iGo, Inc. 10-Q 2012
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended March 31, 2012
For the transition period from to
Commission file number: 0-30907
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
(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 a checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
At May 4, 2012, there were 34,167,122 shares of the Registrants Common Stock, par value $0.01 per share outstanding.
TABLE OF CONTENTS
Items 2, 3, 4 and 5 are not applicable.
ITEM 1. FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
See accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, except per share amounts)
See accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to unaudited condensed consolidated financial statements.
IGO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements include the accounts of iGo, Inc. and its wholly-owned subsidiaries, Mobility California, Inc., Mobility Idaho, Inc., iGo EMEA Limited, Mobility Texas, Inc., iGo Direct Corporation, Adapt Mobile Limited (Adapt) and Aerial7 Industries, Inc. (Aerial7) (collectively, iGo or the Company). All significant intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles, pursuant to rules and regulations of the Securities and Exchange Commission (the SEC). In the opinion of management, the accompanying condensed consolidated financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2011 included in the Companys Form 10-K, filed with the SEC. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of results to be expected for the full year or any other period.
The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make a number of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to bad debt expense, sales returns and price protection, inventories, warranty obligations, impairment of long-lived assets and investments, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Recent Accounting Pronouncements
In June 2011, the FASB issued an amendment to the existing guidance on the presentation of comprehensive income. Under the amended guidance, entities have the option to present the components of net income and other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Entities no longer have the option of presenting the components of other comprehensive income within the statement of changes in stockholders equity. For public entities, the amendment is effective on a retrospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2011. Adoption of this amendment resulted in a change to the Companys presentation of comprehensive income.
As of March 31, 2012, the Companys financial assets and financial liabilities that are measured at fair value on a recurring basis are comprised of overnight money market funds and investments in marketable securities.
The Company invests excess cash from its operating cash accounts in overnight money market funds and reflects these amounts within cash and cash equivalents on the condensed consolidated balance sheet at a net value of 1:1 for each dollar invested.
At March 31, 2012 and December 31, 2011, investments in marketable securities totaling $2,518,000 and $4,890,000, respectively, are classified as short-term investments on the condensed consolidated balance sheets. These investments are considered available-for-sale securities and are reported at fair value based on third-party broker statements, which qualifies as level 2 in the fair value hierarchy. At March 31, 2012, investments in marketable securities totaling $344,000 are classified as long-term investments on the condensed consolidated balance sheet. These investments are considered available-for-sale securities and are reported at fair value based on a quoted market price, which qualifies as level 1 in the fair value hierarchy. The unrealized gains and losses on available-for-sale securities are recorded in accumulated other comprehensive (loss) income. Realized gains and losses are included in interest income, net.
The Company has determined that all of its investments in short-term marketable securities should be classified as available-for-sale and reported at fair value.
The Company assesses its investments in marketable securities for other-than-temporary declines in value by considering various factors that include, among other things, any events that may affect the creditworthiness of a securitys issuer, the length of time the security has been in a loss position, and the Companys ability and intent to hold the security until a forecasted recovery of fair value.
The Company generated net proceeds of $2,375,000 and $7,605,000 from the sale of short-term available-for-sale marketable securities during the three months ended March 31, 2012 and March 31, 2011, respectively.
As of March 31, 2012 and December 31, 2011, the amortized cost basis, unrealized holding gains, unrealized holding losses, and aggregate fair value by short-term major security-type investments were as follows (dollars in thousands):
In June 2011, the Company made an investment in Pure Energy Visions Corporation, which is a shareholder in Pure Energy Solutions, the Companys supplier of rechargeable batteries, in which the Company received 2,142,858 shares of Pure Energy Visions common stock at a price per share equal to $0.286, and an interest-free convertible secured debenture having a one-year repayment term that converts into an additional 2,142,858 shares of Pure Energy Visions common stock in lieu of repayment either upon the achievement of certain business goals or earlier at iGos discretion. The Company did not obtain control of Pure Energy Visions as a result of this investment.
