<PAGE>
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, 1999
Commission file number:
333-84723
iGo CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3174623
(State or other jurisdiction of incorporation (IRS Employer Identification Number)
or organization)
</TABLE>
Ken Hawk
President and Chief Executive Officer
2301 Robb Drive Reno, Nevada 89523
(Address of principal executive offices) (Zip Code)
(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 [_] NO [X]
Shares outstanding of each of the registrant's classes of common stock as of
November 1, 1999
Class Outstanding as of November 1, 1999
----- ----------------------------------
Common stock, $0.001 par value 19,358,450
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iGo Corporation
Form 10-Q
Table of Contents
Part I Financial Information
Item 1 Condensed Financial Statements
Condensed Balance Sheets as of September 30, 1999
and December 31, 1998 4
Condensed Statements of Operations for the Three-Month
Periods and Nine-Month Periods Ended September 30, 1999
and September 30, 1998 6
Condensed Statements of Cash Flows for the Nine-Month
Periods Ended September 30, 1999 and September 30, 1998 7
Notes to Condensed Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Factors That May Effect Future Results 19
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 32
Part II Other Information 33
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 36
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Part I
Financial Information
Item 1
Condensed Financial Statements
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iGo CORPORATION
Condensed Balance Sheets
September 30, 1999 and December 31, 1998
- --------------------------------------------------------------------------------
Dollars in Thousands
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<CAPTION>
ASSETS Sept. 30, 1999 Dec. 31, 1998
-------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $2,571 $2,505
Accounts receivable, net of allowances for doubtful accounts
of $379 and $170 1,303 464
Inventories, net of allowances for obsolescence of $230
and $109 2,110 1,387
Prepaid expenses 1,177 103
------ ------
Total current assets 7,161 4,459
------ ------
PROPERTY AND EQUIPMENT, net of allowances for
depreciation of $236 and $155 1,693 997
------ ------
Intangibles and other assets 485 80
------ ------
TOTAL $9,339 $5,536
====== ======
</TABLE>
(continued)
Page 4 of 36
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iGo CORPORATION
Condensed Balance Sheets (continued)
September 30, 1999 and December 31, 1998
- --------------------------------------------------------------------------------
Dollars in Thousands
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity at
Sept. 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Sept. 30, 1999 Dec. 31, 1998 (Note 4)
-------------- ------------- --------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 3,602 $ 781
Accrued liabilities 814 194
Short term notes payable - 21
Current portion of capital lease obligation 94 16
-------- -------
Total current liabilities 4,510 1,012
Deferred rent 37 36
Long-term portion of capital lease obligation 616 23
Long-term debt 191 -
-------- -------
Total liabilities 5,354 1,071
-------- -------
Commitments and contingencies (Note 5)
Mandatory redeemable preferred stock 15,217 7,890 $ -
-------- ------- --------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value; 52,237,500 shares authorized,
actual; 50,000,000 shares authorized, proforma; 6,682,396,
and 6,590,646 issued and outstanding, actual; 14,325,450
issued and outstanding, pro forma 7 7 14
Additional paid-in capital 2,328 300 17,538
Deferred compensation (1,963) (188) (1,963)
Receivable from stockholder (50) (46) (50)
Accumulated deficit (11,554) (3,498) (11,554)
-------- ------- --------
Total stockholders' equity (deficit) (11,232) (3,425) $ 3,985
-------- ------- ========
TOTAL $ 9,339 $ 5,536
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5 of 36
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iGo CORPORATION
Condensed Statements of Operations
For the Three-Month Periods and Nine-Month Periods Ended September 30, 1999 and
September 30, 1998
- --------------------------------------------------------------------------------
Dollars in Thousands (except weighted average shares)
<TABLE>
<CAPTION>
Three-Month Periods Ended Nine-Month Periods Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
REVENUES:
<S> <C> <C> <C> <C>
Net product revenue $ 5,330 $ 3,140 $ 13,047 $ 8,919
Development revenue - - - 502
---------- ----------- ---------- ---------
Total net revenues 5,330 3,140 13,047 9,421
Cost of goods sold 3,514 2,079 8,526 6,354
---------- ----------- ---------- ---------
Gross profit 1,816 1,061 4,521 3,067
---------- ----------- ---------- ---------
OPERATING EXPENSES:
Sales and marketing 4,076 939 8,252 2,873
Product development 168 95 518 255
General and administrative 1,200 409 3,006 1,194
---------- ----------- ---------- ---------
Total operating expenses 5,444 1,443 11,776 4,322
---------- ----------- ---------- ---------
Loss from operations (3,628) (382) (7,255) (1,255)
OTHER INCOME (EXPENSE), net
Interest income 31 - 63 1
Interest expense (42) (36) (71) (79)
Loss on disposal of assets - - (219) -
Miscellaneous income (expense) (3) 3 4 12
---------- ----------- ---------- ---------
Loss before provision for income taxes (3,642) (415) (7,478) (1,321)
Provision for income taxes - - (1) -
---------- ----------- ---------- ---------
NET LOSS (3,642) (415) (7,479) (1,321)
Preferred stock dividends (250) (38) (577) (113)
---------- ----------- ---------- ---------
Net loss attributable to
common stockholders $ (3,892) $ (453) $ (8,056) $ (1,434)
