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EX-31.2 - CERTIFICATION - I/OMAGIC CORPiomagic_10q-ex3102.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 
FORM 10-Q
 
(Mark One)
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 2011
 
[_]
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
(State or other jurisdiction
of incorporation or organization)
33-0773180
(I.R.S. Employer
Identification No.)
   
4 Marconi, Irvine, California
(Address of principal executive offices)
92618
(Zip Code)
 
(949) 707-4800
(Registrant’s telephone number, including area code)
 
Not applicable.
(Former name, former address and former fiscal year, if changed since last report)
 
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 x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
 
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 Exchange Act).Yes ¨ No x
 
As of August 18, 2011, there were 4,540,292 shares of the issuer’s common stock issued and outstanding.
 
 


 
 

 

 
CAUTIONARY STATEMENT
 
All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, 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 set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2010, which could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. 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.
 
 
 

 

 
i

 

 
TABLE OF CONTENTS
 
PART I
FINANCIAL INFORMATION

   
Page
     
Item 1.
Financial Statements
1
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
25
     
Item 4.
Controls and Procedures
25

PART II
OTHER INFORMATION

Item 1.
Legal Proceedings
26
     
Item 1A.
Risk Factors
26
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
26
     
Item 3.
Defaults Upon Senior Securities
26
     
Item 4.
(Removed and Reserved)
26
     
Item 5.
Other Information
26
     
Item 6.
Exhibits
27
     
Signatures
 
28
     
Exhibits Filed with this Report
 



 
ii

 

PART I – FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
I/OMAGIC CORPORATION
CONSOLIDATED BALANCE SHEETS

   
June 30,
2011
   
December 31,
2010
 
ASSETS
 
(unaudited)
       
Current assets
           
Cash
  $ 150,918     $ 633,521  
Accounts receivable, net
    113,672       122,552  
Inventories, net
    775,871       1,073,716  
Prepaid and other current assets
    65,531       70,587  
Total current assets
    1,105,992       1,900,376  
Property and equipment, net
    66,564       88,605  
Other non-current assets
    32,292       28,532  
Total assets
  $ 1,204,848     $ 2,017,513  
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
Current liabilities
               
Accounts payable and other accrued expenses
  $ 323,578     $ 422,568  
Accounts payable – related party
    60,000       60,000  
Accrued mail-in rebates
    2,000       1,000  
Total current liabilities
    385,578       483,568  
Long-term liabilities
               
Accounts payable – related party
    4,103,553       4,133,553  
Sub-lease deposit
    -       9,703  
Total long-term liabilities
    4,103,553       4,143,256  
Total liabilities
    4,489,131       4,626,824  
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       31,858,651  
Accumulated deficit
    (35,147,475 )     (34,472,503 )
Total stockholders’ deficit
    (3,284,283 )     (2,609,311 )
Total liabilities and stockholders’ deficit
  $ 1,204,848     $ 2,017,513  



See accompanying notes to these unaudited consolidated financial statements.


 
1

 

I/OMAGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                                 
Net sales
  $ 792,280     $ 1,336,249     $ 1,777,793     $ 3,623,127  
Cost of sales
    620,425       978,511       1,300,926       2,613,705  
Gross profit
    171,855       357,738       476,867       1,009,422  
Operating expenses
                               
Selling, marketing and advertising
    95,479       95,273       186,932       225,418  
General and administrative
    404,910       432,489       940,600       926,042  
Depreciation and amortization
    11,799       13,050       23,616       26,133  
Total operating expenses
    512,188       540,812       1,151,148       1,177,593  
Loss from operations
    (340,333 )     (183,074 )     (674,281 )     (168,171 )
Other income (expense)
                               
Other income (expense)
    (12 )     293       109       (571 )
Total other income (expense)
    (12 )     293       109       (571 )
Loss before income taxes
    (340,345 )     (182,781 )     (674,172 )     (168,742 )
Provision for income taxes
                800       800  
Net loss
  $ (340,345 )   $ (182,781 )   $ (674,972 )   $ (169,542 )
Basic and diluted net loss per share
  $ (0.07 )   $ (0.04 )   $ (0.15 )   $ (0.04 )
Basic and diluted weighted-average shares outstanding
    4,540,292       4,540,292       4,540,292       4,540,292  



 
See accompanying notes to these unaudited consolidated financial statements.
 

 
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I/OMAGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
Six Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Cash Flows From Operating Activities:
           
Net loss
  $ (674,972 )   $ (169,542 )
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
               
Depreciation and amortization
    23,616       26,133  
Allowance for product returns
    20,815       (66,412 )
Reserve for sales incentives
    (22,011 )     3,118  
Accrued point-of-sale rebates
    (134,411 )     (13,907 )
Accrued market development funds, cooperative advertising costs and cross-dock fees
    (49,943 )     (29,401 )
Allowance for obsolete inventory
    (118,000 )     (2,509 )
Changes in assets and liabilities (net of dispositions and acquisitions):
               
Accounts receivable
    194,430       644,721  
Inventories
    415,845       248,387  
Prepaid and other current assets
    5,056       130,752  
Other non-current assets
    (3,760 )        
Accounts payable and other accrued expenses
    (98,990     (363,597 )
Accounts payable - related party
    (30,000 )     (124,700 )
Capital lease obligations
    -       (13,704 )
Deposit - sublease
    (9,703 )     -  
Accrued mail-in rebates
    1,000       (3,875 )
Net cash provided by (used in) operating activities
    (481,028 )     265,464  
Cash flows from investing activities
               
Equipment additions
    (1,575 )     -  
Net cash used in investing activities
    (1,575 )     -  
Net increase (decrease) in cash
    (482,603 )     265,464  
Cash at beginning of period
    633,521       445,675  
Cash at end of period
  $ 150,918     $ 711,139  
                 
Supplemental disclosures of cash flow information:
               
Income Taxes Paid
  $ 800       800  
 
See accompanying notes to these unaudited consolidated financial statements.

