than 90 days prior to the end of the initial term or any renewal term. At all
times Lender has the right to terminate the Agreement upon 30 days prior notice.
In August 2009, the Company modified the Agreement to include a month-to-month
term.
If the
Company terminates the Agreement prior to the end of the initial term or any
renewal term, the Company will be subject to an early termination fee equal to
Lender’s average monthly commission and/or deficiency charges for the preceding
six month period, or the entire period from the date of the Agreement if the
preceding period is less than six months, multiplied by the number of months
remaining in the initial term or applicable renewal term.
The
obligations of the Company under the Agreement are secured by the Company’s
accounts receivable and all proceeds thereof and, with respect thereto, all
chattel paper, commercial tort claims, deposit accounts, documents, general
intangibles, goods, letters of credit, letter of credit rights and all
supporting obligations. The Agreement also contains other customary
representations, warranties, covenants and terms and conditions.
NOTE
10 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses as of December 31, 2009 and 2008, consisted of the
following:
2009
|
2008
|
|||||||||
Trade
accounts payable
|
$ | 365,074 | $ | 565,804 | ||||||
Accrued
compensation and related benefits
|
144,627 | 121,998 | ||||||||
Other
|
60,406 | 165,192 | ||||||||
Total
|
$ | 570,107 | $ | 852,994 |
NOTE
11 – ACCOUNTS PAYABLE—RELATED PARTY
In
February 2003, the Company entered into a Warehouse Services and Bailment
Agreement with BTC USA. Under the terms of the agreement, BTC USA agreed to
supply and store at the Company’s warehouse up to $10.0 million of inventory on
a consignment basis. The Company was responsible for insuring the consigned
inventory, storing the consigned inventory for no charge, and furnishing BTC USA
with weekly statements indicating all products received and sold and the current
level of consigned inventory. The agreement also provided the Company with a
trade line of credit of up to $10.0 million with payment terms of net 60 days,
without interest. The agreement could be terminated by either party upon 60
days’ prior written notice to the other party. BTC USA is a subsidiary of
Behavior Tech Computer Corp., one of the Company’s significant stockholders. Mr.
Steel Su, a former director of I/OMagic Corporation, is the Chief Executive
Officer of Behavior Tech Computer Corp. During the years ended December 31, 2009
and 2008, the Company purchased $0 and $723,600 of inventory, respectively,
under this arrangement. As of December 31, 2009 and 2008, there were $4.4
million and $4.6 million, respectively, in trade payables outstanding under this
arrangement. As of March 16, 2010, the Company was out of compliance with the
payment terms of its agreement with BTC and the Company is in continued
negotiations with BTC USA to satisfy its obligations on a basis that is
acceptable to both parties.
F-23
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
BTC USA
provided the Company with significantly preferential trade credit terms. These
terms included extended payment terms, substantial trade lines of credit and
other preferential buying arrangements. The Company believes that these terms
were substantially better terms than it could likely obtain from other
subcontract manufacturers or suppliers. The Company does not currently utilize
this trade credit facility as BTC USA is either not able to supply certain
products the Company currently sells, or in some cases, the Company is able to
source certain products at better prices directly from other third-party
manufacturers. Additionally, due to substantial outstanding obligations owed to
BTC USA, it is highly unlikely that the Company will be able to obtain
additional inventory supplies from BTC USA unless, and at least until, the
Company is able to negotiate repayment terms acceptable to BTC USA. Even if the
Company is able to negotiate repayment terms acceptable to BTC USA, the Company
may be unable to obtain additional inventory supplies from BTC USA on the same
terms as before, on satisfactory terms, or at all.
NOTE
12 – COMMITMENTS AND CONTINGENCIES
Operating Lease
Commitments
The
Company leases its facilities and certain equipment under non-cancelable
operating lease agreements expiring through August 2012. The Company
has the right to extend the lease for one three-year period under the same terms
and conditions, except that the base rent for each year during the option period
shall increase at the rate of three percent per annum.
Future
minimum lease payments under this non-cancelable operating lease at December 31,
2009, were as follows:
Year
Ending
December 31,
|
||||||
2010
|
$ | 394,875 | ||||
2011
|
392,604 | |||||
2012
|
404,384 | |||||
Total
|
$ | 1,191,863 |
Rent
expense was $261,716 and $370,040 for the years ended December 31, 2009 and
2008, respectively, and is included in general and administrative expenses in
the accompanying consolidated statements of operations.
