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EXCEL - IDEA: XBRL DOCUMENT - COMARCO INC | Financial_Report.xls |
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EX-31.2 - EX-31.2 - COMARCO INC | a57417exv31w2.htm |
EX-31.1 - EX-31.1 - COMARCO INC | a57417exv31w1.htm |
EX-32.2 - EX-32.2 - COMARCO INC | a57417exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
JULY 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-5449
COMARCO, INC.
(Exact name of registrant as specified in its charter)
California (State or other jurisdiction of incorporation or organization) |
95-2088894 (I.R.S. Employer Identification No.) |
25541 Commercentre Drive, Lake Forest, California 92630
(Address of principal executive offices and zip code)
(Address of principal executive offices and zip code)
(949) 599-7400
(Registrants telephone number, including area code)
(Registrants 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 that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes þ Noo
The registrant had 7,383,869 shares of common stock outstanding as of September 12, 2011.
COMARCO, INC. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2011
FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2011
TABLE OF CONTENTS
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMARCO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and par value amounts)
July 31, | January 31, | |||||||
2011 | 2011(A) | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 1,556 | $ | 6,381 | ||||
Accounts receivable due from customers, net of reserves of
$64 and $53, respectively |
2,091 | 3,550 | ||||||
Accounts receivable due from suppliers, net of reserves
of $55 and $67, respectively |
764 | 724 | ||||||
Inventory, net of reserves of $1,397 and $1,650, respectively |
1,737 | 1,521 | ||||||
Other current assets |
360 | 165 | ||||||
Total current assets |
6,508 | 12,341 | ||||||
Property and equipment, net |
197 | 420 | ||||||
Total assets |
$ | 6,705 | $ | 12,761 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 3,682 | $ | 5,180 | ||||
Accrued liabilities |
2,264 | 2,762 | ||||||
Line of credit |
| 1,000 | ||||||
Total current liabilities |
5,946 | 8,942 | ||||||
Deferred rent, net of current portion |
39 | | ||||||
Total liabilities |
$ | 5,985 | $ | 8,942 | ||||
Commitments, Contingencies and Subsequent Events |
||||||||
Stockholders Equity: |
||||||||
Preferred stock, no par value, 10,000,000 shares authorized;
no shares issued or outstanding at July 31, 2011 and
January 31, 2011, respectively |
| | ||||||
Common stock, $0.10 par value, 50,625,000 shares
authorized; 7,343,869 shares issued and outstanding at July
31, 2011 and January 31, 2011 |
733 | 733 | ||||||
Additional paid-in capital |
15,394 | 15,299 | ||||||
Accumulated deficit |
(15,407 | ) | (12,213 | ) | ||||
Total stockholders equity |
720 | 3,819 | ||||||
Total liabilities and stockholders equity |
$ | 6,705 | $ | 12,761 | ||||
(A) | Derived from the audited consolidated financial statements as of January 31, 2011. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
COMARCO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended | Six Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
$ | 1,926 | $ | 12,783 | $ | 4,876 | $ | 20,297 | ||||||||
Cost of revenue |
2,232 | 10,645 | 5,006 | 16,557 | ||||||||||||
Gross profit (loss) |
(306 | ) | 2,138 | (130 | ) | 3,740 | ||||||||||
Selling, general, and administrative expenses |
1,114 | 1,210 | 2,065 | 2,617 | ||||||||||||
Engineering and support expenses |
475 | 886 | 974 | 1,788 | ||||||||||||
1,589 | 2,096 | 3,039 | 4,405 | |||||||||||||
Operating income (loss) |
(1,895 | ) | 42 | (3,169 | ) | (665 | ) | |||||||||
Other loss, net |
(13 | ) | (23 | ) | (2 | ) | (42 | ) | ||||||||
Income (loss) from continuing operations
before income taxes |
(1,908 | ) | 19 | (3,171 | ) | (707 | ) | |||||||||
Income tax expense |
2 | | 2 | | ||||||||||||
Net income (loss) from continuing operations |
(1,910 | ) | 19 | (3,173 | ) | (707 | ) | |||||||||
Loss from discontinued operations,
net of income taxes |
(21 | ) | (594 | ) | (21 | ) | (601 | ) | ||||||||
Net loss |
$ | (1,931 | ) | $ | (575 | ) | $ | (3,194 | ) | $ | (1,308 | ) | ||||
Basic and diluted loss per share: |
||||||||||||||||
Net loss from continuing operations |
$ | (0.26 | ) | $ | | $ | (0.43 | ) | $ | (0.10 | ) | |||||