========== ========== ========== =========
Net loss per share--basic and diluted $ (0.59) $ (0.08) $ (1.25) $ (0.24)
========== ========== ========== =========
Supplemental $ (0.26) $ (0.04) $ (0.56) $ (0.14)
========== ========== ========== =========
Weighted-average shares outstanding 6,611,070 6,003,656 6,438,022 5,960,442
========== ========== ========== =========
Supplemental 13,955,495 9,671,156 13,331,993 9,627,942
========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 6 of 36
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iGo CORPORATION
Condensed Statements of Cash Flows
For the Nine-Month Periods Ended September 30, 1998 and September 30, 1999
- --------------------------------------------------------------------------------
Dollars in Thousands
<TABLE>
<CAPTION>
Nine-Month Periods Ended
September 30,
-----------------------------
1999 1998
------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss $(7,479) $(1,321)
Adjustments to reconcile net loss to net cash used in operating activities:
Compensation expense related to stock options 230 11
Accrued interest on stockholder note receivable (4) (2)
Provisions for bad debt and inventory 720 425
Loss on sale leaseback 219 -
Depreciation and amortization 291 99
Changes in:
Accounts receivable (1,241) 420
Inventories (1,040) (395)
Prepaid expenses (1,074) (429)
Accounts payable, accrued liabilities and deferred rent 3,442 308
------- -------
Net cash used in operating activities (5,936) (884)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment (1,170) (263)
Acquisition of intangibles and other assets (442) (4)
------- -------
Net cash used in investing activities (1,612) (267)
------- -------
Cash flows from financing activities:
Principle payments on short-term note and capital leases (53) (36)
Proceeds from sale lease back 702 -
Proceeds from exercise of stock options 23 -
Net proceeds from borrowings 1,171 -
Net proceeds from borrowings under line of credit - 1,216
Net proceeds from issuance of mandatory redeemable preferred stock 5,771 -
------- -------
Net cash provided by financing activities 7,614 1,180
------- -------
Net increase in cash and cash equivalents 66 29
Cash and cash equivalents, beginning of period 2,505 -
------- -------
Cash and cash equivalents, end of period $ 2,571 $ 29
======= =======
</TABLE>
(continued)
Page 7 of 36
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iGo CORPORATION
Condensed Statements of Cash Flows (continued)
For the Nine-Month Periods Ended September 30, 1998 and September 30, 1999
- --------------------------------------------------------------------------------
Dollars in Thousands
<TABLE>
<CAPTION>
Nine-Month Periods Ended
September 30,
---------------------------
1999 1998
------- ------
<S> <C> <C>
Supplemental disclosure of cash flows information:
Cash paid during the period for interest $ 78 $ 79
====== =====
Equipment acquired through capital leases $ - $ 6
====== =====
Mandatory redeemable preferred stock dividends accrued $ 577 $ 113
====== =====
Intangibles and other assets acquired with short-term notes $ - $ 83
====== =====
Conversion of debt to Series C preferred stock $ 980 $ -
====== =====
Deferred compensation on stock options issued $2,005 $ 203
====== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 8 of 36
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iGo CORPORATION
Notes to Condensed Financial Statements
1. Basis of Presentation
The accompanying condensed financial statements for the three-month periods
and nine-month periods ended September 30, 1999 and 1998 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
footnote 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 financial statements, and notes thereto, in the
Company's Form S-1, as amended and filed on October 13, 1999. Certain amounts in
previous presentations have been reclassified to be consistent with the 1999
condensed financial statements.
2. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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. Although the Company does
not believe SFAS No. 133 will have a material impact on its financial
statements, because of the complexity of SFAS No. 133, the ultimate impact of
its adoption has not yet been determined.
3. 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. Supplemental loss per share reflects the assumed conversion of
mandatory redeemable preferred stock (see note 4).
Page 9 of 36
<PAGE>
4. Equity Securities
The Company issued 3,667,500 shares of Series A mandatory redeemable preferred
stock ("Series A") during 1996 and 3,000,000 shares of Series B mandatory
redeemable preferred stock ("Series B") during 1998. Holders of Series A and
Series B were entitled to receive dividends at 8% per annum, prior to conversion
of their shares into common stock at a ratio of 1:1 excluding accrued dividends.
The conversion ratio for Series A would have been adjusted upon issuance of
common stock at less than $0.45 per share. The conversion ratio for Series B
would have been adjusted upon issuance of common stock at less than $2.00 per
share. Conversion was automatic upon the Company's initial public offering at a
share price of not less than $1.25, with aggregate proceeds of not less than
$15.0 million. If elected by the holders of 66 2/3% of the preferred stock then
outstanding, unconverted preferred stock would have been redeemed, on a
quarterly basis, over eight consecutive quarters beginning in June 2003 at the
original issuance price plus any declared but unpaid dividends, or upon a sale
or merger of the Company meeting certain criteria. Holders of Series A and
Series B were also entitled to a liquidation preference over common stock equal
to the original price plus any accrued but unpaid dividends.