On July
6, 2009, the Company entered into a sub-lease for approximately 30% of its
facility with a term of 18 months and an option to renew for an additional 22
months. The total amount of minimum rentals to be received under the
sub-lease for the initial 18 month period is $160,578. In addition to
the base rent, the sub-tenant is required to pay its proportionate share of the
monthly operating expenses related to the facility.
F-24
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Capital Lease
Obligations
The
Company entered into various lease agreements during 2007 to acquire certain
equipment. Future payments under these capital lease obligations at December 31,
2009 were as follows:
Year
Ending
December
31,
|
||||||
2010
|
13,704 | |||||
Total
|
$ | 13,704 |
Financial
Agreements
The
Company entered into a Loan and Security Agreement in January 2007 which
provided for a loan commitment fee of $50,000, a monthly collateral monitoring
fee of $1,250 and an anniversary fee of $50,000. In April 2008, the Company
entered into a new Loan and Security Agreement. The Loan and Security Agreement
was terminated in July 2008.
On
October 29, 2008, the Company entered into a Sale of Accounts and Security
Agreement dated as of October 24, 2008 with Rexford Funding, LLC, which was
acquired by Bay View Funding on November 11, 2009, which provides for an
accounts receivable-based credit facility.
Service
Agreements
Periodically,
the Company enters into various agreements for services including, but not
limited to, public relations, financial consulting, sales consulting and
manufacturing consulting. The agreements generally are ongoing until such time
as they are terminated. Compensation for services is paid either on a fixed
monthly rate or based on a percentage, as specified, and may be payable in
shares of the Company’s common stock or a warrant to purchase shares of the
Company’s common stock. During the years ended December 31, 2009 and 2008, the
Company incurred expenses of $209,467 and $252,763, respectively, in connection
with such arrangements. These expenses are included in general and
administrative expenses in the accompanying consolidated statements of
operations.
Employment
Contract
The
Company entered into an employment agreement with one of its officers on October
15, 2002, the initial term of which expired on October 15, 2007. The contract
automatically renewed for one year and will continue to renew for successive one
year periods unless expressly terminated by either party. The
agreement, which was effective as of January 1, 2002, calls for an initial
salary of $198,500, and provides for certain expense allowances. In addition,
the agreement provides for a quarterly bonus equal to 7% of the Company’s
quarterly net income. For the year ended December 31, 2009, a bonus of $32,000
was accrued under this agreement. For the year ended December 31, 2008, no bonus
was accrued under this agreement.
Employee Retirement
Plan
The
Company offers all eligible employees a 401K retirement plan. The Company is not
required to make annual contributions and has not done so in the
past.
F-25
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Retail
Agreements
In
connection with certain retail agreements, the Company has agreed to pay for
certain marketing development and advertising costs on an ongoing basis.
Marketing development and advertising costs are generally agreed upon at the
time of the event. The Company also records a liability for market
development/cooperative advertising funds based on management’s evaluation of
historical experience and current industry and Company trends.
For the
years ended December 31, 2009 and 2008, the Company incurred $377,616 and
$353,091, respectively, related to its retail agreements with certain customers.
These amounts are netted against revenue in the accompanying consolidated
statements of operations.
The
Company has obligations to one of its customers to provide “back-end” market
development funds if the customer exceeds certain purchase thresholds. The
Company reviews this commitment on a quarterly basis to determine the
probability of the customer exceeding the thresholds. If in management’s
opinion, the thresholds will be exceeded, additional accruals will be required
to account for these “back-end” fees. As of December 31, 2009 and 2008, no such
fees were incurred or accrued.
Indemnification
Obligations
A number
of the Company’s agreements with its customers provide that the Company must
defend, indemnify and hold them and their customers harmless from damages and
costs that arise from product warranty claims or from claims for injury or
damage resulting from defects in the Company’s products. The Company has
historically not had any material liabilities arising from these
obligations.
Legal
Matters
On or
about May 30, 2003, the Company and IOM Holdings, Inc. filed a complaint for
breach of contract and legal malpractice against Lawrence W. Horwitz, Gregory B.