Net loss from discontinued operations |
| (0.08 | ) | | (0.08 | ) | ||||||||||
$ | (0.26 | ) | $ | (0.08 | ) | $ | (0.43 | ) | $ | (0.18 | ) | |||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
7,344 | 7,327 | 7,344 | 7,327 | ||||||||||||
Diluted |
7,344 | 7,327 | 7,344 | 7,327 | ||||||||||||
Common shares outstanding |
7,344 | 7,327 | 7,344 | 7,327 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
COMARCO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended | ||||||||
July 31, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (3,194 | ) | $ | (1,308 | ) | ||
Loss from discontinued operations |
$ | 21 | $ | 601 | ||||
Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities: |
||||||||
Depreciation |
271 | 380 | ||||||
Loan origination fees |
53 | 56 | ||||||
Stock-based compensation |
95 | 143 | ||||||
Recovery from doubtful accounts receivable |
| (104 | ) | |||||
Provision for obsolete inventory |
(185 | ) | (152 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable due from customers |
1,470 | (3,357 | ) | |||||
Accounts receivable due from suppliers |
(51 | ) | (338 | ) | ||||
Inventory |
(31 | ) | (179 | ) | ||||
Other assets |
(195 | ) | (146 | ) | ||||
Accounts payable |
(1,498 | ) | 3,276 | |||||
Accrued liabilities |
(498 | ) | (2,546 | ) | ||||
Deferred rent |
39 | (63 | ) | |||||
Net cash used in continuing operating activities |
(3,703 | ) | (3,737 | ) | ||||
Net cash (used in) provided by discontinued operating activities |
(21 | ) | (601 | ) | ||||
Net cash used in operating activities |
(3,724 | ) | (4,338 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of property and equipment |
(48 | ) | (240 | ) | ||||
Net cash used in investing activities |
(48 | ) | (240 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Line of credit |
(1,000 | ) | | |||||
Loan origination fees |
(53 | ) | (56 | ) | ||||
Net cash used in financing activities |
(1,053 | ) | (56 | ) | ||||
Net decrease in cash and cash equivalents |
(4,825 | ) | (4,634 | ) | ||||
Cash and cash equivalents, beginning of period |
6,381 | 10,127 | ||||||
Cash and cash equivalents, end of period |
$ | 1,556 | $ | 5,493 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid for interest |
$ | 12 | $ | 28 | ||||
Cash paid for income taxes, net of refunds |
$ | 2 | $ | | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization
Comarco, Inc., through its wholly-owned subsidiary Comarco Wireless Technologies, Inc.
(collectively, we, us, our, Comarco, or the Company), is a leading developer and designer
of mobile power adapters used to simultaneously power and charge notebook computers, mobile phones,
BlackBerry® smartphones, iPods®, and many other portable, rechargeable handheld devices. Our
operations consist solely of the operations of Comarco Wireless Technologies, Inc. (CWT), which
was incorporated in the State of Delaware in September 1993. Comarco, Inc. was incorporated in
California in 1960 and its common stock has been publicly traded since 1971 when it was spun-off
from Genge Industries, Inc.
2. Summary of Significant Accounting Policies
The summary of our significant accounting policies presented below is designed to assist the
reader in understanding our condensed consolidated financial statements. Such financial statements
and related notes are the representations of our management, who are responsible for their
integrity and objectivity. In the opinion of management, these accounting policies conform to
accounting principles generally accepted in the United States of America in all material respects,
and have been consistently applied in preparing the accompanying condensed consolidated financial
statements.
Future Operations, Change in Strategy, Liquidity and Capital Resources:
The Company has experienced substantial pre-tax losses from continuing operations for the six
months ended July 31, 2011 and 2010 totaling $3.2 million and $0.7 million, respectively. In
addition, the Company experienced pre-tax losses from operations for fiscal 2011 totaling $5.4
million. The condensed consolidated financial statements have been prepared assuming that the
Company will continue to operate as a going concern, which contemplates that the Company will
realize its assets and satisfy its liabilities and commitments in the ordinary course of business.