No dividends were declared or paid as of December 31, 1998. The Company
recorded accrued dividends on Series A of $140,434 during the year ended
December 31, 1997 and $152,011 and $94,667 on Series A and Series B,
respectively, during the year ended December 31, 1998.
On July 30, 1999, the Company received gross proceeds of approximately $5.8
million on the sale of 850,572 shares of Series C at $6.82 per share. The Series
C shareholders had the same rights, preferences, and privileges as the Series A
and Series B shareholders.
On October 13, 1999, the Company conducted an initial public offering of
5,000,000 shares of its common stock at a price of $12.00 per share. All shares
of Series A, B and C preferred stock automatically converted into common stock
upon the consummation of the offering.
5. Legal Proceedings
On July 19, 1999, the company from whom the Company purchased the rights to
the 1-800-Batteries toll free telephone number and name gave the Company notice
that they believe the Company has failed to cure a material breach of the
Company's agreement with them. The notice also stated that they are terminating
their agreement with the Company and demanding a return of their rights as well
as unspecified monetary damages. At the same time, they made a demand for
arbitration of the matter with the American Arbitration Association ("AAA") in
Richmond, Virginia. The Company responded to their demand by formally denying
their claims as well as challenging the location of the arbitration proceeding.
Subsequently, AAA ruled that the arbitration would be held in Richmond,
Virginia, and an arbitrator has been selected. Many of the Company's customers
may rely on the 1-800-Batteries phone number to reach the Company's customer
solutions representatives and to the extent that the arbitrator disagrees with
the
Page 10 of 36
<PAGE>
Company's position and allows this agreement to terminate, the Company could be
harmed, although it is difficult to estimate the extent or magnitude of such
harm.
On October 11, 1999, the Company and certain employees were named as
defendants in a lawsuit alleging that the Company has induced certain of the
plaintiff's former employees to breach the terms of their nondisclosure and
nonsolicitation agreements with the plaintiff, that the Company has interfered
with the plaintiff's contractual relations and prospective economic advantage,
and that the Company has engaged in unfair competition. The plaintiff seeks
injunctive relief, monetary damages, costs and attorney's fees. The Company
believes that this suit is without merit and has filed a motion to dismiss which
is currently pending before the court. While the Company intends to vigorously
defend its actions in this matter, it cannot be certain that it will be
successful in its defense. Furthermore, if the Company is unsuccessful in
defending this action, any remedies awarded to the plaintiff could have an
adverse effect on the Company's financial position or results of future
operations.
6. Stock Split and Delaware Reincorporation
On August 30, 1999, the Company reincorporated in Delaware and effected a 6
for 1 share stock split. The number of shares issued and outstanding, the
conversion factors for all series of preferred stock, stock option information,
and per share information for all periods presented have been adjusted to
reflect the stock split.
Page 11 of 36
<PAGE>
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 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.
General
iGo is a leading provider of hard-to-find, model-specific accessories and
services for mobile electronic devices such as laptop computers, cellular phones
and handheld electronic organizers. Through our iGo.com website and customer
solutions representatives, we enable businesses and individual consumers to
efficiently identify, locate and purchase these products and services. Our
proprietary databases of over 6,500 products from more than 350 suppliers,
combined with our comprehensive industry knowledge and service expertise, create
a valuable one-stop solution for our customers. We believe that our business
model offers significant benefits to mobile device manufacturers, business
enterprises, mobile professionals and other people on the go.
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, approximately 75% 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.
Page 12 of 36
<PAGE>
We incurred net losses of $45,000 in 1996, $886,000 in 1997 and $1.9 million in
1998. For the nine months ended September 30, 1999, our net loss was $7.5
million. At September 30, 1999, we had an accumulated deficit of approximately
$11.6 million. The net losses resulted from costs associated with marketing
programs to attract new customers, developing our website and proprietary
databases and the development of our operational infrastructure. We plan to
invest heavily in marketing and promotion, to hire additional employees and to
enhance our website and operating infrastructure. Therefore, we expect to incur
increasing 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, although we may never be able to
do so. If our revenue growth is slower than we anticipate or our operating
expenses exceed our expectations, our losses will be significantly greater.
Page 13 of 36
<PAGE>
Nine-Month Period Ended September 30, 1999 Comparison to Nine-Month Period Ended
September 30, 1998
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 46% from $8.9 million for the nine
months ended September 30, 1998 to $13.0 million for the nine months ended
September 30, 1999. The increase in net product revenue reflects sales to new
customers, repeat purchases from existing customers and the overall growth in
the installed base of mobile devices requiring accessories and batteries.
Development Revenue. Development revenue represents sales of proprietary
products developed and manufactured for a specific customer. No product
development revenue was generated for the nine months ended September 30, 1999,
as compared to $502,000 for the nine months ended September 30, 1998. This
decrease reflects our strategy of focusing on the sale of products with broad
appeal to individuals and businesses rather than on proprietary products for a
specific customer's application. We do not anticipate generating significant
development revenue in the future.
