UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number:
000-27021
iGo CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3174623
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
KEN HAWK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
9393 GATEWAY DRIVE RENO, NEVADA 89511
(Address of principal executive offices)
(775) 746 - 6140
(Registrant's telephone number, including area code)
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 than 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 [ ]
Shares outstanding of each of the registrant's classes of common stock as of
October 31, 2000
Class Outstanding as October 31, 2000
----- -------------------------------
Common stock, $0.001 par value 23,215,833
iGo CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30,
2000 AND DECEMBER 31, 1999 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE-MONTH PERIODS AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2000 AND 1999 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
FACTORS THAT MAY EFFECT FUTURE RESULTS 13
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
PART II OTHER INFORMATION 24
ITEM 1 LEGAL PROCEEDINGS
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
ITEM 5 OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES 26
2
iGo CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
DOLLARS IN THOUSANDS SEPT. 30, DEC. 31,
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 27,394 $ 57,364
Accounts receivable, net ........................ 5,628 2,161
Inventory, net .................................. 6,771 2,556
Prepaid expenses ................................ 1,083 1,430
--------- ---------
Total current assets ....................... 40,876 63,511
Property and equipment, net .......................... 4,576 3,522
Intangibles and other assets, net .................... 13,799 634
--------- ---------
Total ................................. $ 59,251 $ 67,667
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 5,709 $ 3,991
Accrued liabilities ............................. 3,443 3,456
Current portion of capital lease obligations
and long-term debt ......................... 362 124
Short-term note payable ......................... 94 165
--------- ---------
Total current liabilities .................. 9,608 7,736
Long-term portion of capital lease obligations
and long-term debt ............................... 381 788
--------- ---------
Total liabilities .......................... 9,989 8,524
--------- ---------
Commitments and contingencies (note 5)
Stockholders' equity:
Common stock, $0.001 par value; 50,000,000
shares authorized; 23,215,833 and
20,119,052 shares issued and outstanding ... 23 20
Additional paid-in capital ...................... 88,816 80,067
Deferred compensation ........................... (1,600) (1,805)
Receivable from stockholder ..................... (46) (52)
Accumulated deficit ............................. (37,931) (19,087)
--------- ---------
Total stockholders' equity ................. 49,262 59,143
--------- ---------
Total ................................. $ 59,251 $ 67,667
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
iGo CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS AND NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 2000 AND 1999
DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA) THREE-MONTH PERIODS NINE-MONTH PERIODS
ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenues:
Net product revenue ..................................... $ 11,162 $ 5,330 $ 27,990 $ 13,047
------------- ------------- ------------- -------------
Cost of goods sold ...................................... 7,411 3,514 18,903 8,526
------------- ------------- ------------- -------------
Gross profit ............................................ 3,751 1,816 9,087 4,521
Operating expenses:
Sales and marketing ................................ 5,487 4,076 18,017 8,252
Product development ................................ 881 168 3,801 518
General and administrative ......................... 1,995 1,200 5,964 3,006
Merger and acquisition costs, including amortization
of goodwill and other purchased intangibles ...... 527 -- 1,530 --
------------- ------------- ------------- -------------
Total operating expenses ...................... 8,890 5,444 29,312 11,776
------------- ------------- ------------- -------------
Loss from operations .................................... (5,139) (3,628) (20,225) (7,255)
Other income (expense):
Interest income .................................... 501 31 1,467 63
Interest expense ................................... (31) (42) (97) (71)
Loss on disposal of assets ......................... -- -- -- (219)
Miscellaneous income (expense) ..................... 22 (3) 12 3
------------- ------------- ------------- -------------
Loss before provision for income taxes .................. (4,647) (3,642) (18,843) (7,479)
Provision for income taxes .............................. -- -- -- --
------------- ------------- ------------- -------------
Net loss ................................................ (4,647) (3,642) (18,843) (7,479)
Preferred stock dividends ............................... -- (250) -- (577)
------------- ------------- ------------- -------------
Net loss attributable to common
stockholders ......................................... $ (4,647) $ (3,892) $ (18,843) $ (8,056)
------------- ------------- ------------- -------------
Net loss per share:
Basic and diluted .................................. $ (0.21) $ (0.59) $ (0.90) $ (1.25)
============= ============= ============= =============
Weighted-average shares outstanding:
Basic and diluted .................................. 21,632,194 6,611,070 20,996,594 6,438,022
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
iGo CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
DOLLARS IN THOUSANDS NINE-MONTH PERIODS ENDED
SEPT. 30, SEPT. 30,
2000 1999
--------- ---------
Cash flows from operating activities:
Net loss ........................................................ $(18,843) $ (7,479)
Adjustments to reconcile net loss to net cash used in operating
activities:
Compensation expense related to stock options ................. 205 230
Accrued interest on stockholder note receivable ............... 6 (4)
Provisions for bad debt and inventory ......................... 1,027 720
Loss on sale leaseback and disposition of assets .............. 17 219
Depreciation and amortization ................................. 878 291
Amortization of goodwill ...................................... 1,442 --
Changes in:
Accounts receivable ......................................... (3,192) (1,241)
Inventory ................................................... (4,435) (1,040)
Prepaid expenses and other assets ........................... (412) (1,074)
Accounts payable, accrued liabilities and deferred rent ..... (738) 3,442
--------- ---------
Net cash used in operating activities ..................... (24,045) (5,936)
Cash flows from investing activities:
Acquisition of property and equipment ........................... (1,881) (1,170)
Acquisition of intangibles and other assets ..................... -- (442)
Acquisition of businesses ....................................... (4,110) --
--------- ---------
Net cash used in investing activities ..................... (5,991) (1,612)
Cash flows from financing activities:
Principal payments on short-term note and capital leases ........ (240) (53)
Net proceeds from issuance of mandatory redeemable
preferred stock .............................................. -- 5,771
Proceeds from sale leaseback .................................... -- 702
Net proceeds from borrowings .................................... -- 1,171
Proceeds from exercise of stock options ......................... 306 23
--------- ---------
Net cash provided by financing activities ................. 66 7,614
Net increase (decrease) in cash and cash equivalents .............. (29,970) 66
Cash and cash equivalents, beginning of period .................... 57,364 2,505
--------- ---------
Cash and cash equivalents, end of period .......................... $ 27,394 $ 2,571
========= =========
Supplemental disclosure of cash flows information:
Cash paid during the year for interest ........................ $ 31 $ 78
========= =========
Common stock issued in connection with acquisitions ........... $ 8,446 $ --
========= =========
Net liabilities acquired in acquisition ....................... $ 1,360 $ --
========= =========
Deferred compensation on stock options issued ................. $ -- $ 2,005
========= =========
Mandatory redeemable preferred stock dividends accrued ........ $ -- $ 577
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
iGo CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
iGo Corporation (formerly Battery Express, Inc.) (the "Company") was
incorporated in California in 1993 and is headquartered in Reno, Nevada. iGo
Corporation (NASDAQ: IGOC) is a leading provider of parts and accessories for
mobile technology products such as laptops, cell phones and wireless devices.
iGo's mission is to keep the mobile professional powered up and connected
anywhere they go. iGo's products are available online (www.igo.com) toll free
(1-800-228-8374) and through a corporate account team, resellers and strategic
partners. iGo's industry leading alliances and business partners include
companies such as Ariba Inc., AT&T Wireless, IBM, Intelisys, Corp., NEC
Computers, Inc., Perksatwork.com (now Abilizer Solutions), Ingram Micro, Concur
Technologies and PurchasePro.com. iGo enables more than half of the FORTUNE 500
to efficiently purchase and receive mobile products and services overnight.