 
3

 

 
I/OMAGIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND BUSINESS
 
Nature of Business
 
I/OMagic Corporation, a Nevada corporation (“I/OMagic” or the “Company”), develops, manufactures through subcontractors or obtains from suppliers, and markets and sells data storage and other consumer electronics products. The Company sells its products in the United States to distributors and retailers (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 incurred a net loss of $674,972 for the six months ended June 30, 2011, as compared to a net loss of $169,542 for the six months ended June 30, 2010. Additionally, the Company experienced a net loss of $779,000 for the year ended December 31, 2010, as compared to net income of $407,000 for the year ended December 31, 2009. Prior to December 31, 2009, the Company had experienced net losses for the years ended December 31, 2008 and 2007, of $4,252,000 and $4,752,000, 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 June 30, 2011, the Company had cash of only $150,918. As of August 18, 2011, the Company had cash of only $192,000 and a credit facility limited to $1,500,000. As of those dates, the Company also had significant long-term liabilities.
 
Accordingly, the Company has limited liquidity and access to capital.  The Company has insufficient liquidity to fund its operations for the next twelve months or less. In addition, any of the following factors could result in insufficient capital to fund the Company’s operations for a period significantly shorter than twelve months:
 
·  
if the Company’s capital requirements or cash flow vary materially from its current rojections;
·  
if the Company is unable to timely collect its accounts receivable;
·  
if the Company is unable to sell-through inventory currently in its sales channels as nticipated;
·  
if the Company is unable to timely bring new successful products to market; or
·  
if other unforeseen circumstances occur.
 
The Company’s inability to fund its operations may require the Company to substantially curtail its operations and may require that the Company seek protection under the United States Bankruptcy Code.
 
These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern and the Company’s independent registered public accounting firm has issued a report expressing substantial doubt about the Company’s ability to continue as a going concern.
 
The Company’s plans for correcting these deficiencies include ongoing efforts to bring new products to market and explore other products with its customers, subcontract manufacturers and suppliers to sell through the Company’s 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 the Company’s sales channels.

 
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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
 
Basis of Presentation
 
The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2010, and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 4, 2011. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of adjustments of a normal recurring nature, necessary for a fair presentation of the Company’s financial position as of June 30, 2011, and its results of operations for the periods presented. These unaudited consolidated financial statements are not necessarily indicative of the results to be expected for the entire year.
 
The report of the Company’s independent registered public accounting firm dated March 4, 2011 contained in the Company’s financial statements as of and for the year ended December 31, 2010 includes a paragraph that explains that the Company has incurred significant recurring losses, has serious liquidity concerns and may require additional financing in the foreseeable future. The report concludes that these matters, among others, raise substantial doubt about the Company’s 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 the Company to raise additional financing necessary to grow or operate its business. The Company urges potential investors to review this report before making a decision to invest in I/OMagic.
 
Critical Accounting Policies and Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions.
 
Certain amounts from prior periods have been reclassified to conform with current period presentation.
 
NOTE 3 – FAIR VALUE MEASUREMENTS
 
The Company’s financial assets that are measured on a recurring basis at fair value as of June 30, 2011 and December 31, 2010 consisted only of cash in the amount of $150,918 and $633,521, respectively.
 
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.

 
5

 

 
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 June 30, 2011, no fair value measurements for assets or liabilities under Level 3 were recognized in the Company’s consolidated financial statements.
 
There were no changes in the Company’s valuation techniques during the six months ended June 30, 2011.
 
The Company is not exposed to changes in interest rates which could result in cash flow risks.
 
NOTE 4 – CONCENTRATION OF RISK
 
Product Concentration
 
During the six months ended June 30, 2011and 2010 the Company’s product offerings were predominantly optical data storage products accounting for approximately 83% and 96% of net sales, respectively.
 
The Company has experienced intense competition within the data storage product category during 2010 and through the second quarter of 2011. The Company believes it is unable to compete effectively in the market for data storage products. The Company expects sales of its data storage products will be significantly lower in 2011 as compared to 2010, and it ultimately may cease selling data storage products.
 
As a consequence, the Company is undergoing a significant transition away from data storage products and toward new consumer electronics products, initially and predominantly Bluetooth devices and other non-electronic accessories for slates, tablets and smart phones, as well as High-Definition Multimedia Interface (HDMI) devices, components and accessories. The Company has thus far been unable to develop new products that have been accepted in the marketplace.
 
Accounts Receivable
 
As of June 30, 2011, the Company had two retailers and two distributors that collectively represented 90.8% of gross accounts receivable. At that date, the amounts due from the two retailers and two distributors were 31.3%, 25.6%, 21.9% and 12.0% of gross accounts receivable, respectively.
 
As of June 30, 2010, the Company had a retailer and two distributors that collectively represented 89.9% of gross accounts receivable. At that date, the amounts due from the retailer and two distributors were 44.4%, 35.5% and 10.0% of gross accounts receivable, respectively.
 
As a result of the substantial amount and concentration of the Company’s accounts receivable, if any of its major customers fails to timely pay the Company amounts owed, the Company could suffer a significant decline in cash flow and liquidity which would negatively affect the Company’s ability to make payments under its credit facility with Bay View Funding and which, in turn, could adversely affect the Company’s ability to borrow funds to pay its liabilities, purchase inventory and sustain its operations.
 
Retailers and Distributors
 
During the six months ended June 30, 2011, the Company’s most significant retailer and distributor were Staples and Tech Data. Collectively, this retailer and distributor accounted for 76.4% of the Company’s net sales in the first six months of 2011. During the six months ended June 30, 2010, the Company’s most significant retailer and distributors were Staples, Tech Data and D&H Distributing. Collectively, this retailer and these distributors accounted for 92.1% of the Company’s net sales in the first six months of 2010.

 
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Related Parties
 
The Company did not purchase inventory from a related party during the six months ended June 30, 2011. As of June 30, 2011 and December 31, 2010, there were $4,163,553 and $4,193,553, respectively, in trade payables outstanding to BTC USA, an affiliate of Behavior Tech Computer Corp., which is a stockholder of the Company.
 