Costs of Goods Sold. Cost of goods sold consists primarily of the cost of
products sold to customers, inbound shipping expense and outbound shipping
charges. Cost of goods sold increased 34% from $6.4 million for the nine
months ended September 30, 1998 to $8.5 million for the nine months ended
September 30, 1999. The increase in gross margin from 33% to 35% reflects
improved sourcing and purchasing capabilities and a shift to higher margin
products in the overall sales mix and is partially offset by shipping discounts.
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 and direct marketing costs. Sales and marketing
expenses increased 187% from $2.9 million for the nine months ended September
30, 1999 to $8.3 million for the nine months ended September 30, 1999. The
increase primarily reflected an increase in advertising and promotional costs,
including direct campaigns to promote our website and significant increases in
web advertising. Advertising and promotional expenses increased 212% from $1.7
million for the nine months ended September 30, 1998 to $5.3 million for the
nine months ended September 30, 1999. All other sales and marketing expenses
(consisting primarily of payroll expenses, credit card processing, fulfillment
expenses and consulting fees) increased 150% from $1.2 million for the nine
months ended September 30, 1998 to $3.0 million for the nine months ended
September 30, 1999. We intend to continue to pursue an aggressive marketing
strategy to attract new customers. Therefore, we expect sales and marketing
expenses to increase significantly in absolute dollar terms in future periods.
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
Page 14 of 36
<PAGE>
expenses. Product development expenses increased 103% from $255,000 for the nine
months ended September 30, 1998 to $518,000 for the nine months ended September
30, 1999. This increase is the result of expenses incurred to improve our
website interface, the introduction of new Internet-based technology and the
overall expansion of our mobile product offerings. We intend to continue to
build the infrastructure necessary to provide a high level of service.
Therefore, we expect product development expenses to increase in the future.
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 152% from $1.2 million for the nine months ended September 30, 1998 to
$3.0 million for the nine months ended September 30, 1999. This increase was
primarily attributable to increased personnel as well as costs associated with
the complete upgrade of our customer contact database and finance systems
including depreciation and service costs. We upgraded these systems in January,
1999, to increase functionality and to provide for expected growth. In addition,
for the nine months ended September 30, 1999, we recorded $2.0 million in
deferred compensation for new option grants to employees and directors and
expensed $230,000, principally related to these grants. This deferred
compensation amount represents the difference between the deemed fair value of
the common stock and the exercise price at the time the options were granted.
Other Income (Expense), Net. Other income (expense), net, consists primarily of
interest expense net of interest income earned on cash and cash equivalents and
loss resulting from sale-leaseback transactions. Other income (expense), net,
increased from $66,000 for the nine months ended September 30, 1998 to $223,000
for the nine months ended September 30, 1999, primarily as a result of a
$219,000 loss incurred on the sale and leaseback of computer equipment and
software, partially offset by $63,000 in interest income.
Three-Month Period Ended September 30, 1999 Comparison to Three-Month Period
Ended September 30, 1998
Net Product Revenue. Net product revenue increased 70% from $3.1 million for
the quarter ended September 30, 1998 to $5.3 million for the quarter ended
September 30, 1999. The increase in net product revenue reflects sales to new
customers, repeat purchases from existing customers and the overall growth in
the installed base of mobile devices requiring accessories and batteries.
Costs of Goods Sold. Cost of goods sold increased 69% from $2.1 million for the
quarter ended September 30, 1998 to $3.5 million for the quarter ended September
30, 1999, as a result of increased sales. Gross margin remained consistent at
34%.
Sales and Marketing. Sales and marketing expenses increased from $939,000 for
the quarter ended September 30, 1998 to $4.1 million for the quarter ended
September 30, 1999. The increase
Page 15 of 36
<PAGE>
primarily reflects an increase in advertising and promotional costs, including
direct campaigns to promote our website, and significant increases in web
advertising. Advertising and promotional expenses increased from $518,000 for
the quarter ended September 30, 1998 to $3.0 million for the quarter ended
September 30, 1999. All other sales and marketing expenses consisting primarily
of payroll expenses, credit card processing, fulfillment expenses and consulting
fees increased 161% from $421,000 for the quarter ended September 30, 1998 to
$1.1 million for the quarter ended September 30, 1999. Therefore, we expect
sales and marketing expenses to increase in the future.
Product Development. Product development expenses increased from $95,000 for
the quarter ended September 30, 1998 to $168,000 for the quarter ended September
30, 1999. This increase is the result of expenses incurred to improve our
website interface, the introduction of new Internet-based technology and the
overall expansion of our mobile product offerings. We intend to continue to
build the infrastructure necessary to provide a high level of service.
Therefore, we expect product development expenses to increase in the future.
General and Administrative. General and administrative expenses increased from
$409,000 for the quarter ended September 30, 1998 to $1.2 million for the
quarter ended September 30, 1999. This increase was primarily attributable to
increased personnel as well as costs associated with the complete upgrade of our
customer contact database and finance systems including depreciation and service
costs. In addition, for the quarter ended September 30, 1999, we recorded $1.1
million in deferred compensation for new option grants to employees and
directors and expensed $139,000, principally related to these grants. This
deferred compensation amount represents the difference between the deemed fair
value of the common stock and the exercise price at the time the options were
granted.