Through the iGo.com website and corporate solutions representatives, iGo enables
more than half of the FORTUNE 500 to efficiently purchase and receive mobile
products and services overnight. iGo's products and services are available via
the Internet (www.igo.com) and iGo's mobile sales specialists (24 hours a day, 7
days a week) at 1-800-228-8374.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements for the
three-month periods and nine-month periods ended September 30, 2000 and 1999
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
interim information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of
financial condition, results of operations, and cash flows have been included.
The results of operations for the interim periods should not be considered
indicative of results for any other interim period or for a full calendar year.
These financial statements should be read in conjunction with the consolidated
financial statements, and notes thereto, in the Company's Form 10-K for the year
ended December 31, 1999. Certain of the 1999 amounts included herein have been
reclassified to be consistent with the 2000 condensed consolidated financial
statements.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
iGo Corporation and its wholly owned subsidiaries. The subsidiaries were formed
for specific transactions, such as acquisitions. All significant intercompany
balances and transactions have been eliminated in consolidation.
6
NET LOSS PER SHARE
Net loss per share--basic and diluted, is computed using the
weighted-average number of common shares outstanding during the period. Stock
options and warrants were not included in the computations because they would
have been antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the consolidated financial
statements. Actual amounts could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters for all fiscal years beginning after June 15,
2000. Management has determined that adoption of SFAS No. 133 will not have a
material impact on its consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 clarifies existing accounting principles related to revenue
recognition in financial statements. The Company is required to comply with the
provisions of SAB 101 by the fourth quarter of 2000. Due to the nature of the
Company's operations, management does not believe that SAB 101 will have a
significant impact on the Company's financial statements.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at September 30, 2000 and
December 31, 1999:
DOLLARS IN THOUSANDS SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
Trade receivables .......................... $ 6,411 $ 2,179
Other current receivables .................. 284 547
Allowance for bad debt ..................... (1,067) (565)
-------- --------
Total accounts receivable, net ........ $ 5,628 $ 2,161
======== ========
3. INVENTORY
Inventory consists of the following at September 30, 2000 and December 31,
1999:
DOLLARS IN THOUSANDS SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
Products on hand ....................... $ 7,528 $ 2,863
Inventory reserve ...................... (757) (307)
-------- --------
Total inventory, net .............. $ 6,771 $ 2,556
======== ========
7
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 2000
and December 31, 1999:
DOLLARS IN THOUSANDS SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
Leasehold improvements ..................... $ 441 $ 365
Furniture and equipment .................... 3,303 2,212
Software ................................... 2,008 1,318
Accumulated depreciation and amortization .. (1,176) (373)
-------- --------
Total property and equipment, net ..... $ 4,576 $ 3,522
======== ========
5. LEGAL PROCEEDINGS
We previously reported that the company from whom we purchased the
rights to the 1-800-Batteries toll-free telephone number and name had filed an
arbitration claim alleging our material breach of the purchase agreement,
terminating the contract, and demanding a return of the number and name as well
as unspecified monetary damages. An arbitration proceeding was held in Richmond,
Virginia, in late June 2000. In late August 2000 the arbitrator ruled that while
we would be required to pay the other company approximately $125,000 (inclusive
of fees), we could keep both the phone number and related name. Further, our
ongoing obligations under the contract are now terminated. We are very pleased
with the result of this arbitration and consider it a very positive development
for the Company in terms of paying a limited sum to confirm unrestricted rights
to these assets with no continuing covenants or obligations to the seller.
We had also previously reported that on October 11, 1999, in the Second
Judicial District Court of the State of Nevada in and for the County of Washoe,
Microflex Corporation filed a lawsuit against us and certain of our employees
based upon circumstances surrounding our hiring of several former Microflex
employees. The suit alleged that we induced certain former Microflex employees
to breach the terms of their nondisclosure and nonsolicitation agreements with
Microflex, that we interfered with Microflex's contractual relations and
prospective economic advantage, and that we engaged in unfair competition. Based
on our belief that these charges were without merit, we filed a motion to
dismiss the charges, and in August 2000 the court granted our motion as to
several of the claims. Based in large part on the success of our motion,
Microflex, through its counsel, has verbally agreed to drop the remaining claims
against us and enter into a mutual release on this matter. We anticipate formal
documentation of this most favorable resolution to be in place shortly.
6. BUSINESS ACQUISITIONS
On January 4, 2000, the Company acquired CAW Products, Inc., d.b.a.
Cellular Accessory Warehouse, for $353,458 comprised of $100,000 in cash and
$253,458 in stock, consisting of 29,167 shares of common stock having a market
value of $8.69 per share on the closing date of the transaction. Additionally,
on January 11, 2000, the Company acquired AR Industries Inc., d.b.a. Road
Warrior International, for $2,704,167 comprised of $750,000 in cash and
$1,954,167 in stock, consisting of 279,167 shares of common stock having a
market value of $7.00 per share on the closing date of the transaction. Road
Warrior International is a designer and distributor of laptop connectivity and
power products, as well as model specific laptop hard drive upgrades. Cellular
Accessory Warehouse is a distributor of model specific cellular accessories.
8
On August 29, 2000, the Company acquired substantially all the assets
of Xtend Micro Products, Inc., for $2,500,000 in cash and 2,268,451 shares of
iGo Common Stock for Xtend. Of such shares, 1,896,574 shares are subject to an
earn-out provision based on the post-closing operating performance of the Xtend
business unit. Xtend will have the opportunity to earn up to an additional
$2,500,000 in a combination of iGo Common Stock and/or cash (at iGo's election)
for exceptional post-closing operating performance. Founded in 1990, Xtend Micro
Products Inc. is a leader in OEM and OEM compatible power products and
accessories for the portable computer market.
Each acquisition was recorded using the purchase method of accounting
under Accounting Principles Board ("APB") Opinion No. 16. Results of operations
for each acquired company have been included in the financial results of the
Company from the respective acquisition date forward. In accordance with APB
Opinion No. 16, all identifiable assets were assigned a portion of the cost of
the acquired companies (purchase price) on the basis of their respective fair
values. Identifiable intangible assets and goodwill are included in "Intangibles
and other assets, net" on the accompanying condensed consolidated balance sheets
and are amortized over their estimated useful lives, which approximates 40
months for both Cellular Accessory Warehouse and Road Warrior International, and
60 months for Xtend Micro Products. Intangible assets were identified and valued
by considering the Company's intended use of acquired assets and analysis of
data concerning products, technologies, markets, historical financial
performance, and underlying assumptions of future performance. The economic and
competitive environment in which the Company and the acquired companies operate
was also considered in the valuation analysis. The Company periodically
evaluates its intangible assets for impairment, and as of September 30, 2000, no
write-downs have been recorded.