NOTE 5 – ACCOUNTS RECEIVABLE
 
Accounts receivable as of June 30, 2011 and December 31, 2010 consisted of the following:

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
       
Accounts receivable
  $ 355,002     $ 549,432  
Less:   Allowance for product returns     (115,638 )     (94,823 )
Reserves for sales incentives
    (13,629 )     (35,640 )
Accrued point-of-sale rebates
    (97,188 )     (231,599 )
Accrued market development funds, cooperative advertising costs and cross-dock fees
    (14,875 )     (64,818 )
Total
  $ 113,672     $ 122,552  

NOTE 6 – INVENTORIES
 
Inventories as of June 30, 2011 and December 31, 2010 consisted of the following:

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
       
Component parts
  $ 26,207     $ 29,442  
Finished goods—warehouse
    250,338       363,375  
Finished goods—consigned
    558,326       857,899  
      834,871       1,250,716  
Less:  Allowance for obsolete and slow-moving inventory
    (59,000 )     (177,000 )
Total
  $ 775,871     $ 1,073,716  

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.
 
For the six months ended June 30, 2011, the Company did not realize any lower-of-cost-or-market adjustments to its consigned inventories, but reserved $59,000 for obsolete and slow-moving inventory, all of which were included in cost of sales. For the year ended December 31, 2010, the Company realized $129,000 of lower-of-cost-or-market adjustments to its consigned inventories, $4,000 of lower-of-cost-or-market adjustments of inventory on hand and reserved $44,000 for obsolete and slow-moving inventory, all of which were included in cost of sales.
 
The Company’s inventories are made up of component parts and finished goods and are valued at the lower of cost or market using the weighted-average cost method, which approximates the first-in, first-out method. Average cost includes the direct purchase price of inventory, net of vendor allowances and cash discounts, and allocated overhead costs associated with the Company’s warehouse and distribution center.

 
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NOTE 7 – PROPERTY AND EQUIPMENT
 
Property and equipment as of June 30, 2011 and December 31, 2010 consisted of the following:

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
       
Computer equipment and software
  $ 278,738     $ 277,163  
Warehouse equipment
    112,343       112,343  
Office furniture and equipment
    191,338       191,338  
Vehicles
    68,035       68,035  
Leasehold improvements
    104,521       104,521  
      754,975       753,400  
Less: Accumulated depreciation
    (688,411 )     (664,795 )
Total
  $ 66,564     $ 88,605  
 
For the six months ended June 30, 2011 and 2010, depreciation and amortization expense was $23,616 and $26,133, respectively.
 
NOTE 8 LINE OF CREDIT
 
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. The Agreement 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 $1,500,000. 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.
 
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 had an initial term through April 30, 2009 with automatic six month extensions unless either party terminated the Agreement at least 60 but not more than 90 days prior to the end of the initial term or any renewal term. In August 2009, the Company modified the Agreement to include a month-to-month term. At all times Lender has the right to terminate the Agreement upon 30 days prior notice.

 
8

 

 
If the Company terminates the Agreement prior to the end of 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 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 9 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
Accounts payable and accrued expenses as of June 30, 2011 and December 31, 2010 consisted of the following:

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
       
Trade accounts payable
  $ 217,317     $ 283,873  
Accrued compensation and related benefits
    91,430       107,945  
Other
    14,831       30,750  
Total
  $ 323,578     $ 422,568  
 
NOTE 10 – 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 $10,000,000 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 $10,000,000 with payment terms of net 60 days, without interest. The agreement may 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, who is the Chief Executive Officer of Behavior Tech Computer Corp., is a former director of the Company. The Company made no purchases under this arrangement during the six months ended June 30, 2011 and 2010. As of June 30, 2011 and December 31, 2010, there were $4,163,000 and $4,194,000, respectively, in trade payables outstanding under this arrangement. On July 20, 2010, the Company agreed to make a one-time payment of $50,000 and monthly payments each in the amount of $5,000 over the next 23 months to BTC USA.  In accordance with the repayment schedule, the Company classified the payments due within one year as a current liability and the balance due in excess of one year as a long-term liability on its balance sheet. The Company and BTC USA are to reach agreement on or before September 1, 2011 on repayment of the balance owed.
 
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, its trade payables owed to BTC USA are repaid. Even if the Company is able to repay its trade payables owed 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.

 
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NOTE 11 – COMMITMENTS AND CONTINGENCIES
 
Operating Lease Commitments
 
The Company leases its facilities and certain equipment under non-cancelable operating lease agreements expiring through December 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 is to increase at the rate of three percent per annum.
 
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 was required to pay its proportionate share of the monthly operating expenses related to the facility. The sub-tenant provided a notice of its intent to terminate the sub-lease in August 2010, but continued to sub-lease the space on a month-to-month basis on the same terms and conditions until May 31, 2011.
 
Capital Lease Obligations
 
The Company currently has no capital lease obligations.
 
Financial Agreements
 
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. The Sale of Accounts and Security Agreement provides for an accounts receivable-based credit facility. As of June 30, 2011, no amounts were outstanding under the facility.
 
Service Agreements
 
The Company periodically enters into various agreements for the provision of services from third parties 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. These expenses are included in operating expenses in the accompanying consolidated statements of operations.
 
Legal Matters
 
In addition to the matter described below, 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, other than the matter described below, will have a material effect on the Company’s financial condition, results of operations or cash flows.
 
On November 10, 2008, Circuit City Stores, Inc. and related parties (collectively, “Circuit City”), filed voluntary petitions in the United Stated Bankruptcy Court for the Eastern District of Virginia, Richmond Division (the “Court”) for relief under chapter 11 of the United States Bankruptcy Code.

 
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On December 5, 2008, the Company filed a claim against Circuit City seeking priority under Bankruptcy Code section 503(b)(9) in respect of $61,000 based on, among other things, various over deductions for returned merchandise, freight charges and vendor deductions totaling approximately $136,000. The Court reclassified the Company’s claim in its entirety as a general unsecured, non-priority claim.
 
The Court confirmed Circuit City’s bankruptcy plan on September 10, 2010. The plan became effective on November 1, 2010.
 
On November 8, 2010, Alfred H. Siegel, Trustee of the Circuit City Stores, Inc. Liquidating Trust, filed with the Court a Complaint to Recover Amounts Owing to the Estate and Objection to Claim against the Company. The Trustee claims that the Company owes at least $75,000 for chargebacks and returns in connection with goods transacted between the Company and Circuit City and alleges breach of contract and unjust enrichment/quasi contract. The Trustee also alleges other customary causes of action and objects to the claim the Company filed against Circuit City on December 5, 2008. The Trustee also filed an action, which has been approved by the Court, to compel mediation.
 