Other Income (Expense), Net. Other income (expense), net, decreased from
$33,000 for the three months ended September 30, 1998 to $14,000 for the three
months ended September 30,1999, primarily as a result of $31,000 in interest
income for the period ended September 30, 1999, offset by a $6,000 increase in
interest expense.
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. As of September 30, 1999, we have 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 nine months ended
September 30, 1999.
Net cash used in operating activities was $5.9 million for the nine months ended
September 30, 1999, and $884,000 for the nine months ended September 30, 1998.
Net cash used in operating
Page 16 of 36
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activities consisted primarily of net losses, as well as increased inventory
balances and fluctuation in accounts receivable between periods, partially
offset by increased depreciation and reserve accounts. Net cash used in
investing activities was $1.6 million for the nine months ended September 30,
1999. Of this amount, $702,000 was financed through sale-leaseback transactions.
The terms of the lease line provide a total facility of $2.0 million, of which
$1.3 million was available at September 30, 1999 and requires repayment over 30
to 42 months. Net cash used in investing activities was $267,000 for the nine
months period ended September 30, 1998, and reflects purchases of equipment
commensurate with the overall growth of our business. Net cash used in investing
activities consists primarily of capital expenditures for computers, software
and office furniture, as well as costs to acquire internet domain names.
Net cash provided by financing activities was $7.6 million for the nine months
period ended September 30, 1999, and $1.2 million for the nine months period
ended September 30, 1998. Cash provided by financing activities reflected sales
of preferred stock in 1999 and equipment leases and bank borrowings in 1998 and
1999. On June 23, 1999, we entered into a lease to finance the acquisition of
equipment. The lease expires 42 months from the date of the lease. As of
September 30, 1999, the aggregate obligation under this capital lease was
$685,000.
On July 30, 1999, we received gross proceeds of $5.8 million from the sale of
Series C preferred stock and entered into a loan agreement which provides for
borrowings of up to $3.5 million. On July 30, 1999 we borrowed $1.2 million
under this facility. Borrowings under this credit facility bear interest at 11%
per annum, are due in 36 months and are secured by substantially all of our
assets. The terms of the debt require interest-only payments for the first 12
months and interest and principal repayments for the next 24 months. This debt
is secured but subordinate to future credit arrangements with banks of similar
lenders. As of September 30, 1999, we had an outstanding balance of $191,000.
This reflects the original loan amount of $1.2 million net of a conversion of
$980,000 into 124,982 shares of our capital stock in connection with our initial
public offering in October 1999.
We offered 5,000,000 shares of our common stock in our initial public offering
on October 13, 1999. Our common stock is quoted on the NASDAQ National Market
under the symbol "IGOC." The initial public offering price was $12.00 per
share. For further discussion of this offering and its proceeds, please see
Part II, Item 2 of this Report.
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 favorable to our stockholders or us.
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Year 2000 Compliance
Impact of the Year 2000 Computer Problem. The Year 2000 computer problem refers
to the potential for system and processing failures of date-related data as a
result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have time-
sensitive software may recognize a date represented as "00" as the Year 1900
rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities. To date, we have experienced no Year 2000
issues with any of our material internal systems, and we do not expect to
experience any. As a result, we have not adopted a specific Year 2000
contingency program.
State of Readiness of Our Internal Systems. In 1999, we upgraded our customer
contact and financial systems as part of the expansion of our business. We have
obtained assurances from our third-party vendors for these new systems and all
other material systems in use by us that such systems are Year 2000 compliant.
State of Readiness of Our Operations. Our internal operations and business are
also dependent upon the computer-controlled systems of third parties such as
suppliers, customers and service providers. We have developed a questionnaire to
help us determine whether our suppliers are Year 2000 compliant and sent it to
our largest suppliers. All of these vendors have responded that they are Year
2000 compliant. Even if some of our vendors are not Year 2000 compliant, we have
alternative sources of supply. We believe that absent a systemic failure outside
our control, such as a prolonged loss of electrical or telephone service, Year
2000 problems at such third-party facilities will not have a material impact on
our operations.
Cost of Year 2000 Compliance. We replaced all of our major internal systems
less than a year ago to increase functionality and to accommodate expected
growth. These new systems have been certified Year 2000 compliant. All of our
systems and operations are being reviewed by our own information technology
employees. To date, we have made no material expenditures for Year 2000
compliance. Based on our assessment to date, we do not anticipate that costs
associated with remediating our internal systems will exceed $50,000.
Additional Risks. Although we believe our internal systems are Year 2000
compliant, if our belief is incorrect, any failure of our internal systems to be
Year 2000 compliant could result in a decrease in sales of our products, an
increase in allocation of resources to address Year 2000 problems of our
customers without additional revenue commensurate with such dedication of
resources, or an increase in litigation costs relating to losses suffered by our
customers due to such Year 2000 problems. Failures of our internal systems could
temporarily prevent us from processing orders, issuing invoices, and developing
products, and could require us to devote significant resources to correcting
such problems. An example of our worse case scenario would be if one or more of
our computers were not Year 2000 compliant or if an employee were to load a non-
compliant software program onto his or her computer. Should this happen, we
would replace the computer with a computer we know is compliant or remove the
software from the computer. We keep spare computers in inventory that we know
are compliant.