The pro forma condensed consolidated financial information for the
nine-month period ended September 30, 1999, determined as if all acquisitions
had occurred on January 1 of that period, would have resulted in net sales of
$24.4 million, net loss of $7.9 million, and basic and diluted loss per share of
$1.32. Due to the timing of the acquisitions on January 4, 2000 and January 11,
2000 for Cellular Accessory Warehouse, and Road Warrior International,
respectively, no significant activity took place prior to the acquisitions and
therefore pro forma results are not presented. The pro forma condensed
consolidated financial information for the nine-month period ended September 30,
2000, determined as if the Xtend acquisition had occurred on January 1 of that
period, would have resulted in net sales of $35.3 million, net loss of $17.9
million, and basic and diluted loss per share of $0.85. This unaudited pro forma
information is presented for illustrative purposes only, and is not necessarily
indicative of the results of operations in future periods or results that would
have been achieved had iGo Corporation and the acquired companies been combined
during the specified period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. The following discussion was prepared by
iGo Corporation (referred throughout this document where appropriate, as "iGo,"
"Company," "we," "our," and "us"), and should be read in conjunction with, and
is qualified in its entirety by, the Consolidated Financial Statements and the
Notes thereto included in this report as well as the Factors That May Effect
Future Results that follow this discussion. The following discussion and other
material in this report on Form 10-Q contain certain forward-looking statements.
The forward-looking statements are necessarily based upon a number of estimates
and assumptions that, while considered reasonable, are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond our control, and upon assumptions with respect to
future business decisions which are subject to change. Accordingly, actual
results could differ materially from those contemplated by such forward-looking
statements.
9
iGo and iGo.com are trademarks of iGo. Road Warrior is a registered
trademark of a subsidiary of iGo. This report also contains brand names, service
marks and trademarks of other companies which are the property of their
respective holders.
OVERVIEW
iGo was incorporated in March 1993 and began offering products for sale
later that year, but did not generate meaningful revenues until 1995. For the
period from inception to 1995, our operating activities related primarily to the
development of our proprietary databases and to locating favorable sources of
supply. In 1995, we launched our first direct marketing campaign and focused on
building sales volume and fulfillment capabilities, and in 1996, we launched our
website. Since 1997, we have significantly increased the depth of our management
team to help implement our growth strategy. In June 1997, we relocated from San
Jose, California to Reno, Nevada to take advantage of lower operating costs for
our customer contact and fulfillment centers.
Revenues from sales of products and shipping fees are recognized at the
time the merchandise is shipped to customers, net of any discounts and reserves
for expected returns. The majority of orders are shipped the same day they are
received. To date, the majority of customer purchases have been made with credit
cards. We generally receive payment from the credit card companies within one to
four business days after shipment of the product. We also extend credit terms,
typically net 30 days, to corporate accounts that we have evaluated for
creditworthiness. Inventory is carried at the lower of cost or market. We use
the first-in-first-out method to determine cost. Advertising and promotional
costs are expensed as incurred, and are recorded net of any cooperative
advertising amounts due from our suppliers at that time. In the case of direct
mail campaigns, the expenses are recorded at the time the promotional piece is
mailed to potential customers because the projected future revenue stream from
these mailings, which can occur over a two month period, cannot be ultimately
determined at the time the mailing occurs.
We incurred net losses of $15.0 million in 1999, $1.9 million in 1998
and $886,000 in 1997. For the nine months ended September 30, 2000, our net loss
was $18.8 million. At September 30, 2000, we had an accumulated deficit of
approximately $37.9 million. These net losses resulted from costs associated
with our implementation of marketing programs to attract new customers, as well
as our development of the Company's website, proprietary databases, and our
operational infrastructure.
We plan to continue to invest in marketing and promotion, to hire
additional employees and to enhance our website and operating infrastructure.
Therefore we expect to continue to incur significant sales and marketing,
general and administrative and product development expenses. As a result, we
will need to generate significantly higher revenues to achieve and maintain
profitability. If our revenue growth is slower than we anticipate or our
operating expenses exceed our expectations, our losses will be significantly
greater, which will in turn delay or prevent our achievement of profitability.
THREE MONTH PERIOD AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARISON TO
THREE MONTH PERIOD AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
NET PRODUCT REVENUE. Net product revenue consists of product sales to
customers and outbound shipping charges, net of any discounts and reserves for
expected returns. Net product revenue increased from $5.3 million for the three
month period ended September 30, 1999 to $11.2 million for the three month
period ended September 30, 2000 and from $13.0 million for the nine month period
ended September 30, 1999 to $28.0 million for the nine month period ended
September 30, 2000. The increase in net product revenue was primarily a result
of new marketing and strategic relationship initiatives, repeat purchases from
pre-existing buyers, increased business-to-business sales and increased sales
through our distribution channels.
10
GROSS MARGIN. Gross Margin is net product revenue less the cost of
sales, which consists primarily of the cost of products sold to customers,
inbound shipping expense and outbound shipping charges. Cost of goods sold
increased from $3.5 million for the three month period ended September 30, 1999
to $7.4 million for the three month period ended September 30, 2000 and from
$8.5 million for the nine month period ended September 30, 1999 to $18.9 million
for the nine month period ended September 30, 2000. Our gross margin decreased
from 34.1 % in the third quarter of 1999 to 33.6 % in the third quarter of 2000
and from 34.7 % for the nine month period ended September 30, 1999 to 32.5 % for
the nine month period ended September 30, 2000. The decreases in gross margin
from the prior year periods were primarily the result of a moderate shift in the
sales mix to higher volume corporate accounts with more aggressive multi-unit
pricing. On a sequential quarter basis, our gross margin increased from 21.6%
for the fourth quarter of 1999 to 31.3% for the first quarter of 2000 to 32.1%
for the second quarter 2000 and again to 33.6 % for the third quarter of 2000.
This increase in gross margin over the last four quarters has primarily been the
result of a shift in our sales mix back toward our higher margin core products,
principally model specific accessories such as batteries, adapters, chargers and
hard drives, utilization of our alliances with IBM and NEC, and better sourcing,
especially offshore.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
advertising costs, fulfillment expenses, credit card costs and the salary and
benefits of our sales, marketing and customer contact center personnel.
Advertising and promotional expenses include online marketing efforts, print
advertising, trade shows, pay for performance and direct marketing costs. Sales
and marketing expenses increased from $4.1 million for the three month period
ended September 30, 1999 to $5.5 million for the three month period ended
September 30, 2000 and from $8.3 million for the nine month period September 30,
1999 to $18.0 million for the nine month period ended September 30, 2000. The
increase was principally due to increased fulfillment related expenses to
support the increase in sales volume, as well as the increased headcount for the
corporate sales team. The most significant single component of sales and
marketing expense is advertising costs. From the third quarter of 1999 to the
third quarter of 2000 advertising costs declined in absolute dollars from $3
million to $2.6 million. Expressed as a percentage of net revenue, advertising
costs decreased from 56% in the third quarter of 1999 to 23% in the third
quarter of 2000. Accordingly, we have more than doubled the efficiency of our ad
spend over the past year. The biggest drivers of this favorable trend are the
aggressive pursuit of pay for performance marketing opportunities and the
continued refinement of out database profiling for direct marketing campaigns.
