InfoSonics Corporation is a rapidly growing provider of wireless handsets and accessories in the United States and Latin America. The company distributes products for many important manufacturers, including Samsung, LG, and Novatel. InfoSonics€™ consolidated comparative statement of cash flows for 2004, 2005, and 2006 follows.

1. For each year reported InfoSonics reports a profit, and each year cash flow from operating activities is negative. Identify the primary reason for the negative cash from operating activities.
2. How is InfoSonics compensating for the negative cash from operating activities?
3. In your opinion, is InfoSonics€™ negative cash from operating activities sustainable over the longterm?

Transcribed Image Text:

For the year ended December 31, CASH FLOWS FROM OPERATING ACTIVITIES Net Income Adjustments to reconclle net Income from operations to 2006 2005 $ 2.538,822 202 38.096 net cash provided by (used In) operating activities 28.390 2,017 (109,990) 62,606 Depreclation and amortization Loss on disposal of fixed assets 154.479 126,560 1.492.613 1,522,119 93,658 Provision for bad debt Provision for obsolete Inventory Stock option expense 302.993 108,390 Income tax benefit realized from the 753,899 .(17962,213) (12,478,395) (1.608,236) exercise of employee stock options Change in fair value of derivative labllity 399 (Increase) decrease in trade accounts receivable Inventory (5,566,889) 079,977)(3,127,363) Prepaid Inventory 1,517,940 (267,793) (49,084) 230.650 (67,000 364,471 302,789 Prepald expenses (210,063) (265,000) 89.207 3.410,856 Other assets 46.592) Deferred tax asset current (491.000) 3.793 Deferred tax asset non current Increase (decrease) In accounts payable 12,114,505 Accrued expenses (1.7 2330) 2,536,826 Income tax lablities (7498515 (5.730, 26) (2267.023) 1,082,834 Cash used In continuing operations Cash provided by (used In) discontinued operations Net cash used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment Sale of property and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Bank overdraft Borrowings from line of credit Payments on line of credit Payments on subordinated notes 14.722 (531.463) $ (7,483,793 $(6,261,589 ) S184,189) $ (342.747) (291,306) 6,250 (230.920) $ (342,747) (285,056) (230,920 (867,555) 48,404,847 (72.774.844) (86.486.949)(51,077.191) 188.423.458 93.922,834 (30,000) (1.887.686) 12,054.000 30,365,882 9,075,684 6,596,415 Offering costs. Cash recelved from stock, options and warrants Net cash provided by financing activities Effect of exchange rate changes on cash Net Increase In cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Cash pald for Interest Cash pald for Income taxes (1,005,582) 15,722,850 1,639,799 (8.865) 22,530.477 7,712,915 5,181306 2,570 $30,243,392 $ 7,712,915 $5,183,876 36.144 1.285,798 2,529,039 5,183,876 324,383 353,233