The Companys condensed consolidated financial statements do not reflect any adjustments related to
the outcome of this uncertainty. The Companys future is highly dependent on its ability to sell
its products at a profit, obtain liquidity, and its ultimate return to overall profitability. During the second quarter of fiscal 2012, the Company had two customers, Lenovo and Dell, both of which are original equipment
manufacturers, or OEMs.
During the second quarter of fiscal 2012 the Company decided to change its sales strategy to
sell its products directly to consumers. Although we plan to continue to sell select products in
the OEM channel, we believe that we can increase sales and margins by also selling our products
direct to consumers. To implement this strategy, during the latter part of the third quarter, we
plan to launch our website to sell our newest generation of AC adapter. However, there can be no
assurance that the Company will be able to successfully achieve its sales volume initiatives
through the launch of its new website and the failure to achieve such initiatives could have a
material adverse effect on the Companys operations and financial condition.
The Company had working capital totaling approximately $0.6 million at July 31, 2011. In
order for us to conduct our business for the next twelve months and to continue operations
thereafter and be able to discharge our liabilities and commitments in the normal course of
business, we must increase sales, reduce operating expenses, and potentially raise additional
funds, through either debt and/or equity financing to meet our working capital needs. On August 3,
2011, the Company received a letter from Silicon Valley Bank (SVB) indicating that an event of
default had occurred under the Loan and Security Agreement entered into by and between the Company
and SVB on February 11, 2009 (as amended, the Loan Agreement). The event of default relates to
the Companys failure to meet the minimum quick ratio financial covenant of 1.25 to 1.00 for
each of the periods ending February 28, 2011, March 31, 2011, April 30, 2011, May 31, 2011 and June
30, 2011. The Company remains in default of the quick ratio financial covenant as of the date of this filing. The Companys ability to borrow under the Loan Agreement may continue to be suspended
based upon our failure to comply with the quick ratio covenant in the future. Although the Company
is currently seeking other forms of financing, we cannot be certain we will be able to secure
additional financing on terms acceptable to us, or at all.
6
Table of Contents
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Basis of Presentation:
The interim condensed consolidated financial statements of Comarco included herein have been
prepared without audit in accordance with accounting principles generally accepted in the United
States of America for interim information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. The Company believes
that the disclosures are adequate to make the information presented not misleading when read in
conjunction with the audited consolidated financial statements included in the Companys annual
report on Form 10-K for the year ended January 31, 2011. The unaudited interim condensed
consolidated financial information presented herein reflects all adjustments, consisting only of
normal recurring accruals, which are, in the opinion of management, necessary for a fair
presentation of the consolidated results for the interim periods presented. The consolidated
results for the three and six months ended July 31, 2011 are not necessarily indicative of the
results to be expected for the fiscal year ending January 31, 2012.
Cash and Cash Equivalents
All highly liquid investments with remaining maturity dates of three months or less when
acquired are classified as cash and cash equivalents. The fair value of cash and cash equivalents
approximates the amounts shown in the unaudited interim condensed consolidated financial
statements. Cash and cash equivalents are generally maintained in uninsured accounts, typically
Eurodollar deposits with daily liquidity, which are subject to investment risk including possible
loss of principal invested.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements of the Company include the
accounts of Comarco, Inc. and CWT, its wholly owned subsidiary. All material intercompany balances,
transactions, and profits and losses have been eliminated.
Accounts Receivable Due from Customers
The Company offers unsecured credit terms to customers and performs ongoing credit evaluations
of its customers. Accounts receivable balances result primarily from the timing of remittance
payments by these customers to the Company. Accounts receivable are stated net of an allowance for
doubtful accounts. Management develops its estimate of this reserve based upon specific
identification of account balances that have indications of uncertainty of collection. Indications
of uncertainty of collections may include the customers inability to pay, customer
dissatisfaction, or other factors. Significant management judgments and estimates must be made and
used in connection with establishing the allowance for doubtful accounts in any accounting period.
Material differences may result in the amount and timing of our losses for any period if management
made different judgments or utilized different estimates. Historically, such losses have been
within managements expectations and the reserves established.
Accounts Receivable Due from Suppliers
Oftentimes the Company is able to source components locally that it later sells to its
contract manufacturers, who build the finished goods, and other suppliers. This is especially the
case when new products are initially introduced into production. Sales to the Companys contract
manufacturers and other suppliers are excluded from revenue and are recorded as a reduction to cost
of revenue.