Overall, the continued focus on more efficient marketing opportunities combined
with favorable business-to-business trends are the most significant factors
behind our reduction in operating losses each quarter this year.
PRODUCT DEVELOPMENT. Product development expenses consist primarily of
payroll and related expenses for merchandising and website personnel, site
hosting fees and web content and design expenses. Product development expenses
increased from $168,000 for the three month period ended September 30, 1999 to
$881,000 for the three month period ended September 30, 2000. This increase of
approximately $700,000 was due to additional investment incurred to improve the
business-to-business (B2B) functionality of our web site as well as integration
costs with the B2B enablers and the development of custom corporate internet
sites. For the nine month period ended September 30, 1999 compared to the nine
month period ended September 30, 2000, product development expenses increased
$3.3 million from $518,000 to $3.8 million. This increase was primarily due to
additional investment made to improve the functionality and speed of our
existing web site, as well as planning and design costs incurred for the next
generation of our web site and increased personnel.
11
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
of salaries and related costs for our executive, administrative and finance
personnel, support services and professional fees, as well as general corporate
expenses such as rent and depreciation. General and administrative expenses
increased from $1.2 million for the quarter ended September 30, 1999 to $2.0
million for the quarter ended September 30, 2000. Expressed as a percentage of
net revenue, general and administrative expenses decreased from 23% to 18%,
respectively. From the nine month period ended September 30, 1999 to the nine
month period ended September 30, 2000, general and administrative expenses
increased $3.0 from $3.0 million to $6.0 million. The increase in general and
administrative expenses for both the three month period and nine month period
ended September 30, 2000 over previous periods was attributable to three
principal factors: first, the addition of personnel in the operations,
information technology, finance and administrative teams; second, an increase in
non-cash expenses, depreciation and deferred compensation; and third, the move
from our old 18,000 square foot facility to our new 85,000 square foot facility
in January of this year to accommodate our growth.
MERGER AND ACQUISITION COSTS. In the three month period and nine month
period ended September 30, 2000, we incurred $527,000 and $1.5 million,
respectively, in merger and acquisition costs inclusive of goodwill.
Amortization of this goodwill during the three month period ended September 30,
2000 totaled $400,000 from the January acquisitions of Road Warrior
International and Cellular Accessory Warehouse, and $127,000 from the August 29,
2000 acquisition of Xtend. Goodwill and covenants not to compete are amortized
on a straight-line basis over their respective useful lives, generally 40 to 60
months. There were no merger and acquisition related costs in 1999.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, consists
primarily of interest income earned on cash and cash equivalents, interest
expense on borrowing and capital leases, and losses resulting from disposals of
fixed assets. Other income (expense), net, changed from expense of $14,000 for
the three month period ended September 30, 1999 to income of $492,000 for the
three month period ended September 30, 2000. The change was primarily
attributable to an increase in interest income of $470,000 from interest earned
on the net proceeds from the initial public offering in October 1999. Other
income (expense), net, changed from expense of $224,000 for the nine month
period ended September 30, 1999 to income of $1.4 million for the nine month
period ended September 30, 2000. The change was primarily attributable to an
increase in interest income of $1.4 million from interest earned on the net
proceeds from the initial public offering in October 1999.
INCOME TAXES. The Company did not provide any current or deferred U.S.
federal, state or foreign income tax provision or benefit for any of the periods
presented because it has experienced losses since inception. Utilization of the
Company's net operating loss carryforwards, which begin to expire in 2011, may
be subject to certain limitations under Section 382 of the Internal Revenue Code
of 1986, as amended. The Company has provided a full valuation allowance on the
deferred tax asset, consisting primarily of net operating loss carryforwards,
because of the uncertainty regarding its realizability.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we financed our operations
primarily through the sale of preferred stock, capital lease obligations and
revolving credit facilities. Prior to our initial public offering, we received
$13.2 million from the sale of preferred stock, net of issuance costs. Of this
amount, $1.4 million was received in June 1996, $6.0 million in October 1998 and
$5.8 million in July 1999. Proceeds from equipment financed under a
sale-leaseback transaction, net of principal repayments, amounted to $685,000
during the year ended December 31, 1999. There were no proceeds from equipment
financed under sale-leaseback transactions during the nine month period ended
September 30, 2000. Proceeds from our initial public offering in October 1999,
net of offering costs, amounted to approximately $62.6 million.
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Net cash used in operating activities was $24.0 million for the nine
month period ended September 30, 2000, and $6.0 million for the nine month
period ended September 30, 1999. Net cash used in operating activities consisted
primarily of net losses, as well as increased inventory balances and fluctuation
in accounts receivable and accounts payable between periods, partially offset by
increased depreciation and amortization and reserve accounts.
Net cash used in investing activities was $6.0 million for the nine
month period ended September 30, 2000. Of this amount, $4.1 million was for the
acquisition of businesses, and the remainder, $1.9 million, was for the
acquisition of property and equipment. Net cash used in investing activities was
$1.6 million for the nine month period ended September 30, 1999, and reflects
purchases of property and equipment and other assets commensurate with the
overall growth of our business.
Net cash provided by financing activities was $66,000 for the nine
month period ended September 30, 2000, and $7.6 million for the nine month
period ended September 30, 1999. Cash provided by financing activities in 2000
reflected proceeds from exercise of stock options, partially offset by principal
payments on a short-term note and capital leases. Cash provided by financing
activities in 1999 reflected proceeds from borrowings under a line of credit,
proceeds from a sale leaseback and issuance of mandatory redeemable preferred
stock that was converted to common stock concurrent with the closing of our IPO,
partially offset by principal payments on capital leases.
We offered 5,000,000 shares of our common stock in our initial public
offering on October 13, 1999, and an additional 750,000 shares were issued upon
exercise of the underwriters' overallotment option in November 1999. Our common
stock is quoted on the NASDAQ National Market under the symbol "IGOC."
We currently anticipate that the net proceeds of our recent equity and
debt financings together with our available funds, will be sufficient to meet
our anticipated working capital and capital expenditure needs for at least the
next 12 months. We may need to raise additional funds before the expiration of
the 12 month period in the event that we pursue strategic acquisitions or
experience operating losses that exceed our expectations. If we raise additional
funds through the issuance of equity securities or convertible debt securities,
our existing stockholders may experience significant dilution. Furthermore,
additional financing may not be available when needed or, if it is available,
the terms may not be favorable to our stockholders or us.
FACTORS THAT MAY EFFECT FUTURE RESULTS
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE OUR POTENTIAL FOR
FUTURE SUCCESS
We were incorporated in 1993 and did not begin to generate meaningful
revenues until 1995. Accordingly, we have only a limited operating history upon
which you can evaluate our business and prospects. You must consider the risks
and uncertainties frequently encountered by growth stage companies in new and
rapidly evolving markets, such as electronic commerce. These risks include our
ability to continue to:
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o sustain historical growth rates;
o implement our business model;
o attract new customers;
o retain existing customers and maintain customer satisfaction;
o maintain our gross margins in the event of price competition or rising
wholesale prices;
o minimize technical difficulties and system downtime;
o manage distribution of our direct marketing materials; and
o attract, train and retain employees.