On January 21, 2011, the Company filed an answer to Circuit City’s claim and reasserted the Company’s claim for recovery of various over deductions for returned merchandise, freight charges and vendor deductions which would offset the claim by the Trustee in its entirety. The Company intends to vigorously defend against the Trustee’s claims. The Company is unable at this time to estimate the likely amount of any recovery or obligation in respect of the claims. However, given the Company’s precarious financial condition, in the event the Trustee prevails in its claim and the Company is required to pay the amount allegedly owed, the Company will suffer a material adverse effect on its financial condition and 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. See “Note 11—Commitments and Contingencies” to the Company’s consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2010.
 
NOTE 12 – 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 June 30, 2011 and December 31, 2010, no shares of Series A or Series B preferred stock were outstanding.

 
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NOTE 13 – STOCK-BASED COMPENSATION
 
Common Stock Issued in Connection with the Exercise of Options
 
During the six months ended June 30, 2011 and 2010, the Company did not issue any shares of common stock in connection with the exercise of any employee 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.
 
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.
 
The following table is a summary of the stock options and warrants as of June 30, 2011:

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
 
  $ 3.50       9,275       9,275    
2.75 years
      $ 3.50       $ 3.50  
 
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.

 
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There were no options granted during the six months ended June 30, 2011 and 2010. No cash was received from the exercise of stock options for the six months ended June 30, 2011 and 2010. As of June 30, 2011, there were no unrecognized compensation costs related to non-vested share-based compensation arrangements.
 
There was no share-based compensation expense for the six months ended June 30, 2011 and 2010. There was no tax deduction for share-based compensation expense during those periods. When options are exercised, the Company’s policy is to issue new shares to satisfy share option exercises.
 
The Company expenses share-based compensation in cost of sales or operating expenses, depending on the job function of the employee.
 
NOTE 14 – INCOME TAXES
 
The Company establishes a valuation allowance when it is more likely than not that the Company’s recorded net deferred tax asset will not be realized. In determining whether a valuation allowance is required, the Company must take into account all positive and negative evidence with regard to the utilization of a deferred tax asset. As of June 30, 2011 and December 31, 2010, the valuation allowance for deferred tax assets totaled approximately $14,061,000 and $13,212,000, respectively. For the six months ended June 30, 2011, the net change in the valuation allowance was $849,000 (increase).
 
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 would not expect to recognize any significant tax benefits in its future results of operations.
 
As of June 30, 2011, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $34,590,000 and $26,026,000, respectively, which expire through 2030 and 2020, 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 ownership.
 
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 limitations, 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 2006.
 
The Company recognizes liabilities for uncertain tax positions based on a two-step process. First, the tax position is evaluated for recognition by determining if it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to be recognized in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. With the exception of certain unrecognized tax benefits that are directly associated with the tax position taken, unrecognized tax benefits are presented gross in the Company’s balance sheet. Interest and penalties related to unrecognized tax benefits are recognized as liabilities recorded for uncertain tax positions and are recorded in the provision for income taxes. The Company had no uncertain tax positions that would be required to be recorded for the six months ended June 30, 2011 and 2010.

 
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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 June 30, 2011 and December 31, 2010, the Company had no accrual for the payment of interest or penalties.
 
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.
 
NOTE 15 – SEGMENT INFORMATION
 
The Company currently operates in one business segment, consumer electronics. All fixed assets are located at the Company’s headquarters in the United States. All sales for the six months ended June 30, 2011 were in the United States.
 
NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS
 
In March 2010, the Financial Accounting Standards Board (“FASB”) ratified the Emerging Issues Task Force final consensus on Issue No. 08-9, Milestone Method of Revenue Recognition. The guidance in this consensus allows the milestone method as an acceptable revenue recognition methodology when an arrangement includes substantive milestones. The guidance provides a definition of a substantive milestone and should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting. The scope of this consensus is limited to the transactions involving milestones relating to research and development deliverables. The guidance includes enhanced disclosure requirements about each arrangement, individual milestones and related contingent consideration, information about substantive milestones and factors considered in the determination. The consensus is effective prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010. Early application and retrospective application are permitted. The Company is currently evaluating this new consensus.
 
In February 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09, Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements, that amends Accounting Standards Codification (“ASC”) Subtopic 855-10, Subsequent Events – Overall. ASU No. 2010-09 requires an SEC filer to evaluate subsequent events through the date that the financial statements are issued but removed the requirement to disclose this date in the notes to the entity’s financial statements. The amendments are effective upon issuance of the final update and accordingly, the Company has adopted the provisions of ASU No. 2010-09. The adoption of these provisions did not have a material impact on the Company’s consolidated financial statements.
 
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820) — Improving Disclosures About Fair Value Measurements. The ASU requires new disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The new disclosures and clarifications of existing disclosures are effective for the Company’s third quarter of fiscal year 2010, except for the disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which are effective for the Company’s first quarter of fiscal year 2012. Other than requiring additional disclosures, the adoption of this new guidance will not have a material impact on the Company’s consolidated results of operations and financial position.

 
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In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC Topic 605) - Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies the fair value requirements of ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements by allowing the use of the “best estimate of selling price” in addition to vendor-specific objective evidence (“VSOE”) and verifiable objective evidence (now referred to as third-party evidence, or “TPE”) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. This update requires expanded qualitative and quantitative disclosures and is effective for the Company’s first quarter of fiscal year 2011. However, early adoption is allowed. The Company is currently evaluating the impact of adopting this update on its consolidated results of operations and financial position.
 
In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements. This ASU changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance will include factors to help companies determine what software elements are considered “essential to the functionality.” The amendments will now subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. The Company is currently evaluating this new ASU.
 
NOTE 17 – INCOME (LOSS) PER COMMON SHARE
 
The Company computes basic income (loss) per common share using net income (loss) and the weighted-average number of common shares outstanding during the period. Diluted income (loss) per common shares is computed using net income (loss) and the weighted-average number of common shares and potentially dilutive common shares outstanding during the period.
 