Use of Estimates
The preparation of unaudited interim condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the unaudited interim condensed
consolidated financial statements and the reported amounts of revenue and expenses during the
period reported. Actual results could materially differ from those estimates.
7
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Certain accounting principles require subjective and complex judgments to be used in the
preparation of financial statements. Accordingly, a different financial presentation could result
depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions
include, but are not specifically limited to, those required in the valuation of long-lived assets,
allowance for doubtful accounts, reserves for inventory obsolescence, reserves for estimated
warranty costs, including product recall costs, valuation allowances for deferred tax assets, and
determination of stock based compensation.
On April 30, 2010, the United States Consumer Product Safety Commission (CPSC) announced a
product safety recall (the Recall) concerning approximately 500,000 units of our ChargeSource
90-watt universal AC power adapter sold to our distributer, Targus from June 2009 through March
2010. During the fourth quarter of fiscal 2010, the Company recorded an accrual of $4.6 million
related to the Recall. The Companys methodology for estimating the costs for the Recall involved
estimating future costs to be incurred to replace the recalled adapters based on expected returns
and the costs to conduct the Recall, particularly communication, replacement, and transportations
costs. Another aspect of the estimate involves Comarcos assessment of Targus and Comarcos
respective obligations regarding returned product. During the fourth quarter of fiscal 2011 and the
first quarter of fiscal 2012, the Company recorded additional accruals of $0.3 million and $0.4
million, respectively, related to the Recall. During the third quarter of fiscal 2012, Targus and
Comarco entered into a Release and Settlement Agreement (the Settlement Agreement) with respect
to all matters concerning the Recall. In the third quarter, as part of the Settlement Agreement,
Targus paid Comarco approximately $290,000 which represents a refund of previous amounts withheld
from payment in the first quarter of fiscal 2012. The Company believes that it has accrued and
paid for substantially all of its material financial obligations with respect to the Recall.
Reclassifications:
Certain prior period balances have been reclassified to conform to the current period
presentation. The reclassifications have no effect on previously reported results of operations or
accumulated deficit.
Impairment or Disposal of Long-lived Assets:
We review our long-lived assets for impairment whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived
asset is greater than the projected future undiscounted net cash flows from such asset (excluding
interest), an impairment loss is recognized. Impairment losses are calculated as the difference
between the cost basis of an asset and its estimated fair value. We did not recognize any impairment
charges during the three or six months ended July 31, 2011.
Fair Value of Financial Instruments:
The Companys financial instruments include cash and cash equivalents, accounts receivable due
from customers and suppliers, accounts payable, accrued liabilities, and a line of credit. The
carrying amount of cash and cash equivalents, accounts receivable due from customers and suppliers,
accounts payable, and accrued liabilities are considered to be representative of their respective
fair values because of the short-term nature of those instruments. The carrying amount of the
Companys line of credit approximates fair value since the interest rate approximates the market
rate for debt securities with similar terms and risk characteristics.
3. Discontinued Operations
The Company entered into an Asset Purchase Agreement on September 26, 2008 with Ascom Holding
AG and its subsidiary Ascom Inc., (collectively, Ascom) to sell the Wireless Test Solutions
(WTS) business and related assets. Comarcos shareholders approved the transaction on November
26, 2008 which closed on January 6, 2009.
8
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The aggregate purchase price paid to Comarco in connection with the transaction was
$12,750,000 in cash, with $1,275,000 of the proceeds placed in escrow for one year from the closing
date as security for general indemnification rights. The proceeds placed in escrow were released in
January 2010.
Operating results of the WTS discontinued operations are as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | | $ | | $ | | $ | | ||||||||
Income (loss) from discontinued operations: |
||||||||||||||||
Gain on sale, net of taxes of $0 |
$ | | $ | | $ | | $ | | ||||||||
Loss from discontinued operations, before taxes |
(21 | ) | (594 | ) | (21 | ) | (601 | ) | ||||||||
Income tax expense |
| | | | ||||||||||||
Total Loss from discontinued operations |
$ | (21 | ) | $ | (594 | ) | $ | (21 | ) | $ | (601 | ) | ||||
The fiscal 2012 year to date loss from WTS discontinued operations of $21,000 relates to a
sales tax audit performed by the California State Board of Equalization during the second quarter
of fiscal 2012. The expensed amount represents the portion of the assessment that is to be borne
by Comarco for the sale of the WTS business to Ascom.