Beam, Horwitz & Beam, Inc., Lawrence M. Cron, Horwitz & Cron, Kevin J.
Senn and Senn Palumbo Meulemans, LLP, the Company’s former attorneys and their
respective law firms, in the Superior Court of the State of California for the
County of Orange. The complaint sought damages of $15.0 million arising out of
the defendants’ representation of the Company and IOM Holdings, Inc. in an
acquisition transaction and in a separate arbitration matter. On or about
November 6, 2003, the Company filed its First Amended Complaint against all
defendants. Defendants responded to the First Amended Complaint denying the
Company’s allegations. Defendants Lawrence W. Horwitz and Lawrence M. Cron also
filed a Cross-Complaint against I/OMagic Corporation for attorneys’ fees in the
approximate amount of $79,000. The Company denied the allegations in the
Cross-Complaint. Trial began on February 6, 2006 and on March 10, 2006, the jury
ruled in the Company’s favor against Lawrence W. Horwitz, Horwitz & Beam,
Inc., Lawrence M. Cron, Horwitz & Cron and Senn Palumbo Meulemans, LLP, and
awarded the Company $3.0 million in damages. Judgment was entered on or about
April 5, 2006. Thereafter, defendants filed a motion for new trial and a motion
for judgment notwithstanding the verdict. On May 31, 2006, the Court denied
the motion for new trial in its entirety, denied the motion for judgment
notwithstanding the verdict as to Lawrence W. Horwitz, Horwitz & Beam, Inc.
and Lawrence M. Cron, but granted the motion for judgment notwithstanding the
verdict as to Horwitz & Cron and Senn Palumbo Meulemans, LLP. An Amended
Judgment Notwithstanding, the Verdict based upon the Court’s ruling on the
motion for judgment notwithstanding the verdict was entered on or about July 7,
2006. Thereafter, appeals were filed as to both the original Judgment and the
Amended Judgment. On March 27, 2008, the Court of Appeal issued an opinion
against the Company as to all defendants, which reversed the Judgments in the
Company’s favor as to Lawrence W. Horwitz, Horwitz & Beam, Inc. and Lawrence
M. Cron. The Court of Appeal also ordered that the Company was to pay
defendants’ costs on appeal. The Company paid the defendants’ claim for
costs.
F-26
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
addition to the matter described above, the Company may be involved in certain
legal proceedings and claims which arise in the normal course of business.
Management does not believe that the outcome of any currently pending matters
will have a material effect on the Company’s financial position, results of
operations or cash flows.
Other Contractual
Obligations
During
its normal course of business, the Company has made commitments under which it
will or may be required to make payments in relation to certain transactions.
These include lease, service and retail agreements and employment
contracts.
NOTE
13 – PREFERRED STOCK
In
December 2000, the Company amended its Articles of Incorporation to authorize
10,000,000 shares of preferred stock, of which 1,000,000 shares are designated
as Series A preferred stock and 1,000,000 shares are designated as Series B
preferred stock. The Series A preferred stock does not have any
voting power but any holder thereof would be entitled to receive dividends on an
equal basis with the holders of the Company’s common stock. The
Series B preferred stock has the same rights as the Series A preferred stock,
except the Company would be obligated to redeem any issued shares that have been
outstanding for two years. At December 31, 2009 and 2008, no shares
of Series A or Series B preferred stock were outstanding.
NOTE 14 – COMMON STOCK, WARRANTS AND STOCK
OPTIONS
Common Stock Issued in
Connection with the Exercise of Options
During
the years ended December 31, 2009 and 2008, the Company did not issue any shares
of common stock in connection with the exercise of any employee stock
options.
Warrants
During
the year ended December 31, 2007, the Company issued warrants to purchase 50,000
shares of common stock to two financial advisory firms, all of which were
exercisable at $3.00 per share. The warrants vested immediately. The fair value
of the warrants was determined to be $46,330 using the Black-Scholes valuation
model assuming a 127% expected volatility and a risk-free rate of 4.9%. This
amount was recorded as a general and administrative expense on the consolidated
statements of operations. None of the warrants were exercised and the warrants
expired in October 2008. The assumptions and valuation methods for valuing the
warrants are the same as those used for the Company’s outstanding stock
options.