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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:
. sustain historical growth rates;
. implement our business model;
. attract new customers;
. retain existing customers and maintain customer satisfaction;
. maintain our gross margins in the event of price competition or rising
wholesale prices;
. minimize technical difficulties and system downtime;
. manage distribution of our direct marketing materials; and
. 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 foreseeable future.
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, 1999, we had an accumulated deficit of approximately $11.6 million. Although
we have experienced an increase in net product revenue each period, 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 incur increasing sales and marketing and general
and administrative expenses. As a result, we will need to generate significantly
higher revenues to achieve and maintain profitability, although we may be unable
to do so. If our revenue growth is slower than we anticipate or our operating
expenses exceed our expectations, our losses will be significantly greater.
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
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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:
. our ability to attract visitors to our website and convert them into
customers;
. the level of merchandise returns we experience;
. changes and seasonal fluctuations in the buying patterns of our customers;
. our inability to obtain adequate supplies of high-demand products;
. unanticipated cost increases or delays in shipping of our products,
transaction processing, or production and distribution of our direct
marketing materials;
. unanticipated delays with respect to product introductions; and
. the costs, timing and impact of our marketing and promotional initiatives.
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--Quarterly Results of Operations" for more information on
our quarterly operating results.
Establishing the iGo brand is critical to our success
We recently launched our new iGo brand and with a portion of the proceeds of the
offering we plan to implement 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. Additionally, our new iGo brand may cause confusion
to current and potential customers, which 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, 1998, we had a
total of 60 full-time employees and at September 30, 1999, we had a total of 116
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 implement operational and
financial systems and controls, 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
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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. None of our employees is bound by an
employment agreement for any specific term. 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:
. mobile products suppliers such as Targus;
. mass merchant retailers such as Circuit City and CompUSA;
. direct marketers such as Buy.com, Insight and Microwarehouse; and
. 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, and 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.
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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 recently
entered into strategic relationships with the NEC Computer Systems Division, or
NEC, and Motorola, that provide us with priority access to new products and
gives 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 maybe
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
in its discretion. Because our agreement with NEC was only recently established,
it is uncertain whether we will meet or exceed the stated purchase obligation.
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 we are unable to maintain these relationships, our
business, financial condition and results of operations could be harmed.
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
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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
For the nine months ended September 30, 1999, approximately 15% of our total net
revenues were from products shipped to our customers directly from our
suppliers. The failure of these 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:
. reduced package tracking information;
. delays in order processing and product delivery;
. increased delivery costs, resulting in reduced gross margins; and
. 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 recently filed federal trademark applications for
"iGo,""iGo.com" and "Solutions for People on the Go." We cannot guarantee that
any of these trademark applications will be granted. In July 1999, the
UnitedStates Patent and Trademark Office, or PTO, preliminarily declined
registration of "iGo" and "iGo.com" when used in connection with our services
because, in the PTO examiner's
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opinion, there was a likelihood that if these marks were to be registered, they
would be confused with a prior trademark registration for "IGO" that covers
interactive teaching equipment (PTO Registration No. 2,086,551). In addition,
the examiner requested non-substantive revisions to the identification and
classification of services. Effective September 30, 1999, we acquired by
assignment the rights to the registered mark cited by the PTO examiner and will
record this assignment promptly with the PTO. We intend to respond to the PTO's
preliminary action prior to the January 15, 2000 deadline. We cannot guarantee
that we will be able to secure registration of these marks. If we are unable to
secure registration of these marks or otherwise obtain the right to use these
marks under contract or common law, we may be required to stop using these
marks. This could cause confusion to our customers and in the marketplace and
harm our business, financial condition and results of operations. In addition,
this 12 cause confusion to potential investors, which could cause the price of
our common stock to decline. We are in the process of filing 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, and this may affect our
ability to do business in the countries where we currently conduct business orin
to which we intend to expand.
In addition, we have received a letter from an individual who owns a federal
registration for an "i GO" mark for clothing alleging that our "iGo" mark
infringes on his mark, and demanding that we cease and desist the use of our
mark. We responded to the allegation disputing this claim. Subsequently, the
attorney for this individual has forwarded to us a draft complaint that he
claims will be filed unless the matter can be resolved. This draft complaint
alleges that the use of our "iGo" mark in connection with our products and
services constitutes trademark infringement, trademark dilution, unfair
competition and unfair trade practices with respect to his "iGO" mark and seeks
injunctive relief, monetary damages, costs and attorney's fees. We anticipate
that this complaint will be filed in the United States District Court for the
Central District of California. We cannot assure you that other third parties
will not claim trademark or trade name infringement in the future. If we are
unable to secure registrations for these marks, or if a third party claim
results in litigation, we may be required to stop using these marks and our name
which could harm our business. With or without merit, these disputes can be time
consuming and result in costly litigation which may harm our financial results.
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.