The following table sets forth the changes to the computation of basic and diluted (loss) per share for the three and six months ended June 30, 2011 and 2010:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
                                 
Net income (loss) available to shareholders
  $ (340,345 )   $ (182,781 )   $ (674,972 )   $ (169,542 )
Basic income (loss) per share:
                               
Basic weighted average shares outstanding
    4,540,292       4,540,292       4,540,292       4,540,292  
Basic income (loss) per share
  $ (0.07 )   $ (0.04 )   $ (0.15 )   $ (0.04 )
Diluted income (loss) per share:
                               
Basic weighted average shares outstanding
    4,540,292       4,540,292       4,540,292       4,540,292  
Effective of dilutive stock options*
    -       -       -       -  
Diluted weighted average shares outstanding
    4,540,292       4,540,292       4,540,292       4,540,292  
Diluted income (loss) per share
  $ (0.07 )   $ (0.04 )   $ (0.15 )   $ (0.04 )
 

*           Diluted income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Options with an exercise price in excess of the average market value of the Company’s common stock during the period have been excluded from the calculation as their effect would be anti-dilutive. Additionally, potentially dilutive securities are excluded from the computation of income (loss) per share in periods in which a net loss is reported as their effect would be anti-dilutive. Thus, both basic and diluted weighted-average shares outstanding are the same in all periods presented.
 
NOTE 18 – SUBSEQUENT EVENTS
 
The Company performed an evaluation of subsequent events through the date of filing this Quarterly Report on Form 10-Q and has determined that there are no subsequent events that require disclosure.
 
 
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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with our unaudited consolidated financial statements for the three and six months ended June 30, 2011 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 consumer electronics 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 the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2010 and elsewhere in this report.
 
Overview
 
We sell data storage and other consumer electronics products.  We sell our products through computer, consumer electronics and office supply superstores, wholesale clubs, distributors, and other major North American retailers.  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 network of retailers enables us to offer products to consumers across North America, including every major metropolitan market in the United States.  During the first six months of 2011 and all of 2010, all of our net sales were generated within the United States.
 
We market our products primarily under our I/OMagic® brand name, but from time to time, we also market products under our Digital Research Technologies® and Hi-Val® brand names.  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 our products.  We subcontract the manufacturing of the majority of our products or source our products from suppliers in Asia, predominantly from China and Taiwan, which is intended to allow 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.
 
Liquidity Overview
 
As of August 18, 2011, we had cash of only $192,000 and a credit facility limited to $1,500,000.  We also have significant long-term liabilities.  Accordingly, we have limited liquidity and access to capital.  We have insufficient liquidity to fund our operations for the next twelve months or less.  In addition, any of the following factors could result in insufficient capital to fund our operations for a period significantly shorter than twelve months:
 
·  
if our capital requirements or cash flow vary materially from our current projections;
·  
if we are unable to timely collect our accounts receivable;
·  
if we are unable to sell-through inventory currently in our sales channels as anticipated;
·  
if we are unable to timely bring new successful products to market; or
·  
if other unforeseen circumstances occur.
 
Inability to fund our operations may require us to substantially curtail our operations and may require that we seek protection under the United States Bankruptcy Code, which will likely result in a complete loss of any investment in shares of our common stock.  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.  See “—Liquidity and Capital Resources.”

 
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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.
 
Performance Overview
 
During the six months ended June 30, 2011and 2010 our product offerings were predominantly optical data storage products.  Our optical data storage products included recordable compact disc, or CD, drives and recordable digital video or versatile disc, or DVD, drives.  Our CD and DVD drives were primarily for use with desktop computers, notebooks, sub-notebooks and netbooks.  Our optical data storage products accounted for approximately 82% and 96% of our net sales during the six months ended June 30, 2011 and 2010, respectively.
 
During the six months ended June 30, 2011 and 2010, we also sold external magnetic data storage enclosures. Our magnetic data storage enclosures accounted for approximately 13% and 4% of our net sales for the six months ended June 30, 2011 and 2010, respectively.  During the six months ended June 30, 2011, we also provided technical rework services to an unrelated party which accounted for approximately 4% of our net sales.  We also sold other consumer electronics products, which accounted for approximately 1% of our net sales during the six months ended June 30, 2011 and 2010.
 
During the six months ended June 30, 2011, our most significant retailer and distributor were Staples and Tech Data.  Collectively, this retailer and distributor accounted for 76%, or 65% and 11%, respectively, of our net sales for the six months ended June 30, 2011.  During the first six months of 2010, our most significant retailer and distributors were Staples, Tech Data and D&H Distributing. Collectively, this retailer and these distributors accounted for 92% of our net sales for the first six months of 2010, or 64%, 15% and 13%, respectively.
 
We continued to experience intense competition within the data storage product category during the six months ended June 30, 2011.  We believe that we are unable to compete effectively in the market for data storage products.  We expect sales of our data storage products will be significantly lower in 2011 as compared to 2010, and we ultimately may cease selling data storage products.
 
As a consequence, we are presently undergoing a significant transition away from data storage products and toward new consumer electronics products, initially and predominantly Bluetooth devices and other non-electronic accessories for slates, tablets and smart phones, as well as High-Definition Multimedia Interface, or HDMI, devices, components and accessories.  We have been unable, however, in the six months ended June 30, 2011 to develop new products that have been accepted in the marketplace.

 
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Critical Accounting Policies and Estimates
 
The preparation of our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, requires us to make judgments and estimates that may have a significant impact upon the portrayal of our financial condition and results of operations.  We believe that of our significant accounting policies, the following require estimates and assumptions that require complex, subjective judgments by management that can materially impact the portrayal of our financial condition and results of operations: going concern assumption, revenue recognition; product returns; vendor consideration received; accounts receivable and allowance for doubtful accounts; sales incentives; market development funds and cooperative advertising costs, rebate promotion costs and slotting fees; inventory obsolescence allowance; lower-of-cost-or-market reserve; litigation and other contingencies; and income taxes.  These significant accounting policies are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2010.
 
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.
 