The fiscal 2011 year to date loss from WTS discontinued operations of $601,000 relates to a
settlement with a former officer and employee of the WTS business, whereby Comarco agreed to pay
the former employee $508,000 which amount included reimbursement for attorney and professional
fees. The remaining loss relates primarily to Comarcos legal fees incurred relating to the
matter.
4. Stock-Based Compensation
The Company grants stock awards for a fixed number of shares to employees, consultants, and
directors with an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock-based compensation using the modified prospective method, which
requires measurement of compensation cost for all stock awards at fair value on date of grant and
recognition of compensation over the service period for awards expected to vest. The fair value of
stock options is determined using a Lattice Binomial model for options with performance-based
vesting tied to the Companys stock price and the Black-Scholes valuation model for options with
ratable term vesting. Both the Lattice Binomial and Black-Scholes valuation models require the
input of subjective assumptions. These assumptions include estimating the length of time optionees
will retain their vested stock options before exercising them (the expected term), the estimated
volatility of our common stock price over the expected term, and the number of awards that will
ultimately not complete their vesting requirements (forfeitures). Changes in these subjective
assumptions can materially affect the estimate of fair value of stock-based compensation and,
consequently, the related amount recognized as an expense on the consolidated statements of
operations. As required under the accounting rules, the Company reviews its valuation assumptions
at each grant date and, as a result, is likely to change its valuation assumptions used to value
stock-based awards granted in future periods. The values derived from using either the Lattice
Binomial or the Black-Scholes model are recognized as an expense over the vesting period, net of
estimated forfeitures. The estimation of stock awards that will ultimately vest requires
significant judgment. Actual results, and future changes in estimates, may differ from the
Companys current estimates.
9
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The compensation expense recognized is summarized in the table below (in thousands except per
share amounts):
Three Months Ended | Six Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total stock-based compensation expense |
$ | 24 | $ | 88 | $ | 95 | $ | 143 | ||||||||
Impact on basic and diluted earnings per share |
$ | 0.00 | $ | 0.01 | $ | 0.01 | $ | 0.02 |
The total compensation cost related to nonvested awards not yet recognized is approximately
$315,000, which will be expensed over a weighted average remaining life of 18 months.
During the three and six months ended July 31, 2011, 220,000 and 295,000 restricted stock
units were granted. During the three and six months ended July 31, 2011, no stock options were
granted. During the three months ended July 31, 2010, 80,000 restricted stock units were granted
and 10,000 stock options were granted. No restricted stock units or stock options were granted in
the first quarter of fiscal 2010. The fair value of the restricted stock units granted during the
three months ended July 31, 2010 was estimated using the stock price on the date of the grant of
$2.35 and a forfeiture rate of 8.2 percent. The fair value of the 10,000 options granted under the
Companys stock option plans during the three months ended July 31, 2010 was estimated on the date
of grant using the Black-Scholes option-pricing model utilizing the following weighted average
assumptions:
Weighted average risk-free interest rate |
0.98 | % | ||
Expected life (in years) |
3.2 | |||
Expected stock volatility |
62.2 | % | ||
Dividend yield |
None | |||
Expected forfeitures |
10.6 | % |
Comarco has stock-based compensation plans under which outside directors, consultants, and
employees are eligible to receive stock options and other equity-based awards. The stock option
plans and a director stock option plan provide that officers, key employees, directors and
consultants may be granted options to purchase up to 3,312,500 shares of common stock of the
Company at not less than 100 percent of the fair market value at the date of grant, unless the
grantee is a 10 percent shareholder of the Company, in which case the price must not be less than
110 percent of the fair market value. Figures for these plans reflect a 3-for-2 stock split
declared during the year ended January 31, 2001.
The Companys Director Stock Option Plan (the Director Plan) expired in December 2010, and
the Companys former employee stock option plan (the Employee Plan) expired during May 2005.
These plans provided for 637,500 and 825,000 shares issuable, respectively. During December 2005,
the Board of Directors approved and adopted the Companys 2005 Equity Incentive Plan (the 2005
Plan) covering 450,000 shares of common stock. The 2005 Plan was approved by the Companys
shareholders at its annual shareholders meeting in June 2006, and subsequently amended at its
annual shareholders meeting in June 2008 to increase the number of shares issuable under the plan
from 450,000 to 1,100,000 shares. In July 2011, the Companys shareholders approved the 2011
Equity Incentive Plan (the 2011 Plan) covering 750,000 shares of common stock.