The Company assesses its long-term investments for other-than-temporary declines in value by considering various factors that include, among other things, events that may affect the creditworthiness of a securitys issuer, the length of time the security has been in a loss position, and the Companys ability and intent to hold the security until a forecasted recovery of fair value. At March 31, 2012 the Companys investments in Pure Energy Visions had fair values significantly below their amortized cost, resulting in unrealized holding losses. Due to the short duration of the decline in value and the Companys ability and intent to hold these securities until recovery, the Company does not consider the declines in value of the long-term investments to be other-than-temporary. However, any such losses will be evaluated on an ongoing basis and could result in other than temporary impairment charges in future periods.
As of March 31, 2012 and December 31, 2011, the amortized cost basis, unrealized holding gains, unrealized holding losses, and aggregate fair value by long-term major security-type investments were as follows (dollars in thousands):
Intangible assets consist of the following at March 31, 2012 and December 31, 2011 (dollars in thousands):
Aggregate amortization expense for identifiable intangible assets totaled $345,000 and $379,000 for the three months ended March 31, 2012 and 2011, respectively.
Stock-based compensation expense includes compensation expense, recognized over the applicable requisite service periods for share-based awards. As of March 31, 2012, there were no fully-vested outstanding stock options and no non-vested outstanding stock options.
The following table summarizes information regarding restricted stock units for the three months ended March 31, 2012:
For the three months ended March 31, 2012 and 2011, the Company recorded in general and administrative expense pre-tax charges of $461,000 and $422,000 associated with the expensing of restricted stock unit awards activity.
As of March 31, 2012, there was $2,292,000 of total unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over a weighted average period of two years.
As of March 31, 2012, all outstanding restricted stock units were non-vested.
The computation of basic and diluted net loss per share follows (in thousands, except per share amounts):
All restricted stock units were excluded from the computation of diluted net loss per common share for each period presented because the inclusion of such items would be anti-dilutive based on the net loss reported.
The Company is engaged in the business of selling accessories for computers and mobile electronic devices. The Company has five product lines, consisting of Power, Batteries, Audio, Protection and Other Accessories. The Companys chief operating decision maker (CODM) continues to evaluate revenues based on product lines and geographies. However, the CODM manages the Companys operations as a single business segment, which consists of the development, marketing and sales of electronics accessories across all product lines.
The following tables summarize the Companys revenues by product line, as well as its revenues by geography (dollars in thousands):
The majority of the Companys assets are domiciled in the United States.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with high credit quality financial institutions and generally limits the amount of credit exposure to the amount of FDIC coverage. However, periodically during the year, the Company maintains cash in financial institutions in excess of the current FDIC insurance coverage limit of $250,000. The Company performs ongoing credit evaluations of its customers financial condition but does not typically require collateral to support customer receivables. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Two customers accounted for 24% and 16% of net sales for the three months ended March 31, 2012. Two customers accounted for 24% and 10% of net sales for the three months ended March 31, 2011.
Two customers accounts receivable balance accounted for 30% and 10% of net accounts receivable at March 31, 2012. One customers accounts receivable balance accounted for 19% of net accounts receivable at March 31, 2011.
Allowance for doubtful accounts was $299,000 and $311,000 at March 31, 2012 and December 31, 2011, respectively. Allowance for sales returns and price protection was $423,000 and $318,000 at March 31, 2012 and December 31, 2011, respectively.
The Company procures its products primarily from supply sources based in Asia. Typically, the Company places purchase orders for completed products and takes ownership of the finished inventory upon completion and delivery from its supplier. Occasionally, the Company presents its suppliers with Letters of Authorization for the suppliers to procure long-lead raw components to be used in the manufacture of the Companys products. These Letters of Authorization indicate the Companys commitment to utilize the long-lead raw components in production. As of June 30, 2007, based on a change in strategic direction, the Company determined it would not procure certain products for which it had outstanding Letters of Authorization with suppliers. The Company believes it is probable that it will be required to pay suppliers for certain Letter of Authorization commitments and has already partially settled some of these obligations. At March 31, 2012 and December 31, 2011, the Company had estimated, and recorded, a remaining liability for this contingency in the amount of $150,000.
From time to time, the Company is involved in legal proceedings arising in the ordinary course of its business. The Company is not currently a party to any litigation that the Company believes, if determined adversely to it, would have a material adverse effect on its financial condition, results of operations, or cash flows.