The loss of our current toll-free telephone number and associated rights could
harm our business
On July 19, 1999, the company from whom we purchased the rights to the 1-800-
Batteries toll-free telephone number and name gave us notice that they believe
we have failed to cure a
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material breach of our agreement with them. The notice also stated that they are
terminating their agreement with us and demanding a return of their rights as
well as unspecified monetary damages. At the same time, they made a demand for
arbitration of the matter with the American Arbitration Association ("AAA") in
Richmond, Virginia. We responded to their demand by formally denying their
claims as well as challenging the location of the arbitration proceedings.
Subsequently, AAA ruled that the arbitration would be held in Richmond,
Virginia, and an arbitrator has been selected. Many of our customers may rely on
the1-800-Batteries phone number to reach our customer solutions representatives
and to the extent that the arbitrator disagrees with our position and allows
this agreement to terminate, we could be harmed, although it is difficult to
estimate the extent or materiality of such harm.
The failure to successfully defend a lawsuit challenging our hiring practices
could harm our business
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 alleges that we have
induced certain former Microflex employees to breach the terms of their
nondisclosure and nonsolicitation agreements with Microflex, that we have
interfered with Microflex's contractual relations and prospective economic
advantage, and that we have engaged in unfair competition. Microflex seeks
injunctive relief, monetary damages, costs and attorney's fees. We believe that
this suit is without merit and have filed a motion to dismiss which is currently
pending before the court. We cannot be certain that we will be successful in
defending our actions. Furthermore, if we are unsuccessful in our defense, any
remedies awarded to Microflex could harm our business.
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
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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:
. the need to develop new supplier relationships;
. unexpected changes in international regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations;
. potential adverse tax consequences;
. price controls or other restrictions on, or fluctuations in, foreign
currency; and
. 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
While we have no current agreements or negotiations underway, we may invest in
or buy complementary businesses, products or technologies in the future. In the
event of any investments or purchases, we could:
. issue stock that would dilute the percentage ownership of our current
stockholders;
. incur debt;
. assume liabilities;
. incur amortization expenses related to goodwill and other intangible assets;
or
. incur large and immediate write-offs.
These acquisitions could also involve numerous operational risks, including:
. problems combining the purchased operations, products or technologies;
. unanticipated costs;
. diversion of management's attention away from our core business;
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which we have no or limited prior
experience; and
. 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 might acquire in the future.
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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.
We would lose revenues and incur significant costs if our systems or those of
material third-parties are not Year 2000 compliant
The Year 2000 computer problem refers to the potential for system and processing
failures of date-related data as a result of computer-controlled systems using
two digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date represented as
"00" as the Year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
The failure of our internal systems, or any material third-party systems, to be
Year 2000 compliant could harm our business, financial condition and results of
operations. We have obtained assurances from a substantial number of our
suppliers that their systems or products are or will be Year 2000 compliant. We
have reviewed the Year 2000 readiness disclosures of our major suppliers and
service providers.
To date, we have not incurred any material costs in identifying or evaluating
Year 2000 compliance issues. However, we may fail to discover Year 2000
compliance problems in our systems that will require substantial revisions or
replacements. In the event that the fulfillment and operational facilities that
support our business, or our web-hosting facilities, are not Year 2000
compliant, portions of our website may become unavailable and we would be unable
to deliver services to our customers. In addition, there can be no assurance
that third-party software, hardware or services incorporated into our internal
systems will not need to be revised or replaced, which could be time-consuming
and expensive. Our inability to fix or replace third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs and other business interruptions, any of which could harm our business,
financial condition and results of operations. Moreover, the failure to
adequately address Year 2000 compliance issues in our software, hardware or
systems could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, which could be costly and time-consuming to
defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. The failure by these entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from delivering our services to our
customers, decrease the use of the Internet or prevent customers from accessing
our services, any of which would harm our business, financial condition and
results of operations.
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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 $4,000,000 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.
Damage to or destruction of our warehouse could result in loss of our nventory,
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. Approximately 85% of the
products we sell come from the inventory in our warehouse. 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:
. inadequate Internet infrastructure;
. inconsistent quality of service; and
. 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, I 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
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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:
. potential customers may be unwilling to shift their purchasing from
traditional vendors to online vendors;
. 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;
. continued growth in the number of Internet users;
. concerns about transaction security;
. continued development of the necessary technological infrastructure;
. development of enabling technologies; and
. uncertain and increasing government regulations.
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:
. to enhance our existing products and services; and
. 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
date, approximately 75% of our customer purchases have been made with credit
cards. 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
Page 29 of 36
<PAGE>
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:
. liabilities or claims resulting from unsolicited email;
. lost or misdirected messages; or
. illegal or fraudulent use of email.
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
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<PAGE>
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.
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<PAGE>
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.
Page 32 of 36
<PAGE>
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.