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010 (Unaudited)
 
   
Three Months Ended
June 30,
   
Dollar
 Variance
Favorable
   
Percentage
Variance
Favorable
   
Results as a Percentage of Net Sales
 
   
2011
   
2010
    (Unfavorable)     (Unfavorable)    
2011
   
2010
 
   
(in thousands)
                   
Net sales
  $ 792     $ 1,336     $ (544 )     (40.7% )     100.0%       100.0%  
Cost of sales
    620       978       358       36.6%       78.3%       73.2%  
Gross profit
    172       358       (186 )     (51.9% )     21.7%       26.8%  
Selling, marketing and advertising expenses
    95       95             0.0%       12.0%       7.1%  
General and administrative expenses
    405       433       28       (6.5% )     51.1%       32.4%  
Depreciation and amortization
    12       13       1       7.7%       1.5%       1.0%  
Operating loss
    (340 )     (183 )     (157 )     (85.8% )     42.9%       13.7%  
Other income (expense)
                      0.0%       —%       —%  
Loss from operations before provision for income taxes
    (340 )     (183 )     (157 )     (85.8% )     42.9%       13.7%  
Net loss
  $ (340 )   $ (183 )   $ (157 )     (85.8% )     42.9%       13.7%  
 
 
 
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Net Sales.  Net sales decreased by $544,000, or 41%, to $792,000 in the second quarter of 2011 as compared to $1,336,000 in the second quarter of 2010.  The decrease in our net sales was primarily caused by a $674,000, or 50%, decrease in sales of our optical data storage products due to intense competition within the data storage product category, which was partially offset by an increase of $107,000, or 196%, in sales of our data storage enclosures and an increase of $23,000 in our service revenues.  Sales of our optical data storage products totaled $606,000, or 76% of our net sales for the second quarter of 2011, as compared to $1,280,000, or 95% of our net sales for the second quarter of 2010. Sales of our data storage enclosures totaled $163,000, or 20% of our net sales for the second quarter of 2011, as compared to $56,000, or 4% of our net sales for the second quarter of 2010.  Service revenues totaled $23,000, or 3% of our net sales in the second quarter of 2011.  We had no sales of our other consumer electronics products in the first six months of 2011 as compared to approximately $1,000, or less than 1% of our net sales in the second quarter of 2010.
 
The average unit net sales price of our optical data storage products for the second quarter of 2011 decreased by 28% to $40.19 compared to $55.49 for the second quarter of 2010.  We sold approximately 15,000 optical data storage units in the second quarter of 2011 as compared to approximately 23,000 units in the second quarter of 2010, representing a decrease of approximately 35% as a result of intense competition within the optical data storage product category.
 
Our overall product return rate was 16.6% in the second quarter of 2011 compared to 11.3% in the second quarter of 2010.  The increase in our overall product return rate resulted from an increase in returns of our optical data storage products during the second quarter of 2011 as compared to the second quarter of 2010 as a result of an exchange of customer inventory due to an upgrade in technology.
 
Our sales incentives, point-of-sale rebates, market development funds, cooperative advertising costs and cross-dock fees, rebate promotion costs and slotting fees, collectively as a percentage of gross sales, decreased primarily as result of a substantial reduction and recapture of our point-of-sale rebate reserves equal to approximately 4% of our gross sales, all of which were applied against gross sales, in the second quarter of 2011, as compared to an expense of 6% of our gross sales in the second quarter of 2010.  The decrease in our point-of-sale rebate reserves resulted primarily from the significant decrease in net sales and the related methodology of calculating future expense reserves.  We believe that our overall strategy for stimulating sales through sales incentives has not been effective and we are reviewing our promotions strategy to increase sales.
 
Gross Profit.  Gross profit decreased by $186,000, or 52%, to $172,000 in the second quarter of 2011 as compared to gross profit of $358,000 in the second quarter of 2010.  The decrease in gross profit primarily resulted from decreased net sales and decreases in the operating margins on our optical data storage products due to lower average unit net sales prices and increases in material costs which were partially offset by a substantial reduction and recapture of our point-of-sale rebate reserves.  Our gross profit margin as a percentage of net sales decreased to 22% in the second quarter of 2011 as compared 27% in the second quarter of 2010 as a result of lower average unit net sales prices and increases in material costs which were partially offset by substantial reduction and recapture of our point-of-sale rebate reserves.
 
Selling, Marketing and Advertising Expenses.  Selling, marketing and advertising expenses remained the same for the second quarters of both 2011 and 2010, totaling $95,000. However, sales expenses increased in the second quarter of 2011 by $5,000 which were offset by a decrease of $5,000 in outside commissions related to lower sales as compared to the second quarter of 2010.
 
General and Administrative Expenses.  General and administrative expenses decreased by $28,000, or 7%, to $405,000 in the second quarter of 2011 as compared to $433,000 in the second quarter of 2010.  This increase was primarily due to increases of $32,000 in personnel costs, $6,000 in rent, $5,000 in outside services costs, $4,000 in bank charges, $2,000 in system support expenses and $2,000 in insurance costs, all of which were partially offset by decreases of $9,000 in product design expenses, $4,000 in finance charges, $4,000 in utilities costs, $3,000 in travel and entertainment expenses, $1,000 in legal fees, $1,000 in supplies expenses and $1,000 in miscellaneous expenses.

 
19

 

 
Depreciation and Amortization.  Depreciation and amortization decreased in the second quarter of 2011 as compared to the second quarter of 2010 as a result of some assets becoming fully depreciated from the previous period.
 