This report contains statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words believe, expect, anticipate, estimate and other similar statements of expectations identify forward-looking statements. Forward-looking statements in this report can be found in the Business, Managements Discussion and Analysis of Financial Condition and Results of Operations and Financial Statements and Supplementary Data sections as well as other sections of this report and include, without limitation, statements concerning our expectations regarding our anticipated revenue, costs, cash flows, gross profit, gross margins, operating efficiencies, and related expenses for 2012; expectation regarding our strategy, including but not limited to, our intentions to expand our line of cases, skins, screen protectors, audio products and introduce new accessories for mobile devices,, to protect our intellectual property position by filing for additional patents, to pursue opportunities to acquire businesses, products or technologies, and to expand the market availability of our products; our anticipated ability to broaden our distribution base, thus decreasing our dependence on sales to Walmart and RadioShack; beliefs relating to our competitive advantages and the market need for our products; the expected sources, availability and sufficiency of cash and liquidity; expected market and industry trends; expectations regarding the success of new product introductions; the anticipated strength, and ability to protect, our intellectual property portfolio;; our expectations about competition; trends in key operating metrics, including days outstanding in accounts receivable and inventory turns; the results of future tax audits and tax settlements; the realizability of our deferred tax asset and the outcome of uncertain tax positions; the recognition of unrecognized equity compensation cost; our initiatives, including plans for internal product development, sourcing products from third-parties, joint marketing ventures, product bundling, licensing opportunities, acquisitions of complementary and synergistic product families and companies, expanding our distribution beyond consumer retail by selling products into the enterprise, government and education channels and the resulting positive impact on our revenue and earnings of these initiatives; our intention to retain cash balances in the United Kingdom; the possible disposition of assets; future payments to suppliers for letters of authorization; the possibility that we may issue additional shares of stock or attempt to access a credit facility; our intention and ability to hold marketable securities to maturity; our intentions about employing hedging strategies; and our expectations regarding the outcome and anticipated impact of various legal proceedings in which we may be involved.
These forward-looking statements are based largely on our managements expectations and involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include those discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 under the heading Risk Factors and those set forth in other sections of this report and in other reports that we file with the SEC. Additional factors that could cause actual results to differ materially from those expressed in these forward-looking statements include, among others, the following:
In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will prove to be accurate. We undertake no obligation to publicly update or revise any forward-looking statements, or any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements.
iGo®, iGo Green®, Adapt Mobile®, and Aerial7® are registered trademarks of iGo, Inc. or its subsidiaries in the United States and other countries. Other names and brands may be claimed as the property of others.
We are a provider of innovative accessories and power management solutions for the electronics industry. Our vision is to attach our products and technology to every mobile electronic device. Increased functionality and the ability to access and manage information remotely are driving the proliferation of mobile electronic devices and applications. The popularity of these devices is increasing due to reductions in size, weight and cost and improvements in functionality, storage capacity and reliability. Each of these devices needs to be powered and connected when in the home, the office, or on the road, and can be accessorized, representing opportunities for one or more of our products.
We design and develop products that make computers and mobile electronic devices more efficient and cost effective, thus enabling professionals and consumers higher utilization of their mobile devices and the ability to access information more readily. Our current product offering primarily consists of power, batteries, audio and protection solutions for mobile electronic devices, and we intend to continue to introduce new accessories for mobile electronic devices.
The centerpiece of our power management solutions is our proprietary iGo Green® technology. Our first iGo Green products are laptop chargers and surge protectors that incorporate our new patented technology. Our iGo Green technology reduces energy consumption and almost completely eliminates standby power, or Vampire Power. We believe that this power-saving technology will help us achieve our long-term goal of establishing an industry standard for reduced power consumption when charging mobile electronic devices.
Through our relationship with Pure Energy Solutions (Pure Energy), we are the exclusive marketer and distributor of Pure Energys patented rechargeable alkaline (RAMcell) batteries to retailers worldwide (excluding China) with non-exclusive distribution rights in Africa. RAMcell batteries are pre-charged and hold a charge for up to seven years. Approximately three billion single-use alkaline batteries are sold annually in the United States. RAMcell batteries provide users an environmentally friendly, cost-effective alternative to disposable alkaline batteries. We believe that RAMcell batteries and related battery chargers are complementary to our power-saving technology and contribute to lower levels of electronic waste.