Stock Option
Plans
The
Company has a 2002 Stock Option Plan (the “2002 Plan”) and a 2003 Stock Option
Plan (the “2003 Plan”). The 2002 Plan and 2003 Plan are collectively
referred to as the “Plans.”
The total
number of shares of the Company’s common stock authorized for issuance under the
2002 Plan and the 2003 Plan are 133,334, and 400,000, respectively.
F-27
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Under the
Plans, options granted may be either “incentive stock options,” within the
meaning of Section 422 of the Internal Revenue Code, or “nonqualified options.”
Incentive stock options granted under the Plans must have an exercise price of
not less than the fair market value of a share of common stock on the date of
grant unless the optionee owns more than 10% of the total voting securities of
the Company. In this case, the exercise price will not be less than 110% of the
fair market value of a share of common stock on the date of grant. Incentive
stock options may not be granted to an optionee under the Plans if the aggregate
fair market value, as determined on the date of grant, of the stock with respect
to which incentive stock options are exercisable by such optionee in any
calendar year under the Plans, exceeds $100,000. Nonqualified options granted
under the Plans must have an exercise price of not less than the fair market
value of a share of common stock on the date of grant. Nonqualified options
granted under the Plans must have an exercise price of not less than 85% of the
fair market value of a share of common stock on the date of grant.
Under the
Plans, options may be exercised during a period of time fixed by the committee
administering the Plans (which could include the entire Board of Directors).
Options granted under the Plans must vest at a rate not less than 20% per year
over a consecutive five-year period. No option granted under any of the Plans
may be exercised more than 10 years after the date of grant. Incentive stock
options granted to an optionee who owns more than 10% of the voting securities
of the Company may not be exercised more than five years after the date of
grant.
A summary
of option and warrant activity under the Plans for the years ended December 31,
2009 and 2008 is presented below:
Weighted-
|
|||||||||||||||||||
Weighted-
|
Average
|
||||||||||||||||||
Average
|
Remaining
|
Aggregate
|
|||||||||||||||||
Exercise
|
Contractural
|
Intrinsic
|
|||||||||||||||||
Options
and Warrants
|
Shares
|
Price
|
Life
(Years)
|
Value
|
|||||||||||||||
Outstanding
at January 1, 2008
|
353,775 | $ | 3.15 | 2.4 | $ | - | |||||||||||||
Granted
|
- | ||||||||||||||||||
Exercised
|
- | ||||||||||||||||||
Forfeited
|
66,951 | $ | 3.16 | ||||||||||||||||
Outstanding
at December 31, 2008
|
286,824 | $ | 3.14 | 1.6 | $ | - | |||||||||||||
Exercisable
at December 31, 2008
|
277,458 | $ | 3.15 | 1.6 | |||||||||||||||
Vested
or expected to vest at December 31, 2008
|
283,648 | $ | 3.15 | 1.6 | |||||||||||||||
Granted
|
- | ||||||||||||||||||
Exercised
|
- | ||||||||||||||||||
Forfeited
|
153,524 | $ | 3.47 | ||||||||||||||||
Outstanding
at December 31, 2009
|
133,300 | $ | 2.77 | 0.8 | $ | - | |||||||||||||
Exercisable
at December 31, 2009
|
133,300 | $ | 2.77 | 0.8 | |||||||||||||||
Vested
or expected to vest at December 31, 2009
|
133,300 | $ | 2.77 | 0.8 |
Aggregate
intrinsic value excludes those options that are not “in-the-money.” Awards that
are expected to vest take into consideration estimated forfeitures for awards
not yet vested.
There
were no options exercised during the years ended December 31, 2009 and
2008. When options are exercised, the Company’s policy is to issue
new shares to satisfy share option exercises.
As of
December 31, 2009 and 2008, there were $0 and $15,513, respectively, of total
unrecognized compensation costs related to outstanding non-vested share-based
compensation arrangements, including warrants.
F-28
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table is a summary of the stock options and warrants as of December
31, 2009:
Range
of
Exercise
Prices
|
Stock
Options
and
Warrants
Outstanding
|
Stock
Options
and
Warrants
Exercisable
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted-
Average
Exercise
Price
of
Options
and
Warrants
Outstanding
|
Weighted-
Average
Exercise
Price
of
Options
and
Warrants
Exercisable
|
||||||||||||||
$ | 2.50–4.00 | 133,300 | 133,300 |
0.8
years
|
$ | 2.77 | $ | 2.77 |
The
Black-Scholes valuation model was developed for use in estimating the fair value
of traded options, which have no 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.
