TM editors' note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence.

The competitive wireless handset market has left small companies such as InfoSonics (IFON) struggling to reach the scale needed to effectively compete against the tech giants in the space. A proposed merger could shift the equation for IFON and bring the combined new entity into the spotlight with a key relationship with a tech giant. 

The stock only trades at around $0.40 with a micro-cap value. A merger that provides synergies and adds access to the products of the largest company in the world is a possible game changer as InfoSonics looks to shift further into the rebounding Latin America markets. 

Struggling Business

InfoSonics had a bustling business a few years back. The company has now exited the U.S. markets and shifted focus towards Latin America. For Q1, revenues declined 34% to $6.2 million due to weakness at carrier customers in Central and South America. The company had revenues of nearly $40 million in 2016 leaving the current market value around only $6 million as surprisingly low. 

The company sells wireless handset solutions and tablets under the Verykool brand with the goal of offering exceptional value in a market dominated with the high-end products of Apple (AAPL) and Samsung (SSNLF). The San Diego-based company has executives from some of the largest tech companies in the U.S. providing the leadership to compete in the large tech sector. 

What the company needed was an edge in a difficult market. Enter Cooltech into the picture. 

Cooltech Merger

On July 26, InfoSonics and Cooltech Holdings agreed to merge. Cooltech is a licensed Apple partner and reseller with a distribution business that includes a retail footprint under its OneClick branded stores with a growing presence in Latin America. 

The deal involves Cooltech becoming a subsidiary in exchange for 62.5 million shares of InfoSonics stock. At the current stock price, the deal is valued at roughly $25 million and will boost the value of the stock 5 fold to over $30 million. 

Considering that InfoSonics ended March with $1.3 million in cash, the deal actually involves Cooltech investing directly via the purchase of 2.5 million shares at $0.40 and additional warrants. As well, investors agreed to buy an additional 4.375 million shares and an equal amount of warrants at the same prices to provide the funding for the costs of closing the deal and investing for the future. Such a move reduces the risk of the deal not closing. 

For 2016, Cooltech saw revenues grow roughly 50% to $22.2 million. The company had a small loss for the year though 2015 was profitable. 

The vertically integrated Apple partner operates over 20 stores throughout Latin America and four stores in the U.S. In addition, Cooltech has a commitment with Apple to expand stores in Latin America as the tech giant has a limited presence in the region. The brick-and-motor stores have the look and feel of traditional Apple stores. Based in Miami, the company has the ability to be a gateway to Latin America and related residents in the U.S. 

With Apple booming again and the expected demand for the upcoming iPhone 8, the new InfoSonics is ideally positioned to benefit. The combined entity had roughly $60 million in sales in 2016 and the market price based on roughly 85 million shares leaves the stock trading at about 0.5x sales. The higher stock value and Nasdaq listing should provide more attention to the OneClick brand stores and hopefully expand the profile in Latin America. 

The merger is expected to close in Q4. 

Latin America Reviving 

The Latin America economy is coming off a nearly two-year slump. GDP data shows that the economy in the region is on target to expand 1.2% in 2017 after solid expansion in Q1. The World Bank expects growth to accelerate to 2.1% in 2018.

Roughly six years of an economic slowdown have had adverse effects on jobs and household income. The region appears poised to return to the growth from the prior decade that should place InfoSonics and the OneClick store brand in a great position to participate from the rebounding economies with total populations of 630 million.   

Takeaway

InfoSonics is an under the radar stock facing a difficult market environment. The combination with Cooltech provides the entity a larger presence in growing Latin America markets. With expansion plans already in place with Apple, the growth rate should exist to entice investors. 

As a small stock, a position is only recommended for a diversified portfolio willing to accept the risk. The company still needs to complete the merger, but after that the new entity provides a rare opportunity to invest in the rebounding Latin America growth supported by the strong products developed by Apple. Check this stock out before the market finds out about the potential.