As a result of our acquisition of Aerial7 Industries, Inc. (Aerial7), we now offer a line of earbuds and headphones. As mobile phones have recently evolved into smartphones and the introduction of new portable media devices, all of which are capable of playing music and video, many consumers utilize a variety of mobile electronic devices for both communication and entertainment purposes. Our audio products are uniquely designed to provide enhanced sound quality compared to competitive products at similar price points. Our line of audio products also offer consumers the ability to both communicate with others via an integrated microphone that can be used with a portable computer, mobile phone, computer or other portable media device as well the ability to listen to music or video from these devices. Similar to our protection products and in addition to the quality sound output delivered by our audio products, our line of audio products is also fashionably designed, allowing consumers to express their unique and personal style. Currently, these products are offered primarily through lifestyle and music retailers around the world, however we intend to expand our audio product offering and introduce these and similar products in consumer electronics retailers around the world as well.
As a result of our acquisition of Adapt Mobile Limited (Adapt), we now offer a line of skins, cases and screen protectors for mobile electronic devices. Consumers value the protection of their mobile electronic devices as they rely on them heavily in their daily lives to both connect with others and store important information. In addition, consumers often view these products as a way to express their personal fashion and style, similar to clothing and other accessories. Our line of protection products is designed to meet both of these consumer needs by providing the consumer with a high degree of protection, while simultaneously offering them a unique fashionable design that fits their personal style. Currently, we offer these products primarily in Europe, however we expect to expand our line of cases, skins, screen protectors and other similar products and introduce them in other markets throughout the world.
Our ability to execute successfully on our near and long-term objectives depends largely upon the general market acceptance of our power, protection and audio products, our ability to protect our unique proprietary rights, including notable our iGo Green technology, our ability to generate additional major customers, and general economic conditions. Additionally, we must execute on the customer relationships that we have developed and continue to design, develop, manufacture and market new and innovative technology and products that are embraced by these customers and the overall market.
Critical Accounting Policies and Estimates
There were no changes in our critical accounting policies during the three months ended March 31, 2012 from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2011.
Results of Operations
The following table presents certain selected consolidated financial data for the periods indicated expressed as a percentage of total revenue:
Comparison of Three Months Ended March 31, 2012 and 2011
Revenue. Revenue generally consists of sales of products, net of returns and allowances. To date, our revenues have come predominantly from laptop chargers. The following table summarizes the year-over-year comparison of our consolidated revenue for the periods indicated (dollars in thousands):
Following is a breakdown of revenue by significant account for the three months ended March 31, 2012 and 2011 with the corresponding dollar and percent changes (dollars in thousands):
The decrease in revenue for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 was primarily due to declines in sales volume of power products to Belkin and Office Depot combined with a decline in average selling price for power products to Walmart, partially offset by an increase in sales volume to RadioShack, as indicated in the table above. Sales to all other customers also declined as indicated in the table above. The decrease in revenue was also partially offset by an increase in sales of batteries of $511,000 to $658,000 for the three months ended March 31, 2012, compared to $147,000 for the three months ended March 31, 2011. We are working to continue to broaden our distribution base and expand sales of product categories other than power during 2012 with the goal of reducing our dependence on sales of power products to Walmart and RadioShack.
Cost of revenue, gross profit and gross margin. Cost of revenue generally consists of costs associated with components, outsourced manufacturing and in-house labor associated with assembly, testing, packaging, shipping and quality assurance, depreciation of equipment and indirect manufacturing costs. Gross profit is the difference between revenue and cost of revenue. Gross margin is gross profit stated as a percentage of revenue. The following table summarizes the year-over-year comparison of our cost of revenue, gross profit and gross margin for the periods indicated (dollars in thousands):
Although revenue decreased for the three months ended March 31, 2012 compared to three months ended March 31, 2011, cost of revenue increased and gross profit decreased due primarily to the declines in average selling prices to Walmart and other customers. Labor and overhead expenses, which are mostly fixed, increased by $68,000 to $1.4 million, or 16.8% of revenue, for the three months ended March 31, 2012, compared to $1.3 million, or 14.3% of revenue, for the three months ended March 31, 2011. As a result, cost of revenue as a percentage of revenue increased to 82.5% for the three months ended March 31, 2012 from 69.0% for the three months ended March 31, 2011. We continue to see pricing pressure on our products, and as a result, we expect gross margins to remain the same or decline slightly in 2012 compared to 2011.