If we are unsuccessful in addressing these risks and uncertainties, our
business, financial condition and results of operations will be harmed.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT LOSSES FOR THE NEXT SEVERAL QUARTERS
Since our inception in 1993, we have incurred significant net losses,
resulting primarily from costs related to developing our proprietary databases,
establishing our brand, building our customer contact center, developing
relationships with suppliers and attracting users to our website. At September
30, 2000, we had an accumulated deficit of approximately $37.9 million. Although
we have experienced an annual increase in net product revenue each year, this
growth may not be sustainable. Because of our plans to invest heavily in
marketing and promotion, hire additional employees and enhance our website and
operating infrastructure, we expect to continue to incur significant sales and
marketing and general and administrative expenses. As a result, we will need to
generate significantly higher revenues to achieve and maintain profitability. If
our revenue growth is slower than we anticipate or our operating expenses exceed
our expectations, our losses will be significantly greater, which in turn will
delay or prevent our achievement of profitability.
OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY SIGNIFICANT FLUCTUATIONS IN OUR
QUARTERLY OPERATING RESULTS
Our revenues for the foreseeable future will remain primarily dependent
on sales of mobile electronic devices, accessories, batteries and services
through our website and our customer contact center. Although independent market
research firms forecast that shipments of portable personal computers, the
number of wireless subscribers and the market for accessories and batteries for
mobile electronic devices will grow substantially over the next few years, we
cannot be certain that this growth will actually occur or that our sales will
grow at the same rate. We cannot forecast with any degree of certainty the
extent of our sales of these products or services. We expect our operating
results could fluctuate significantly from quarter to quarter as a result of
various factors including:
o our ability to attract visitors to our website and convert them into
customers;
o the level of merchandise returns we experience;
o changes and seasonal fluctuations in the buying patterns of our
customers;
o our inability to obtain adequate supplies of high-demand products;
o unanticipated cost increases or delays in shipping of our products,
transaction processing, or production and distribution of our direct
marketing materials;
o unanticipated delays with respect to product introductions; and
o the costs, timing and impact of our marketing and promotional
initiatives.
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Because of these and other factors, we believe that quarter to quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of securities
analysts and investors in some future periods, our stock price will likely
decline. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more information on our quarterly operating results.
STRENGTHENING THE iGo BRAND IS CRITICAL TO OUR SUCCESS
During 1999 we launched our iGo brand, and we have implemented
aggressive traditional and online marketing programs to promote our brand in
order to attract visitors to our website. We believe that strengthening the iGo
brand will be critical to the success of our business. We cannot be certain that
our brand will attract new customers or retain existing customers, and the
failure to maintain a strong and effective brand may harm our business,
financial condition and results of operations.
IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, OUR BUSINESS AND PROSPECTS COULD BE
SERIOUSLY HARMED
Our ability to execute our business model in a rapidly evolving market
requires an effective planning and management process. At December 31, 1999, we
had a total of 169 full-time employees and at September 30, 2000, we had a total
of 256 full-time employees. We plan to continue to hire additional employees and
to expand our warehouse facilities. This growth has placed, and we expect our
anticipated growth to continue to place, a significant strain on our management
systems and resources. To manage our growth, we must successfully implement
operational and financial systems and controls, properly integrate acquired
businesses, and recruit, train and retain new employees. Some key members of our
management team have recently been hired. These individuals have had little
experience working in our organization. We cannot be certain that we will be
able to integrate new executives or other employees into our organization
effectively. In addition, there will be significant administrative burdens
placed on our management team as a result of our status as a public company. If
we do not manage growth effectively, our business, financial condition and
results of operations could be harmed.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS AND WE MAY NOT BE ABLE TO
HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS
Our performance is substantially dependent on the continued services
and on the performance of our executive officers, particularly Ken Hawk, our
Chief Executive Officer. The loss of the services of any of our executive
officers could harm our business. Additionally, we will need to attract, retain
and motivate talented management and other highly skilled employees to be
successful. In particular, competition for employees that possess knowledge of
the Internet industry is intense. Any of our officers or employees can terminate
his or her employment relationship at any time. The loss of any of our officers
or our inability to attract or retain other qualified employees could harm our
results of operations and financial condition. We may be unable to retain our
key employees or attract, assimilate and retain other highly qualified employees
in the future, which could harm our business, financial condition and results of
operations.
COMPETITION MAY DECREASE OUR MARKET SHARE, NET REVENUES AND GROSS MARGINS AND
MAY CAUSE OUR STOCK PRICE TO DECLINE
We believe the portable computing and mobile communications market is
highly fragmented. In addition, the electronic commerce market in which we
operate is new, rapidly evolving and highly competitive. We believe no single
competitor competes directly with us with respect to all of the products and
services we offer; however, we currently or potentially compete with a variety
of companies in the sale of products in specific categories, including:
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o mobile products suppliers such as Targus;
o mass merchant retailers such as Circuit City and CompUSA;
o direct marketers such as Buy.com, Insight and Microwarehouse; and
o traditional mobile device manufacturers such as Fujitsu and Toshiba.
Many of these current and potential competitors may have the ability to
devote substantially more resources to marketing, systems and website
development than we do. In addition, larger and more well-financed entities may
acquire, invest in or form joint ventures with our competitors. Some of our
competitors may be able to secure products from suppliers on more favorable
terms, fulfill customer orders more efficiently and adopt more aggressive
pricing or inventory availability policies then we can. Finally, new
technologies and the expansion of existing technologies, such as price
comparison programs that search for products from a variety of websites, may
direct customers to other online merchants.
THE LOSS OF OUR PROPRIETARY DATABASES WOULD SERIOUSLY HARM OUR BUSINESS
Our proprietary databases are a key competitive advantage. If we fail
to keep these databases current or if the proprietary customer, product,
supplier and compatibility information contained in these databases is damaged
or destroyed, our business would be seriously harmed and our stock price would
decline.
THE FAILURE TO SUCCESSFULLY GROW, MANAGE AND USE OUR DATABASE OF CUSTOMERS AND
USERS WOULD HARM OUR BUSINESS
We intend to continually expand our database of customers, potential
customers and website registrants to more effectively create targeted direct
marketing offers. We seek to expand our customer database by using information
we collect through our website and our customer contact center, as well as from
purchased or rented lists. We must also continually develop and refine our
techniques for segmenting this information to maximize its usefulness. If we are
unable to expand our customer database or if we fail to utilize this information
successfully, our business model may not be successful. In addition, if federal
or state governments enact privacy legislation resulting in the increased
regulation of mailing lists, we could experience increased costs in complying
with potentially burdensome regulations concerning the solicitation of consents
to keep or add customer names to our mailing lists.