NOTE
15 – INCOME TAXES
The
components of the income tax provision for the years ended December 31, 2009 and
2008 were as follows:
2009
|
2008
|
|||||||||
Current
|
$ | 1,600 | $ | 800 | ||||||
Deferred
|
– | – | ||||||||
Total
|
$ | 1,600 | $ | 800 |
Income
tax expense (benefit) for the years ended December 31, 2009 and 2008 differed
from the amounts computed applying the federal statutory rate of 34% to pre-tax
income as follows:
2009
|
2008
|
||||||||
Computed
"expected" tax provision (benefit)
|
$ | 138,705 | $ | (1,449,516 | ) | ||||
Income
taxes resulting from expenses not deductible for tax
purposes
|
4,032 | 3,641 | |||||||
Other
|
- | 3,095 | |||||||
Change
in the valuation allowance for deferred tax assets net of return to
provision adjustment
|
(166,687 | ) | 1,691,164 | ||||||
State
and local income taxes, net of tax benefit
|
25,550 | (247,584 | ) | ||||||
Total
|
$ | 1,600 | $ | 800 |
F-29
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Significant
components of the Company’s deferred tax assets and liabilities for federal
income taxes at December 31, 2009 and 2008 consisted of the
following:
2009
|
2008
|
||||||||
Current
deferred tax assets
|
|||||||||
Allowance
for doubtful accounts
|
$ | - | $ | 451 | |||||
Allowance
for product returns
|
130,963 | 134,650 | |||||||
Allowance
for sales incentives
|
14,414 | 24,623 | |||||||
Accrued
compensation
|
22,563 | 29,697 | |||||||
Inventory
|
240,350 | 238,106 | |||||||
Deferred
revenues
|
- | 11,310 | |||||||
Other
|
136,623 | 122,251 | |||||||
Valuation
allowance
|
(544,913 | ) | (561,088 | ) | |||||
Net
current deferred tax assets
|
- | - | |||||||
Long-term
deferred tax assets
|
|||||||||
Net
operating loss carryforward
|
$ | 15,344,578 | $ | 15,232,228 | |||||
Amortization
of trademarks
|
1,446,275 | 1,721,755 | |||||||
State
taxes effect of deferred tax assets
|
(959,323 | ) | (971,941 | ) | |||||
Valuation
allowance
|
(15,831,530 | ) | (15,982,042 | ) | |||||
Net
long-term deferred tax assets
|
- | - | |||||||
Net
deferred tax assets
|
$ | - | $ | - |
The
following table reconciles the effective income tax rate indicated by the
consolidated statements of operations and the statutory federal income tax for
the years ending December 31, 2009 and 2008:
2009
|
2008
|
||||||||
Satutory
federal and state income tax rate
|
34.0% | 34.0% | |||||||
State
income taxes (net of federal tax benefit)
|
6.0% | 5.8% | |||||||
Valuation
allowance
|
(40.9)% | (39.7)% | |||||||
Other
|
1.5% | (0.1)% | |||||||
Effectivefederal
and state income tax rate
|
0.6% | 0.0% |
SFAS No.
109, Accounting for Income
Taxes, requires that a valuation allowance be established when it is more
likely than not that a company’s recorded net deferred tax asset will not be
realized. In determining whether a valuation allowance is required, a company
must take into account all positive and negative evidence with regard to the
utilization of a deferred tax asset. SFAS No. 109 further states that
it is difficult to conclude that a valuation allowance is not needed when there
is negative evidence such as cumulative losses in recent years. As of
December 31, 2009 and 2008, the valuation allowance for deferred tax assets
totaled approximately $16,376,000 and $16,543,000, respectively. For years ended
December 31, 2009 and 2008, the net change in the valuation allowance was
$166,687 (decrease) and $1,691,164 (increase), respectively.
F-30
I/OMAGIC
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company plans to continue to provide a full valuation allowance on future tax
benefits until it can sustain an appropriate level of profitability and until
such time, the Company does not expect to recognize any significant tax benefits
in its future results of operations.