Sales and marketing. Sales and marketing expenses generally consist of salaries, commissions and other personnel-related costs of our sales, marketing and support personnel, advertising, public relations, promotions, printed media and travel. The following table summarizes the year-over-year comparison of our sales and marketing expenses for the periods indicated (dollars in thousands):
The decrease in sales and marketing expenses primarily resulted from decreases of approximately $282,000 in personnel-related expenses and $220,000 in advertising, market research, public relations and website development expenses for the three months ended March 31, 2012, compared to the three months ended March 31, 2011, due to a reduction of personnel that occurred in August 2011 combined with our decision to reduce discretionary marketing expenditures. As a percentage of revenue, sales and marketing expenses decreased to 19.0% for the three months ended March 31, 2012 from 22.1% for the three months ended March 31, 2011.
Research and development. Research and development expenses consist primarily of salaries and personnel-related costs, outside consulting, lab costs and travel-related costs of our product development group. The following table summarizes the year-over-year comparison of our research and development expenses for the periods indicated (dollars in thousands):
The increase in research and development expenses primarily resulted from the increases of approximately $75,000 in personnel-related expenses, along with increases of approximately $98,000 in engineering consulting and product certifications for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. As a percentage of revenue, research and development expenses increased to 7.9% for the three months ended March 31, 2012 from 5.1% for the three months ended March 31, 2011. We anticipate increased research and development expenses in 2012 compared to 2011.
General and administrative. General and administrative expenses consist primarily of salaries and other personnel-related expenses of our finance, human resources, information systems, corporate development and other administrative personnel, as well as facilities, legal and other professional fees, depreciation and amortization and related expenses. The following table summarizes the year-over-year comparison of our general and administrative expenses for the periods indicated (dollars in thousands):
The decrease in general and administrative expenses primarily resulted from a decrease of $78,000 in bad debt expense, partially offset by an increase in equity compensation of $39,000 during the three months ended March 31, 2012 compared to the three months ended March 31, 2011. General and administrative expenses as a percentage of revenue increased to 24.2% for the three months ended March 31, 2012 from 22.1% for the three months ended March 31, 2011.
Interest income, net. Interest income, net decreased by $16,000 to $5,000 for the three months ended March 31, 2012 compared to $21,000 for the three months ended March 31, 2011. The decrease was primarily due to decreased short-term investment balances during 2012. At March 31, 2012, the average yield on our cash and short-term investments was approximately 0%.
Other income (expense), net.Other income (expense), net was $(23,000) for the three months ended March 31, 2012 compared to $30,000 for the three months ended March 31, 2011. The shift from other income for the three months ended March 31, 2011 to other expense for the three months ended March 31, 2012 was due to sales to customers outside of the United States denominated in foreign currency and fluctuations in those foreign currencies between invoicing and cash collection related to those sales.
Income taxes. No provision for income taxes was required for the three months ended March 31, 2012 or 2011. Based on historical operating losses and projections for future taxable income, it is more likely than not that we will not fully realize the benefits of the net operating loss carryforwards. We have not, therefore, recorded a tax benefit from our net operating loss carryforwards for either of the three months ended March 31, 2012 or March 31, 2011, which at March 31, 2012 totaled approximately $168 million.
We have historically generated the majority of our revenue from the sale of chargers for laptops, however, consumers are increasingly using smartphones and tablets as their primary mobile electronic devices. As a result of this shift, we have seen increased competition and a decline in demand for our power products with our traditional customer base. For example, during 2011, we faced increased competition from retail customers who began offering traditional power products under their own private-label brands, including most notably RadioShack. Although we have expanded our offering of products beyond our traditional power products to include a variety of accessories to support the increased utilization of smartphones and tablets, including audio, protection, and battery products, the revenue generated from the sales of these products has not yet offset the decline in revenue from historical sales of our traditional power products. Nevertheless, as a result of the diversification of our product offering combined with the continued sales of our traditional power products, we expect our total 2012 revenue to be more than our 2011 revenue.