FAILURE OF OUR STRATEGIC RELATIONSHIPS TO ATTRACT CUSTOMERS COULD HARM OUR
BUSINESS
We intend to continue to establish, leverage and grow key strategic
relationships with manufacturers, suppliers and electronic commerce partners to
enable us to collect crucial product-specific information, ensure access to
adequate product supply and acquire new customers. For example, we have entered
into strategic relationships with the NEC Computer Systems Division (or NEC),
IBM, and Motorola, that provide us with priority access to new products and give
us the ability to offer a more integrated electronic commerce solution for
enterprises. In addition, we plan to establish additional online partnerships
that create direct online links from other websites and from the portable
computing and mobile communications areas of major Internet portals. For
example, we recently entered into an agreement with Ariba, which enables
customers to order our products from the Ariba purchasing system, and we
recently launched our online affiliate program. We cannot be certain that any of
these strategic relationships or partnerships will be successful in attracting
new customers. In addition, the strategic relationship with Motorola is not
subject to a written agreement, and the agreements with Ariba and NEC may be
terminated by any party at any time upon written notice. Furthermore, under our
agreement with NEC we are currently obligated to purchase at least $4,000,000 of
product per year, which requirement may be increased, decreased or waived by NEC
at its discretion. Because our agreement with NEC was only recently established,
it is uncertain whether we will meet or exceed the stated purchase obligation.
The terms of one agreement with IBM require us to purchase at least $2,000,000
of product per year. If iGo fails to meet this purchase level, IBM has the
discretion to allow iGo to cure before terminating the agreement. Also, either
party may terminate the agreement with or without cause on three months written
notice. Consequently, we cannot be certain that we will be able to maintain
these strategic relationships in the future. If these programs fail to attract
additional customers or if we are unable to maintain these relationships, our
business, financial condition and results of operations could be harmed.
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WE MUST EFFECTIVELY MANAGE OUR VENDORS TO MINIMIZE INVENTORY RISK AND MAINTAIN
OUR GROSS MARGINS
In order to fulfill our orders, we depend upon our vendors to produce
sufficient quantities of products according to schedule. We may maintain high
inventory levels in some categories of merchandise in an effort to ensure that
these products are available to our customers. This may expose us to risks of
excess inventory and outdated merchandise, which could harm our business. If we
underestimate customer demand, we may disappoint customers who may purchase from
our competitors. We also negotiate with our vendors to get the best quality
available at the best prices in order to maintain and increase our gross
margins. Our failure to be able to manage our vendors effectively would harm our
operating results.
FAILURE OF THIRD PARTY SUPPLIERS TO SHIP PRODUCTS DIRECTLY TO OUR CUSTOMERS
COULD HARM OUR BUSINESS
The failure of our suppliers to continue to ship products directly to
our customers or to ship products to our customers in a timely manner could
result in lost revenues, customer dissatisfaction and damage to our reputation.
In addition, if we could not depend on these suppliers to ship products to our
customers directly, we would have to carry the products in our inventory, which
would expose us to risks of excess inventory, outdated merchandise and increased
warehouse costs, all of which could harm our business.
FAILURE OF THIRD-PARTY CARRIERS TO DELIVER OUR PRODUCTS TIMELY AND CONSISTENTLY
COULD HARM OUR BUSINESS
Our supply and distribution system is primarily dependent upon our
relationships with United Parcel Service, Federal Express and AirborneExpress.
We ship substantially all of our orders with these carriers. Because we do not
have written agreements with these carriers that guarantee continued service, we
cannot be sure that our relationships with these carriers will continue on terms
favorable to us, or at all. If our relationship with one or more of these
carriers is terminated or impaired, or if one or more of these carriers is
unable to ship products for us, whether through labor shortage, slow down or
stoppage, deteriorating financial or business conditions or for any other
reason, we would be required to rely on the other carriers. These carriers may
not be able to accommodate the increased shipping volume, in which case we may
be required to use alternative carriers, with whom we may have no prior business
relationship, for the shipment of products to our customers. We may be unable to
engage an alternative carrier on a timely basis or upon terms favorable to us.
Changing carriers would likely harm our business, financial condition and
results of operations. Potential adverse consequences include:
o reduced package tracking information;
o delays in order processing and product delivery;
o increased delivery costs, resulting in reduced gross margins; and
o reduced shipment quality, which may result in damaged products and
customer dissatisfaction.
WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR TRADEMARKS, INTERNET ADDRESSES AND
INTELLECTUAL PROPERTY RIGHTS
We seek to protect our brand and our other intellectual property
through a combination of copyright, trade secret and trademark laws. Our iGo
brand and our Internet address, WWW.IGO.COM, are important components of our
business strategy. We have filed trademark applications in the U.S. Patent and
Trademark Office to register "iGo," and "iGo.com. " The PTO examiner has
approved the "iGo" and "iGo.com" applications for publication for opposition by
third parties. Although we expect to obtain registrations for "iGo" and
"iGo.com" in due course, we cannot guarantee that we will be able to secure
registration of these marks.
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Even if we are able to secure registration of these marks , there is
always the possibility that a third party claiming to have prior rights in a
similar mark, could object to our use of these marks and could petition to
cancel our trademark registrations. In the event of such an objection by a third
party, we may be required to stop using these marks. If we had to change our
marks and no longer use the "iGo" and "iGo.com" marks, this could cause
confusion to our customers and in the marketplace and harm our business,
financial condition and results of operations, and could cause the price of our
common stock to decline.
We have also filed trademark applications for "iGo," "iGo.com" and our
logo in various jurisdictions outside the United States. We cannot guarantee
that we will be able to secure the registration of these trademarks in foreign
countries, or that we can use the mark in any foreign country without objection
by a third party or parties having prior rights in a similar mark. This may
affect our ability to do business in the countries where we currently conduct
business or into which we intend to expand.
In addition, we currently hold various Internet domain names, including
iGo.com. The acquisition and maintenance of domain names generally is regulated
by Internet regulatory bodies. The regulation of domain names in the United
States and in foreign countries is subject to change. Governing bodies may
establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result, we
may be unable to acquire or maintain relevant domain names in all countries in
which we conduct business. Furthermore, the relationship between regulations
governing domain names and laws protecting trademarks and similar proprietary
rights continues to evolve. Therefore, we may be unable to prevent third parties
from acquiring domain names that are similar to, infringe upon or otherwise
decrease the value of our trademarks and other proprietary rights.
WE MAY BE VULNERABLE TO NEW TAX OBLIGATIONS THAT COULD BE IMPOSED ON ELECTRONIC
COMMERCE TRANSACTIONS
We do not expect to collect sales or other similar taxes or goods
shipped into most states. However, one or more states or the federal government
may seek to impose sales tax collection obligations on out-of-state companies,
such as ours, which engage in or facilitate electronic commerce. A number of
proposals have been made at the state and local levels that would impose
additional taxes on the sale of goods and services through the Internet. These
proposals, if adopted, could substantially impair the growth of electronic
commerce and cause purchasing through our website to be less attractive to
customers. In October 1998, the United States Congress passed legislation
limiting for three years the ability of the states to impose taxes on
Internet-based transactions. Failure to renew this legislation could result in
the imposition by various states of taxes on electronic commerce. Further,
states have attempted to impose sales tax collection obligations on direct
marketing sales from businesses such as ours. A successful assertion by one or
more states that we should have collected or be collecting sales taxes on the
sale of products could harm our business.