As of
December 31, 2009, the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $38,050,000 and $27,234,000 that
expire through 2029 and 2019, respectively. The utilization of net operating
loss carryforwards may be limited under the provisions of Internal Revenue Code
Section 382 and similar state provisions due to a change in
control.
The
Company is required to file federal and state income tax returns in the United
States. The preparation of these tax returns requires the Company to
interpret the applicable tax laws and regulations in effect in such
jurisdictions, which could affect the amount of tax paid by the Company. The
Company, in consultation with its tax advisors, bases its tax returns on
interpretations that are believed to be reasonable under the circumstances. The
tax returns, however, are subject to routine reviews by the various federal and
state taxing authorities in the jurisdictions in which the Company files its
returns. As part of these reviews, a taxing authority may disagree with respect
to the tax positions taken by the Company (“uncertain tax positions”) and
therefore require the Company to pay additional taxes. The Company
prepares an accrual for uncertain tax positions as more definitive information
becomes available from taxing authorities, completion of tax audits, expiration
of statutes of limitation, or upon the occurrence of other events. With few
exceptions, the Company is no longer subject to United States federal, state or
local, or non-United States income tax examination by tax authorities for tax
years before 2001.
Prior to
January 1, 2007, the Company analyzed and determined that no accrual was
required for uncertain tax positions based upon SFAS No. 5, Accounting for Contingencies,
which requires the Company to accrue for the estimated additional amount of
taxes for the uncertain tax positions if it was probable the Company would be
required to pay such additional taxes. Effective January 1, 2007, the Company
adopted and implemented the provisions of FASB Interpretation No. (“FIN”)
48, Accounting for Uncertainty
in Income Taxes, which requires the Company to accrue for the estimated
additional amount of taxes for the uncertain tax positions if it is more likely
than not that the Company would be required to pay such additional taxes. As a
result of the implementation of FIN 48, the Company recognized no charge for
uncertain tax positions.
FIN 48
not only impacts the amount of the Company’s accrual for uncertain tax positions
but it also impacts the manner in which such accruals should be classified in
the Company’s financial statements. In connection with the implementation of FIN
48, and if an accrual is recorded, the Company will record the aggregate accrual
for uncertain tax positions as a component of current or non-current income tax
payable and the offsetting amounts as a component of the
Company’s net deferred tax assets and liabilities.
The
Company’s continuing practice is to recognize interest and/or penalties related
to income tax matters in income tax expense. As of December 31, 2009 and 2008,
the Company had no accrual for the payment of interest or
penalties.
NOTE
16 – RELATED PARTY TRANSACTIONS
During
the years ended December 31, 2009 and 2008, the Company made purchases from a
related party totaling $0 and $723,600. See “Note 11—Accounts Payable—Related
Party.”
F-31
SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS
Balance,
Beginning
of
Year
|
Additions
Charged
to
Operations
|
Deductions
from
Reserve
|
Balance,
End
of
Year
|
|||||||||||||
Allowance
for doubtful accounts
|
||||||||||||||||
December
31, 2009
|
$ | 1,053 | $ | - | $ | (1,053 | ) | $ | - | |||||||
December
31, 2008
|
$ | 146,128 | $ | 285,041 | $ | (430,116 | ) | $ | 1,053 | |||||||
Allowance
for product returns
|
||||||||||||||||
December
31, 2009
|
$ | 314,310 | $ | 454,573 | $ | (463,180 | ) | $ | 305,703 | |||||||
December
31, 2008
|
$ | 400,268 | $ | 403,843 | $ | (489,801 | ) | $ | 314,310 | |||||||
Reserves
for sales incentives
|
||||||||||||||||
December
31, 2009
|
$ | 498,750 | $ | 1,162,777 | $ | (1,339,783 | ) | $ | 321,744 | |||||||
December
31, 2008
|