We expect to continue to introduce additional mobile electronics accessory products in the future as we execute on our vision to attach our products and technology to every mobile electronic device. In order to continue to grow our business and enhance shareholder value, we believe it is necessary to continue to expand our product portfolio. Moving forward, we intend to continue to explore a number of initiatives designed to broaden our product portfolio within the mobile electronics accessories space. We currently plan that the initiatives will consist of internal product development, sourcing products from third-parties, joint marketing ventures, product bundling, licensing opportunities, and acquisitions of complementary and synergistic product families and companies. We also have initiatives to expand our distribution beyond consumer retail with the intent to sell products into the enterprise, government and education channels. All of these initiatives are designed to leverage the inherent strengths of our business, most notably, our strong balance sheet, our compelling portfolio of intellectual property, and our established brand and relationships with major retailers. As we continue to execute on this vision, we believe we can improve our ability to drive higher levels of revenue and earnings, which will ultimately have a positive impact on value creation for our shareholders.
We continue to see increases in component costs from our primary Asian suppliers combined with pricing pressure from our customers, most notably from Walmart. However, we expect the cost and price pressures will be partially offset by expected increased operating efficiency as a result of anticipated increases in revenue. As a result, we expect gross margins to remain the same or decline slightly in 2012 compared to 2011. We expect operating expenses in 2012 to be consistent with 2011 operating expenses.
We anticipate increased research and development expenses in 2012 compared to 2011, primarily as a result of the continued development of our iGo Green technology, including expenses relating to the collaborative development of an integrated circuit with Texas Instruments based on our iGo Green technology. As a result of our planned product development efforts, we expect to further expand our intellectual property position by filing for additional patents in various countries around the world. A portion of these costs are recorded as research and development expense as incurred, and a portion are capitalized and amortized as general and administrative expense. We may also incur additional legal and related expenses associated with the defense and enforcement of our intellectual property portfolio, which could increase our general and administrative expenses.
Liquidity and Capital Resources
Cash and Cash Flow. Our available cash and cash equivalents are held in bank deposits and money market funds in the United States and in the United Kingdom. Our intent is that the cash balances in the United Kingdom will remain there for future growth and investments, and we will meet any liquidity requirements in the United States through ongoing cash flows, cash on hand, external financing, or both. We actively monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety of principal while secondarily maximizing yield on those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities. To date, we have experienced no material loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets.
At any point in time we have funds in our operating accounts that are with third-party financial institutions. These balances in the U.S. may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or could be subject to other adverse conditions in the financial markets.
Our primary use of cash has been to fund operating losses, fund acquisitions, and fund working capital needs of our business, which we expect to continue through 2012. Some of our new suppliers of batteries, protection and audio products have been unwilling to extend trade credit to us on the same terms and conditions as our power product suppliers have historically done. As a result, we are required to pay for purchases of these products in advance of the related sale of these products, which has increased our use of cash to support the working capital required to effectively operate our business. Historically, our primary sources of liquidity have been funds provided by the sale of intellectual property assets. We cannot assure you that this source will be available to us in the future.
We currently do not maintain a credit facility with a bank, however, we may attempt to access to this source of financing at some point in the future.
The following table sets forth for the period presented certain consolidated cash flow information (dollars in thousands):
Our consolidated cash flow operating metrics are as follows:
The increase in DSOs at March 31, 2012 compared to March 31, 2011 was primarily due to the increase in sales to RadioShack, which generally requires longer payment terms. We expect DSOs will increase in 2012 as our revenue base increases. The decrease in inventory turns was primarily due to the overall decline in revenue for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. We expect to manage inventory during 2012 and we expect inventory turns for the remainder of 2012 to increase.