On July 19, 1999, the company from whom we purchased the rights to the 1-800-
Batteries toll-free telephone number and name gave us notice that they believe
we have failed to cure a material breach of our agreement with them. The notice
also stated that they are terminating their agreement with us and demanding a
return of their rights as well as unspecified monetary damages. At the same
time, they made a demand for arbitration of the matter with the American
Arbitration Association ("AAA") in Richmond, Virginia. We responded to their
demand by formally denying their claims as well as challenging the location of
the arbitration proceedings. Subsequently, AAA ruled that the arbitration would
be held in Richmond, Virginia, and an arbitrator has been selected. Many of our
customers may rely on the1-800-Batteries phone number to reach our customer
solutions representatives and to the extent that the arbitrator disagrees with
our position and allows this agreement to terminate, we could be harmed,
although it is difficult to estimate the extent or materiality of such harm.
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 alleges that we have
induced certain former Microflex employees to breach the terms of their
nondisclosure and nonsolicitation agreements with Microflex, that we have
interfered with Microflex's contractual relations and prospective economic
advantage, and that we have engaged in unfair competition. Microflex seeks
injunctive relief, monetary damages, costs and attorney's fees. We believe that
this suit is without merit and have filed a motion to dismiss which is currently
pending before the court. While we intend to vigorously defend our actions in
this matter, we cannot be certain that we will be successful in our defense.
Furthermore, if we are unsuccessful in defending this action, any remedies
awarded to Microflex could harm our business.
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 $60.0 million, $4.2 million of
which was applied towards the underwriters discounts and commissions. Other
expenses related to the offering $1.3
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<PAGE>
million. The net proceeds to us from the sale of common stock in the initial
public offering are estimated to be approximately $54.5 million ($62.9 million
if the underwriters' over-allotment option is exercised in full).
We invested the net proceeds from the offering in short-term, investment grade,
interest-bearing securities. The use of proceeds from the offering does not
represent a material change in the use of proceeds described in the prospectus.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
On August 30, 1999, iGo reincorporated into the State of Delaware by way of a
statutory merger of Battery Express, Inc., a California corporation doing
business as iGo Corporation ("Parent"), with and into iGo Corporation, a
Delaware corporation and wholly owned subsidiary of Parent ("iGo"). In such
transaction, each stockholder of Parent received six shares of iGo common stock
or preferred stock for each one share of Parent common stock or preferred stock
held by such stockholder immediately prior to the reincorporation (the "Stock
Split"). No matters have been submitted to a vote of iGo's stockholders since
the completion of the reincorporation transaction.
Effective August 17, 1999, Parent, as the sole stockholder of iGo, approved by
written consent (i) the amendment and restatement of iGo's Certificate of
Incorporation to, among other things, (a) increase the authorized common stock,
(b) increase the authorized preferred stock, and (c) designate shares of Series
C preferred stock, and (ii) the merger of Parent with and into iGo.
During the quarter ended September 30, 1999, the stockholders of Parent (and
later the stockholders of iGo), took the following actions by written consent
(note: all share figures reflect the Stock Split):
. Effective as of July 26, 1999, the holders of 5,970,600 shares of common
stock (or approximately 90% of the common stock then outstanding) and
6,356,328 shares of preferred stock (or approximately 95% of the preferred
stock then outstanding) approved by written consent the amendment and
restatement of Parent's Articles of Incorporation to, among other things, (a)
increase the authorized common stock, (b) increase the authorized preferred
stock, and (c) designate shares of Series C preferred stock.
. Effective as of August 27, 1999, the holders of 6,559,980 shares of common
stock (or approximately 98% of the common stock then outstanding) and
7,400,166 shares of preferred stock (or approximately 98% of the preferred
stock then outstanding) approved by written
Page 34 of 36
<PAGE>
consent:
(a) The merger of Parent with and into iGo.
(b) The amendment and restatement of iGo's 1996 Stock Option Plan (the
"Option Plan") and the increase in the number of shares of common
stock reserved for issuance thereunder to an aggregate of 3,256,800
shares (inclusive of shares currently subject to outstanding options
and shares issued upon exercise of previously granted options). The
1999 Plan provides for the grant of incentive and nonqualified stock
options, as applicable, to employees, directors and consultants.
(c) The adoption of iGo's 1999 Employee Stock Purchase Plan (the "Purchase
Plan") and the reservation of 132,000 shares of common stock for
issuance thereunder. The Purchase Plan permits eligible employees to
purchase shares of common stock through payroll deductions at 85% of
the fair market value of the common stock, as defined in the Purchase
Plan.
(d) The form of Indemnification Agreement to be entered into with each of
iGo's officers and directors. The Indemnification Agreement provides,
among other things, for certain indemnification against certain
expenses incurred by reason of the indemnitee's service as an officer
or director of iGo.
(e) The forms of Change of Control Agreement to be entered into with each
of iGo's officers and directors. The Change of Control Agreements
provide for certain acceleration of vesting applicable to stock and/or
options held by any such officer or director in the event of a change
in the control of iGo.
In no case did any stockholder not affirmatively approving the foregoing matters
indicate that they were abstaining or withholding their consent to or voting
against such matters.
Item 5. Other Information.
None
Page 35 of 36
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits
Number Description
- ------ -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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 11, 1999
iGo Corporation
/s/ Mick Delargy
Mick Delargy
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer, Principal
Financial and Accounting Officer)
Page 36 of 36
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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15,217
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