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010 (Unaudited)
 
     
Six Months Ended
June 30,
      Dollar Variance Favorable       Percentage Variance Favorable      
Results as a Percentage of
Net Sales
 
     
2011
     
2010
      (Unfavorable)       (Unfavorable)      
2011
     
2010
 
     
(in thousands)
                         
Net sales
 
$
1,778
   
$
3,623
   
$
(1,845
)
   
(50.9%
)
   
100.0%
 
   
100.0%
 
Cost of sales
   
1,301
     
2,614
     
1,313
     
50.2%
 
   
73.2%
 
   
72.2%
 
Gross profit
   
477
     
1,009
     
(532
)
   
(52.7%
)
   
26.8%
 
   
27.8%
 
Selling, marketing and advertising expenses
   
187
     
225
     
38
     
16.9%
 
   
10.5%
 
   
6.2%
 
General and administrative expenses
   
940
     
926
     
(14
)
   
(1.5%
)
   
52.9%
 
   
25.6%
 
Depreciation and amortization
   
24
     
26
     
2
     
7.7%
 
   
1.3%
 
   
0.7%
 
Operating loss
   
(674
)
   
(168
)
   
(506
)
   
(301.2%
)
   
37.9%
 
   
4.6%
 
Other income
   
     
     
     
—%
 
   
—%
 
   
—%
 
Loss from operations before income taxes
   
(674
)
   
(168
)
   
(506
)
   
(301.2%
)
   
37.9%
 
   
4.6%
 
Income tax provision
   
1
     
1
     
     
—%
 
   
—%
 
   
—%
 
Net loss
 
$
(675
)
 
$
(169
)
 
$
(506
)
   
(299.4%
)
   
38.0%
 
   
4.7%
 
 
Net Sales.  Net sales decreased by $1,845,000, or 51%, to $1,778,000 in the first six months of 2011 as compared to $3,623,000 in the first six months of 2010. The decrease in our net sales was primarily caused by a decrease of $1,989,000, or 55%, in sales of our optical data storage products and a decrease of $17,000, or 100%, of our magnetic data storage products, which have been discontinued, which were partially offset by increases of $83,000, or 55%, in sales of our data storage enclosures and an increase of $78,000 in our service revenues.  Sales of our optical data storage products totaled $1,480,000, or 83% of our net sales for the first six months of 2011 as compared to $3,469,000, or 96% of our net sales in the first six months of 2010. Sales of our data storage enclosures totaled $233,000, or 13% of our net sales in the first six months of 2011 as compared to $150,000, or 4% of our net sales for the first six months of 2010. Service revenues totaled $78,320, or 4% of our net sales in the first six months of 2011.  Sales of our other consumer electronics products decreased by $1,000, or 100%, for the first six months of 2011 as compared to the same period in 2010.
 
 The average unit net sales price of our optical drives for the first six months of 2011 decreased by 25% to $47.36 compared to $62.99 for the first six months of 2010.  We sold approximately 31,000 optical data storage units in the first six months of 2011 as compared to approximately 55,000 units in the first six months of 2010, representing a decrease of approximately 44% as a result of intense competition within the optical data storage product category.

 
20

 

 
Our overall product return rate increased to 15% of our gross sales in the first six months of 2011, as a result of an increase in returns of our optical data storage products during the second quarter of 2011 from an exchange of customer inventory due to an upgrade in technology, as compared to 10% of our gross sales in the first six months of 2010. Our sales incentives, point-of-sale rebates, market development funds, cooperative advertising costs and cross-dock fees, rebate promotion costs and slotting fees, collectively as a percentage of gross sales, decreased primarily as result of a substantial reduction and recapture of our point-of-sale rebate reserves equal to approximately 5% of our gross sales, all of which were applied against gross sales, for the first six months of 2011, as compared to an expense of 9% of our gross sales for the first six months of 2010.  The decrease in our point-of-sale rebate reserves resulted primarily from the significant decrease in net sales and the related methodology of calculating future expense reserves.  Additionally, we believe that our overall strategy for stimulating sales through sales incentives has not been effective and we are reviewing our promotions strategy to increase sales.
 
Gross Profit. Gross profit decreased by $532,000, or 53%, to $477,000 in the first six months of 2011 as compared to gross profit of $1,009,000 in the first six months of 2010. The decrease in gross profit primarily resulted from lower sales and decreased operating margins on our optical data storage products. Our gross profit margin as a percentage of net sales decreased to 27% in the first six months of 2011 as compared 28% in the first six months of 2010 as a result of lower average unit net sales prices and increases in material costs which were partially offset by substantial reduction and recapture of our point-of-sale rebate reserves.
 
Selling, Marketing and Advertising Expenses. Selling, marketing and advertising expenses decreased by $38,000, or 17%, to $187,000 in the first six months of 2011 as compared to $225,000 in the first six months of 2010. This decrease was primarily due to decreases of $29,000 in shipping and handling costs related to lower sales volumes, $23,000 in outside commissions and $1,000 in trade show expenses, all of which were partially offset by increases of $11,000 in sales expenses, $3,000 in personnel costs, and $1,000 in supplies.
 
General and Administrative Expenses. General and administrative expenses increased by $14,000, or 2%, to $940,000 in the first six months of 2011 as compared to $926,000 in the first six months of 2010. This increase was primarily due to increases of $20,000 in legal fees, $18,000 in product design expenses, $12,000 in travel and entertainment expenses, $8,000 in outside services, $3,000 in financial relations expenses and $3,000 in supplies, all of which were partially offset by decreases of $14,000 in personnel costs, $14,000 in facilities costs, $10,000 in bank charges, $5,000 in insurance costs, $5,000 in system support, $1,000 in audit fees and $1,000 in finance charges,
 
Depreciation and Amortization. Depreciation and amortization expense decreased in the first six months of 2011 as compared to the first six months of 2010 as a result of some assets becoming fully depreciated during the first six months of 2011.
 
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 June 30, 2011, we had working capital of $720,000, an accumulated deficit of $35,147,000, cash of $151,000 and net accounts receivable of $114,000.  This compares to working capital of $1,417,000, an accumulated deficit of $34,473,000, cash of $634,000 and net accounts receivable of $123,000 as of December 31, 2010.

 
21

 

 
As of August 18, 2011, we had cash of only $192,000 and a credit facility limited to $1,500,000.  We also have significant long-term liabilities.  Accordingly, we have limited liquidity and access to capital.  We have insufficient liquidity to fund our operations for the next twelve months or less.  In addition, any of the following factors could result in insufficient capital to fund our operations for a period significantly shorter than twelve months:
 
·  
if our capital requirements or cash flow vary materially from our current projections;
·  
if we are unable to timely collect our accounts receivable;
·  
if we are unable to sell-through inventory currently in our sales channels as anticipated;
·  
if we are unable to timely bring new successful products to market; or
·  
if other unforeseen circumstances occur.
 