Investments. At March 31, 2012, our short-term investments in marketable securities included one corporate bond and one municipal mutual fund with a total fair value of approximately $2.5 million. Our long-term investments consisted of 2,142,858 shares of Pure Energy Visions common stock with a fair value per share equal to $0.08, plus an interest-free convertible secured debenture having a one-year repayment term that converts into an additional 2,142,858 shares of Pure Energy Visions common stock in lieu of repayment either upon the achievement of certain business goals or earlier at our discretion.
We believe we have the ability to hold all marketable securities to maturity. However, we may dispose of securities prior to their scheduled maturity due to changes in interest rates, prepayments, tax and credit considerations, liquidity or regulatory capital requirements, or other similar factors. As a result, we classify all marketable securities as available-for-sale. These securities are reported at fair value based on third-party broker statements, which represents level 2 in the fair value hierarchy, with unrealized gains and losses, reported in equity as a separate component of accumulated other comprehensive (loss) income.
Contractual Obligations. In our day-to-day business activities, we incur certain commitments to make future payments under contracts such as operating leases and purchase orders. Maturities under these contracts are set forth in the following table as of March 31, 2011 (dollars in thousands):
Off-Balance Sheet Arrangements. We have no off-balance sheet financing arrangements.
Acquisitions and Dispositions. In 2010 we acquired Adapt and Aerial7 to complement our product offerings and expand our revenue base. Our future strategy includes the possible acquisition of other businesses to continue to expand or complement our operations. The magnitude, timing and nature of any future acquisitions will depend on a number of factors, including the availability of suitable acquisition candidates, the negotiation of acceptable terms, our financial capabilities and general economic and business conditions. Financing of future acquisitions would result in the utilization of cash, incurrence of additional debt, issuance of additional equity securities or a combination of all of these. Our future strategy may also include the possible disposition of assets that are not considered integral to our business which would likely result in the generation of cash.
Net Operating Loss Carryforwards. As of March 31, 2012, we had approximately $168 million of federal, foreign and state net operating loss carryforwards which expire at various dates. The issuance of our common stock in the future for acquisitions, if any, coupled with prior sales of common stock could cause an annual limitation on the use of our net operating loss carryforwards pursuant to the change in ownership provisions of Section 382 of the Internal Revenue Code of 1986, as amended. This limitation is expected to have a material effect on the timing of our ability to use the net operating loss carryforwards in the future. Additionally, our ability to use the net operating loss carryforwards is dependent upon our future level of profitability, which cannot be determined.
Liquidity Outlook. Based on our projections, we believe that our existing cash, cash equivalents, and short-term investments will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to obtain debt financing or sell additional equity securities. The sale of additional equity securities would result in more dilution to our stockholders. In addition, additional capital resources may not be available to us in amounts or on terms that are acceptable to us.
We are exposed to certain market risks in the ordinary course of our business. These risks result primarily from changes in foreign currency exchange rates and interest rates. In addition, our international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures and other regulations and restrictions.
To date we have not utilized derivative financial instruments or derivative commodity instruments. We do not expect to employ these or other strategies to hedge market risk in the foreseeable future. We invest our cash in money market funds, which are subject to minimal credit and market risk. We believe that the market risks associated with these financial instruments are immaterial.
See Liquidity and Capital Resources for further discussion of our capital structure. Market risk, calculated as the potential change in fair value of our cash and cash equivalents and resulting from a hypothetical 1.0% (100 basis point) change in interest rates, was not material at March 31, 2012.
Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and other procedures that are designed to ensure that information required to be disclosed in our filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of disclosure controls and procedures in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. With the participation of the principal executive officer and principal financial officer, management conducted an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2012, and concluded that our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. The Company regularly reviews contingencies to determine the adequacy of the accruals and related disclosures. The amount of ultimate loss may differ from these estimates. Although it is possible that the results of operations, liquidity, or financial position of the Company could be materially affected in any particular future reporting period by the unfavorable resolution of one or more of these contingencies, the Company currently believes that the ultimate outcome of these matters will not have a material adverse effect on the results of operations, liquidity or financial position of the Company.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I. Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. There have been no material changes in our risk factors from the disclosure included in our Annual Report on Form 10-K. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
The Exhibit Index and required Exhibits immediately following the Signatures to this Form 10-Q are filed as part of, or hereby incorporated by reference into, this Form 10-Q.
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.