Business Valuation of iGo Inc (IGOI):Part 1

I’m excited to bring a new net net idea. Don’t be discouraged that it is in penny stock territory. It has a lot of potential and it immediately jumped out screaming value. The following is a  business valuation of iGo Inc, but has been divided over two posts due to its length. This post focuses on the business and recent events and the second will look at valuing the business.

Business Summary

iGo Inc, formerly known as Mobility Electronics, designs and develops power accessories such as AC/DC adapters and other connectivity solutions. iGo sells its products through private label resellers such as Targus (contract has been canceled, more on this later), Radioshack, Ingram Micro, AT&T retail stores and the iGo.com website.

Our power products, marketed either under a private-label or our iGo brand, include our range of AC, DC, combination AC/DC, and battery-powered universal power adapters. Our combination AC/DC power adapters allow users to charge a variety of their mobile electronic devices from AC power sources located in a home, office or hotel room, as well as DC power sources located in automobiles, planes and trains.

Our battery-powered universal power adapters, such as the iGo powerXtender, allow users to charge a variety of their mobile electronic devices when they do not have access to an AC or DC power source. Each of these adapters utilizes our patented intelligent tip technology, which allows the use of a single power adapter with interchangeable tips to charge a variety of mobile electronic devices, including portable computers, mobile phones, MP3 players, smartphones, PDAs, portable gaming consoles and other handheld devices. When our power adapters are combined with a multiple output connector accessory, such as the iGo dualpower or iGo power splitter, the user can also simultaneously charge multiple mobile electronic devices.

Coincidentally, I have  one of these power adapters with a set of tips and it does come in handy.

Growth Strategy and Competitive Advantage

I won’t be going into too much detail in this part as any electronics company, especially one that makes generic power adapters, is an incredibly tough and competitive business. I see no real continued growth strategy or competitive advantage no matter how innovative its products are, as cheap copies can flood the markets easily.

From first hand experience, I would never have bought their power adapter had I not lost my original one. Even with interchangeable tips, I always find myself reaching for the original chargers and adapters. I assume most people are like this as well.

Sales, Marketing and Customers

In 2008, 45% of sales came from private label resellers and OEMs and approximately 45% of sales through retailers and distributors. North America made up 96% of revenue with 1% coming from Asia and 3% from Europe.

In 2008, the largest customers were as follows:

Private Label Resellers

• Targus – 42% of total 2008 revenue

Retailers/Distributors

• Airport Wireless
• Brookstone
• Hudson News
• Ingram Micro
• Inmotion Pictures
• Microcel
• RadioShack – 33% of total 2008 revenue
• Superior Communications
• Wynit

No customer other than Targus or RadioShack accounted for greater than 10% sales. Also, from what I can see, these are places where people visit when they need to urgently replace or buy another power adapter. Not a very appealing growth strategy.

It also states in the 10-K

“The loss of any one or more of Targus, RadioShack or any of our remaining other major customers would likely have a material adverse effect on our business.”

Unfortunately, iGo has lost Targus as a major customer which is discussed in the next section.

Recent Events and Catalyst

On March 9, 2009

The company received a letter on March 9, 2009 from Charles R. Mollo, one of the founders and previous CEO and Chairman of the Board, and Jeffrey R. Harris, a former director and Chairman of the Audir Committee. As major shareholders, they expressed “extreme dissatisfaction with the ongoing managemenet of iGo” and provided 4 detailed problems with the company followed by a detailed proposal plan.

The problems addressed are:

• Lack of growth strategy
• Lack of Innovation
• Lack of shareholder value creation initiatives
• Excess management compensation

The presented proposal consists of:

• Restructuring the current board and management
• Share buy back
• Explore company strategic alternatives – including potential sale, merger, privatization, and other possibilities
• Reassess the company’s product development plans and strategy
• Review and restructure CEO compensation

On March 12, 2009

The company responded to the letter.

…

“We are always interested in the views of our stockholders and we appreciate the interest shown by Messrs. Mollo and Harris. In order to avoid any confusion, however, these individuals are no longer in a position of authority with the Company and, therefore, do not have the ability to commit the Company to any course of action. As a result, the demands made in their letter will be treated as suggestions that will be given appropriate consideration. To this end, the Board and management have evaluated, and continue to evaluate, many of the very issues outlined by Messrs. Mollo and Harris, with the ultimate goal of maximizing shareholder value.”

The message I received while reading the response was – Since the two of you are no longer with the company, we don’t care. We are going to do it our way.

After reading the news articles available and the past 10-K, it also leaves the impression that management is stubborn and slow to react.

On March 19, 2009

iGo (Nasdaq:IGOI), a leading provider of innovative portable power solutions, today announced that Targus, a private label distributor, has notified the Company that it will not renew its contractual relationship with iGo, which expires on May 3, 2009. However, Targus has indicated that it desires to continue a commercial relationship with iGo.

At this time, the Company cannot project the impact on revenues given the change in the nature of the relationship with Targus. Given the gross margins generated through sales to Targus, though, the Company believes the termination of the contractual relationship will have only a modestly negative impact on cash flow.

The managers are the ones that know the company best. If they are unable to figure out the change in revenue from a loss of a 42% customer then who can? But the one thing is clear. There will be a big negative impact on cash flow. Not “modest” as the company suggests.

The Company also announced that the Board of Directors has initiated a process to consider all possible strategic alternatives to enhance stockholder value.

“The Board believes that there is value in the Company that is not currently being fully realized in the public markets,” said Michael D. Heil, Chief Executive Officer of iGo. “Therefore, the Board has determined that it would be in the best interests of the stockholders to initiate a review of strategic alternatives that may be available to the Company to better unlock that value.

I’m sure iGo would have been happy to coast along had they not lost Targus. Rather than seeking ways to increase shareholder value, iGo had to wait for a big event to announce some sort of strategic alternative.

Summary

Sudden uncertainty has created a catalyst for the business of this net net, and of the things to look for in a net net, the company is:

• easy to understand
• now has a catalyst – potential sale or share buyback

The next post will go over the risks and valuation of the business.

Disclosure

I own shares of IOGI at the time of writing.