IF WE EXPAND OUR BUSINESS INTERNATIONALLY, OUR BUSINESS WOULD BECOME
INCREASINGLY SUSCEPTIBLE TO NUMEROUS INTERNATIONAL RISKS AND CHALLENGES THAT
COULD AFFECT OUR RESULTS OF OPERATIONS
Although we have not had meaningful international revenues to date, we
intend to increase our international sales efforts. International sales are
subject to inherent risks and challenges that could affect our results of
operations, including:
o the need to develop new supplier relationships;
o unexpected changes in international regulatory requirements and
tariffs;
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o difficulties in staffing and managing foreign operations;
o potential adverse tax consequences;
o price controls or other restrictions on, or fluctuations in, foreign
currency; and
o difficulties in obtaining export and import licenses.
To the extent we generate international sales in the future, any
negative effects on our international business could harm our business,
financial condition and results of operations as a whole. In particular, gains
and losses on the conversion of foreign payments into U.S. dollars may
contribute to fluctuations in our results of operations, and fluctuating
exchange rates could cause reduced revenues from dollar-denominated
international sales.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION
We have recently bought and may again invest in or buy complementary
businesses, products or technologies in the future. In the event of any
investments or purchases, we could:
o issue stock that would dilute the percentage ownership of our current
stockholders;
o incur debt;
o assume liabilities;
o incur amortization expenses related to goodwill and other intangible
assets; or
o incur large and immediate write-offs.
These acquisitions could also involve numerous operational risks,
including:
o problems combining the purchased operations, products or technologies;
o unanticipated costs;
o diversion of management's attention away from our core business;
o adverse effects on existing business relationships with suppliers and
customers;
o risks associated with entering markets in which we have no or limited
prior experience; and
o potential loss of key employees, particularly those of the purchased
organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products or technologies that we have acquired or might acquire in
the future.
THE LOSS OF TECHNOLOGIES LICENSED FROM THIRD PARTIES COULD HARM OUR BUSINESS
We rely to a material extent on technology developed and licensed from
third parties. The loss of existing technology licenses could harm the
performance of our existing services until equivalent technology can be
identified, obtained and integrated. Failure to obtain new technology licenses
may result in delays or reductions in the introduction of new features,
functions or services, which would harm our business.
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE HARMED IF
WE WERE TO BE LIABLE FOR DEFECTS IN THE PRODUCTS WE OFFER
We may be subject to product liability claims for the products we sell.
While we believe that our product liability coverage of $2,000,000 is currently
adequate, we can provide no assurance that the insurance can be maintained in
the future at a reasonable cost or in amounts sufficient to protect us against
losses due to liability. A successful liability claim brought against us in
excess of relevant insurance coverage could harm our business, financial
condition and results of operations.
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Damage to or destruction of our warehouse could result in loss of our
inventory, which could harm our business, financial condition and results of
operations.
If all or most of the inventory in our warehouse were damaged or
destroyed, we might be unable to replace the inventory in a timely manner and,
as a result, be unable to process orders in a timely manner or at all. We cannot
be certain that we would be able to replace the inventory as quickly as our
customer orders demand, which may result in the loss of revenue and customers,
which would harm our business, financial condition and results of operations.
RISKS RELATED TO THE INTERNET INDUSTRY
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE
Our industry is new and rapidly evolving. Our business would be harmed
if Internet usage does not continue to grow. Internet usage may be inhibited for
a number of reasons, including:
o inadequate Internet infrastructure;
o inconsistent quality of service; and
o unavailability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth, or its performance and
reliability may decline. In addition, websites, including ours, have experienced
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. We anticipate that these outages
or delays will occur from time to time in the future and, if they occur
frequently or for extended periods of time, Internet usage, including usage of
our website, could grow more slowly or decline.
OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE ELECTRONIC COMMERCE
MARKET, WHICH IS UNCERTAIN
Our future revenues substantially depend upon the widespread acceptance
and use of the Internet as an effective medium of commerce by consumers. Demand
for recently introduced products and services over the Internet is subject to a
high level of uncertainty. Although independent market research firms forecast
that the number of Internet users worldwide will grow substantially in the next
few years, we cannot be certain that this growth will occur or that our sales
will grow at the same rate. The development of the Internet as a viable
commercial marketplace is subject to a number of risks including:
o potential customers may be unwilling to shift their purchasing from
traditional vendors to online vendors;
o insufficient availability of or changes in telecommunications services
could result in slower response times, which could delay the acceptance
of the Internet as an effective commerce medium;
o continued growth in the number of Internet users;
o concerns about transaction security;
o continued development of the necessary technological infrastructure;
o development of enabling technologies; and
o uncertain and increasing government regulations.
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RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR WEBSITES AND SYSTEMS OBSOLETE AND
REQUIRE SIGNIFICANT CAPITAL EXPENDITURES
The Internet and the electronic commerce industry are characterized by
rapid technological change, sudden changes in customer requirements and
preferences, frequent new product and service introductions incorporating new
technologies and the emergence of new industry standards and practices that
could render our existing websites and transaction processing systems obsolete.
The emerging nature of these products and services and their rapid evolution
will require that we continually improve the performance, features and
reliability of our online services, particularly in response to competitive
offerings. Our success will depend, in part, on our ability:
o to enhance our existing products and services; and
o to respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis.
The development of websites and other proprietary technology entails
significant technical and business risks and requires substantial expenditures
and lead time. We may be unable to use new technologies effectively or adapt our
website, proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards which could harm our business.
Updating our technology internally and licensing new technology from third
parties may require significant additional capital expenditures and could affect
our results of operations.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH ELECTRONIC COMMERCE SECURITY AND CREDIT
CARD FRAUD, WHICH MAY REDUCE COLLECTIONS AND DISCOURAGE ONLINE TRANSACTIONS
Consumer concerns about privacy or the security of transactions
conducted on the Internet may inhibit the growth of the Internet and electronic
commerce. To securely transmit confidential information, such as customer credit
card numbers, we rely on encryption and authentication technology that we
license from third parties. We cannot predict whether the algorithms we use to
protect customer transaction data will be compromised. Furthermore, our servers
may be vulnerable to computer viruses, physical or electronic break-ins and
similar disruptions. We may need to expend significant additional capital and
other resources to protect against a security breach or to alleviate problems
caused by any security breaches. The measures we take to protect against
security breaches may not be successful. Our failure to prevent security
breaches could harm our business.
To date, we have suffered minor losses as a result of orders placed
with fraudulent credit card data even though the associated financial
institution approved payment of the orders in each case. Under current credit
card practices, a merchant is liable for fraudulent credit card transactions
where, as is the case with the transactions we process, that merchant does not
obtain a cardholder's signature. A failure to adequately control fraudulent
credit card transactions could reduce our revenues and harm our business.
WE COULD FACE LIABILITY FOR INFORMATION DISPLAYED ON AND COMMUNICATIONS THROUGH
OUR WEBSITE
We may be subject to claims for defamation, negligence, copyright or
trademark infringement or other claims relating to the information we publish on
our website. These types of claims have been brought, sometimes successfully,
against Internet companies as well as print publications in the past. We also
utilize email as a marketing medium, which may subject us to potential risks,
such as:
o liabilities or claims resulting from unsolicited email;
o lost or misdirected messages; or
o illegal or fraudulent use of email.