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.  Inability to fund our operations may require us to substantially curtail our operations and may require that we seek protection under the United States Bankruptcy Code, which will likely result in a complete loss of any investment in shares of our common stock.
 
Our consolidated financial statements as of June 30, 2011 and for the year ended December 31, 2010 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 limited working capital and substantial 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.
 
Cash Flows
 
The following table summarizes our cash flows for the periods presented:
       
   
For the Six Months Ended
 
   
June 30,
 
   
2011
   
2010
 
Net cash provided by (used in):
           
Operating activities
  $ (481,029 )   $ 265,464  
Investing activities
    (1,575 )      
Financing activities
           
Net increase (decrease) in cash
  $ (482,604 )   $ 265,464  
 
Cash provided by (used in) operating activities.  The increase in cash used in our operating activities for the six months ended June 30, 2011 reflects the weakening in our business during 2011 as a result of the increased competition in the marketplace for optical data storage products, our primary product category.

 
22

 

 
This weakening continued through the first six months of 2011. Our business during the first six months of 2011 was characterized in large part by further substantial declines in sales of all of our optical data storage products. In addition, at the end of 2010 and during the first six months of 2011, we were required to replace a substantial portion of our consigned inventory with an enhanced model which also resulted in returns of older models. We increased our reserves for slow-moving and obsolete inventory in response these product replacements and returns.
 
During first six months of 2011, we continued the successful collection of outstanding accounts receivable in accordance with our normal sales and collection cycles and we made minimal payments to our related party supplier as compared to no payments to our related party supplier in the first six months of 2010.  As of June 30, 2011, we owed the related party $4,163,000.  See “—Credit Facility—BTC USA” below.
 
Cash used in our investing activities.  We purchased $1,575 in equipment in the first six months of 2011. We had no investing activities in the first six months of 2010.
 
Cash provided by financing activities.  We had no financing activities in the first six months of 2011 or 2010 as we did not borrow any funds under credit facilities during those periods.  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 — 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.  The Agreement 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 $1,500,000.  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 had an initial term through April 30, 2009 with automatic six month extensions unless either party terminated the Agreement at least 60 but not more than 90 days prior to the end of the initial term or any renewal term.  In August 2009, we modified the Agreement to include a month-to-month term.  At all times Bay View Funding has the right to terminate the Agreement upon 30 days prior notice.

 
23

 

 
If we terminate the Agreement prior to the end of 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 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.
 
There was no outstanding balance under the credit facility as of June 30, 2011 or as of the filing of this report.
 
Credit Facility — 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 $10,000,000 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 $10,000,000 with payment terms of net 60 days, without interest.  The agreement may 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, who is the Chief Executive Officer of Behavior Tech Computer Corp., is one of our former directors.  We did not make any purchases under this arrangement during the six months ended June 30, 2011 and 2010.  As of June 30, 2011, there were $4,163,000 in trade payables outstanding under this arrangement.  On July 20, 2010, we agreed to make a payment of $50,000 and monthly payments each in the amount of $5,000 over the next 23 months to BTC USA.  We classified the payments due within one year as a current liability and classified the balance due as a long-term liability.  I/OMagic and BTC USA are to reach agreement on or before September 1, 2011 on repayment of the balance owed.
 
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, our trade payables owed to BTC USA are repaid.  Even if we are able to repay our trade payables owed 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.

 
24

 

 
Liquidity Impact of Consignment Inventory Model
 
We retain most risks of ownership of our consignment inventory.  These products remain our inventory until their sale by our customers.  The return of this inventory could result in significant inventory valuation adjustments caused by the declining value of the inventory from the time it is placed on consignment to the time it is returned.  For the six months ended June 30, 2011 and 2010, no lower-of-cost-or-market adjustments were made to our consigned inventories.  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.
 
Impact of New Accounting Pronouncements
 
The disclosure requirements and impacts of new accounting pronouncements are described in “Note 16—Recent Accounting Pronouncements” to our consolidated financial statements contained elsewhere in this report.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 
ITEM 4.
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 June 30, 2011 that our disclosure controls and procedures were effective at the reasonable assurance level.
 
Changes in Internal Control over Financial Reporting
 
There has been 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.

 
25

 

 
PART II – OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
We are subject to legal proceedings, claims and litigation arising in the ordinary course of business.  While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist.  Therefore, it is possible that the outcome of those legal proceedings, claims and litigation could adversely affect our quarterly or annual operating results or cash flows when resolved in a future period.  However, based on facts currently available, management believes such matters will not adversely affect our financial position, results of operations or cash flows.
 
ITEM 1A.
RISK FACTORS
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially and adversely affect our business, financial condition and results of operations.  The risks described in our Annual Report on Form 10-K for the year ended December 31, 2010 are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations.
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.
(REMOVED AND RESERVED)
 
Not applicable.
 
ITEM 5.
OTHER INFORMATION
 
None.


 
26

 

 
ITEM 6.
EXHIBITS
 
Exhibit
Number
Description
   
31.1
Certifications 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 (1)
   
31.2
Certifications 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 (1)
   
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 (1)
   
101.INS
XBRL Instance Document (1) (2)
   
101.SCH
XBRL Taxonomy Extension Schema (1) (2)
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase (1) (2)
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase (1) (2)
   
101.LAB
XBRL Taxonomy Extension Label Linkbase (1) (2)
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase (1) (2)
 

(1)
Filed herewith.
(2)
Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
 
 
 
27

 

 
SIGNATURES
 
Pursuant to the requirements 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.
 
 
I/OMAGIC CORPORATION
 
       
Dated:  August 22, 2011
By:
/s/ TONY SHAHBAZ  
   
Tony Shahbaz
 
   
Acting Chief Financial Officer
 
   
(principal financial and accounting officer)
 
 
 
 
 
 
 


 
28

 

 
EXHIBITS FILED WITH THIS REPORT
Exhibit
Number
Description
   
31.1
Certifications 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
Certifications 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
   
101.INS
XBRL Instance Document (*)
   
101.SCH
XBRL Taxonomy Extension Schema (*)
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase (*)
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase (*)
   
101.LAB
XBRL Taxonomy Extension Label Linkbase (*)
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase (*)
 

(*)
Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
 
 
 
 
29