$ | 758,481 | $ | 1,272,971 | $ | (1,532,702 | ) | $ | 498,750 | |||||||
Reserves
for obsolete inventory
|
||||||||||||||||
December
31, 2009
|
$ | 302,824 | $ | 201,938 | $ | (494,115 | ) | $ | 10,647 | |||||||
December
31, 2008
|
$ | 440,000 | $ | 1,437,834 | $ | (1,575,010 | ) | $ | 302,824 |
F-32
INDEX
TO EXHIBITS
Exhibit
Number
|
Description
|
||
3.1
|
Amended
and Restated Articles of Incorporation of I/OMagic Corporation filed with
the Secretary of State of Nevada on December 6, 2002
(6)
|
||
3.2
|
Amended
and Restated Bylaws of I/OMagic Corporation dated July 25, 2002
(1)
|
||
10.1
|
Employment
Agreement dated October 15, 2002 between I/OMagic Corporation and Tony
Shahbaz (#) (2)
|
||
10.2
|
I/OMagic
Corporation 2002 Stock Option Plan (#) (3)
|
||
10.3
|
I/OMagic
Corporation 2003 Stock Option Plan (#) (5)
|
||
10.4
|
Standard
Industrial/Commercial Single-Tenant Lease-Net dated July 1, 2003 between
Laro Properties, L.P. and I/OMagic Corporation (4)
|
||
10.5
|
Form
of Indemnification Agreement (7)
|
||
10.6
|
Sale
of Accounts and Security Agreement dated October 24, 2008 between I/OMagic
Corporation and Rexford Funding, LLC (8)
|
||
14.1
|
I/OMagic
Corporation Code of Business Conduct and Ethics dated March 15, 2004
(6)
|
||
14.2
|
I/OMagic
Corporation Code of Business Ethics for CEO and Senior Financial Officers
dated March 15, 2004 (6)
|
||
14.3
|
Charter
of the Audit Committee of the Board of Directors of I/OMagic Corporation
dated March 15, 2004 (6)
|
||
23.1
|
Consent
of Independent Registered Public Accounting Firm (*)
|
||
31.1
|
Certification
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (*)
|
||
31.2
|
Certification
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (*)
|
||
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.
C. Section 350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (*)
|
_______________
(*)
|
Filed
herewith.
|
(#)
|
Management
contract or compensatory plan, contract or arrangement required to be
filed as an exhibit.
|
(1)
|
Incorporated
by reference to the Registrant’s quarterly report on Form 10-Q for the
quarterly period ended June 30, 2002 (File No.
000-27267).
|
(2)
|
Incorporated
by reference to the Registrant’s quarterly report on Form 10-Q for the
quarterly period ended September 30, 2002 (File No.
000-27267).
|
(3)
|
Incorporated
by reference to Registrant’s definitive proxy statement for the annual
meeting of stockholders held November 4,
2002.
|
(4)
|
Incorporated
by reference to the Registrant’s quarterly report on Form 10-Q for the
quarterly period ended June 30, 2003 (File No.
000-27267).
|
(5)
|
Incorporated
by reference to the Registrant’s definitive proxy statement for the annual
meeting of stockholders held December 18,
2003.
|
(6)
|
Incorporated
by reference to the Registrant’s annual report on Form 10-K for the year
ended December 31, 2003 (File No.
000-27267).
|
(7)
|
Incorporated
by reference to the Registrant’s registration statement on Form S-1/A No.
1 filed by the Registrant with the Securities and Exchange Commission on
July 30, 2004 (Reg. No.
333-115208).
|
(8)
|
Incorporated
by reference to the Registrant’s current report on Form 8-K filed by the
Registrant with the Securities and Exchange Commission on November 4, 2008
(File No. 000-27267).
|
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 on March 18, 2010.
I/OMAGIC
CORPORATION
|
|||
|
By:
|
/s/ TONY SHAHBAZ | |
Tony
Shahbaz
|
|||
Chief
Executive Officer
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following person on behalf of the Registrant and in the
capacities and on the date indicated.
Signature
|
Title
|
Date
|
||
/s/ TONY
SHAHBAZ
Tony
Shahbaz
|
President
and Chief Executive Officer (principal executive officer), Acting Chief
Financial Officer (principal accounting and financial officer), Secretary
and Sole Director
|
March
18, 2010
|
EXHIBITS FILED WITH THIS REPORT
Exhibit
Number
|
Description
|
||
23.1
|
Consent
of Independent Registered Public Accounting Firm
|
||
31.1
|
Certification
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
||
31.2
|
Certification
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
||
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|