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These claims could result in substantial costs and a diversion of our
management's attention and resources, which could harm our business.
EFFORTS TO REGULATE OR ELIMINATE THE USE OF MECHANISMS THAT AUTOMATICALLY
COLLECT INFORMATION ON VISITORS TO OUR WEBSITE MAY INTERFERE WITH OUR ABILITY TO
TARGET OUR MARKETING EFFORTS
Websites typically place a small tracking program on a user's hard
drive without the user's knowledge or consent. These programs automatically
collect data about any visits that a user makes to various websites. Website
operators use these mechanisms for a variety of purposes, including the
collection of data derived from users' Internet activity. Most currently
available Internet browsers allow users to elect to remove these tracking
programs at any time or to prevent this information from being stored on their
hard drive. In addition, some commentators, privacy advocates and governmental
bodies have suggested limiting or eliminating the use of these tracking
mechanisms. Any reduction or limitation in the use of this software could limit
the effectiveness of our sales and marketing efforts.
WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND
LEGAL UNCERTAINTIES SURROUNDING THE INTERNET
New Internet legislation or regulation or the application of existing
laws and regulations to the Internet and electronic commerce could harm our
business, financial condition and results of operations. We are subject to
regulations applicable to businesses generally and laws or regulations directly
applicable to communications over the Internet and access to electronic
commerce. Although there are currently few laws and regulations directly
applicable to electronic commerce, it is possible that a number of laws and
regulations may be adopted with respect to the Internet covering issues such as
user privacy, pricing, content, copyrights, distribution, antitrust, taxation
and characteristics and quality of products and services. For example, the
United States Congress recently enacted Internet laws regarding children's
privacy, copyrights and transmission of sexually explicit material. In addition,
the European Union recently enacted its own Internet privacy regulations.
Furthermore, the growth and development of the market for electronic commerce
may prompt calls for more stringent consumer protection laws that may impose
additional burdens on those companies conducting business online. The adoption
of any additional laws or regulations regarding the Internet may decrease the
growth of the Internet or electronic commerce, which could, in turn, decrease
the demand for our products and services and increase our cost of doing
business. In addition, if we were alleged to have violated federal, state or
foreign civil or criminal law, we could be subject to liability, and even if we
could successfully defend such claims, they may involve significant legal
compliance and litigation costs.
Due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, freedom of expression,
pricing, content and quality of products and services, taxation, advertising,
intellectual property rights and information security. The nature of this
legislation and the manner in which it may be interpreted and enforced cannot be
fully determined and, therefore, this legislation could subject us to potential
liability, which in turn could harm our business. The adoption of any such laws
or regulations might also decrease the rate of growth of Internet use, which in
turn could decrease the demand for our products and services, or increase the
cost of doing business, or otherwise harm our business, financial condition and
results of operations. In addition, applicability to the Internet of existing
laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy is
uncertain. The vast majority of these laws were adopted prior to the advent of
the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of electronic commerce.
22
Several states have also proposed legislation that would limit the use
of personal information gathered online or require websites to establish privacy
policies. The Federal Trade Commission has also initiated action against at
least one website regarding the manner in which information is collected from
users and provided to third parties. Changes to existing laws or the passage of
new laws intended to address these issues, including some recently proposed
changes, could create uncertainty in the marketplace that could reduce demand
for our products or services, increase the cost of doing business as a result of
litigation costs or increased service delivery costs. In addition, because our
products and services are accessible throughout the United States, other
jurisdictions may claim that we are required to qualify to do business as a
foreign corporation in a particular state. We are qualified to do business in
California and Nevada. Our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties for the failure to qualify and could result in our inability to
enforce contracts in those jurisdictions. Any new legislation or regulation of
this kind, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could harm our business, financial
condition or results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates is limited to
the exposure related to our debt instruments which are tied to market rates. We
plan to ensure the safety and preservation of our invested principal funds by
limiting default risks, market risk and reinvestment risk. We plan to invest in
high-quality, investment-grade securities. As a result, we do not believe that
we are subject to material market risk.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we are involved in litigation incidental to the
conduct of our business. We are not party to any lawsuit or proceeding that, in
our opinion, is likely to seriously harm our business.
We previously reported that the company from whom we purchased the
rights to the 1-800-Batteries toll-free telephone number and name had filed an
arbitration claim alleging our material breach of the purchase agreement,
terminating the contract, and demanding a return of the number and name as well
as unspecified monetary damages. An arbitration proceeding was held in Richmond,
Virginia, in late June 2000. In late August 2000 the arbitrator ruled that while
we would be required to pay the other company approximately $125,000 (inclusive
of fees), we could keep both the phone number and related name. Further, our
ongoing obligations under the contract are now terminated. We are very pleased
with the result of this arbitration and consider it a very positive development
for the Company in terms of paying a limited sum to confirm unrestricted rights
to these assets with no continuing covenants or obligations to the seller.
We had also previously reported that on October 11, 1999, in the Second
Judicial District Court of the State of Nevada in and for the County of Washoe,
Microflex Corporation filed a lawsuit against us and certain of our employees
based upon circumstances surrounding our hiring of several former Microflex
employees. The suit alleged that we induced certain former Microflex employees
to breach the terms of their nondisclosure and nonsolicitation agreements with
Microflex, that we interfered with Microflex's contractual relations and
prospective economic advantage, and that we engaged in unfair competition. Based
on our belief that these charges were without merit, we filed a motion to
dismiss the charges, and in August 2000 the court granted our motion as to
several of the claims. Based in large part on the success of our motion,
Microflex, through its counsel, has verbally agreed to drop the remaining claims
against us and enter into a mutual release on this matter. We anticipate formal
documentation of this most favorable resolution to be in place shortly.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with our initial public offering of common stock, we
filed a Registration Statement on Form S-1, SEC File No. 333-84723 (the
"Registration Statement"), which was declared effective by the Commission on
October 13, 1999. Pursuant to the Registration Statement, we registered
5,750,000 shares of our common stock, $.001 par value per share, including
750,000 shares available for sale to the underwriters upon the exercise of their
over-allotment option. The aggregate offering price of the shares sold was $69.0
million, $4.8 million of which was applied towards the underwriters discounts
and commissions. Other expenses related to the offering totaled $1.6 million.
The net proceeds to us from the sale of common stock in the initial public
offering were approximately $62.6 million, including exercise of the
underwriters' over-allotment option.
We have used a portion of the proceeds for investment in sales and
marketing, and general corporate purposes, including capital expenditures ($3.8
million), as well as strategic acquisitions ($3.0 million). The remainder of the
proceeds have been invested in short-term, interest-bearing, investment-grade
securities. The use of proceeds from the offering does not represent a material
change in the use of proceeds described in our final prospectus filed on October
15, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On September 13, 2000, the Company filed a Form 8-K under Item 2 announcing the
Company's acquisition of Xtend Micro Products, Inc. The principal agreement for
such transaction was filed in connection with such Form 8-K and, accordingly, is
not included herewith.
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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.
Dated: November 14, 2000
iGo CORPORATION
/s/ Mick Delargy
Senior Vice President and
Chief Operating Officer
(Duly Authorized Officer, Principal
Financial and Accounting Officer)
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