Under both the 2011 and 2005 Plan, the Company may grant stock options, stock appreciation
rights, restricted stock, restricted stock units, and performance based awards to employees,
consultants and directors. Under all plans, awards vest or become exercisable in installments
determined by the compensation committee of the
10
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Companys Board of Directors; however, under the 2005 Plan no option may be exercised prior to
one year following the grant of the option. The options granted under the Director Plan and the
Employee Plan expire as determined by the committee, but no later than ten years and one week after
the date of grant (five years for 10 percent shareholders). The options granted under the 2011 and
2005 Plan expire as determined by the committee, but no later than ten years after the date of
grant (five years for 10 percent shareholders).
Transactions and other information related to stock options granted under these plans for the
six months ended July 31, 2011 are summarized below:
Outstanding Options | ||||||||
Weighted-Average | ||||||||
Number of Shares | Exercise Price | |||||||
Balance, January 31, 2011 |
1,022,500 | $ | 2.81 | |||||
Options granted |
| | ||||||
Options canceled or expired |
(407,500 | ) | 1.85 | |||||
Options exercised |
| | ||||||
Balance, July 31, 2011 |
615,000 | $ | 3.46 | |||||
Stock Options Exercisable at July 31, 2011 |
322,050 | $ | 5.63 | |||||
Transactions and other information related to restricted stock units (RSUs) granted under
these plans for the six months ended July 31, 2011 are summarized below:
Outstanding Restricted Stock Units | ||||||||
Weighted-Average | ||||||||
Stock Price | ||||||||
Number of Shares | On Grant Date | |||||||
Balance, January 31, 2011 |
98,928 | $ | 2.56 | |||||
RSUs granted |
295,000 | 0.30 | ||||||
RSUs canceled or expired |
(45,952 | ) | 2.65 | |||||
Common Stock Issued |
| | ||||||
Balance, July 31, 2011 |
347,976 | $ | 0.61 | |||||
As of July 31, 2011 40,000 restricted stock units had vested. The shares were issued to the
recipients in August 2011.
As of July 31, 2011, the stock awards outstanding have an intrinsic value of $1,000, based on
a closing market price of $0.27 per share on July 31, 2011. The following table summarizes
information about the Companys stock awards outstanding at July 31, 2011:
Awards Outstanding | Awards Exercisable | |||||||||
Weighted-Avg. | Weighted-Avg. | Weighted-Avg. | ||||||||
Range of | Number | Remaining | Exercise/Grant | Number | Exercise/Grant | |||||
Exercise/Grant Prices | Outstanding | Contractual Life | Price | Exercisable | Price | |||||
$0.26 to 4.90
|
781,476 | 4.03 | $0.96 | 180,550 | $1.69 | |||||
6.29 to 9.89 | 121,500 | 2.82 | 7.89 | 121,500 | 7.89 | |||||
10.43 to 11.60 | 60,000 | 3.77 | 10.72 | 60,000 | 10.72 | |||||
962,976 | 3.86 years | 2.45 | 362,050 | 5.27 | ||||||
At July 31, 2011, shares available for future grants were 995,224.
11
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Recent Accounting Pronouncements
In February 2011, the FASB issued amended guidance on subsequent events. Under this amended
guidance, SEC filers are no longer required to disclose the date through which subsequent events
have been evaluated in originally issued and revised financial statements. This guidance was
effective immediately and we adopted these new requirements upon issuance of this guidance.
6. Earnings (Loss) Per Share
The Company calculates basic earnings (loss) per share by dividing net income (loss) by the
weighted-average number of common shares outstanding during the reporting period. Diluted earnings
(loss) per share reflects the effects of potentially dilutive securities. Since the Company
incurred a net loss for the three and six months ended July 31, 2011 and 2010, basic and diluted
loss per share were the same because the inclusion of potential common shares related to
outstanding stock options in the calculation would have been antidilutive.
Potential common shares of 10,275 and 4,288 have been excluded from diluted weighted average
common shares for the three and six months ended July 31, 2011, as the effect would have been
antidilutive. Similarly, potential common shares of 260,153 and 276,587 have been excluded from
diluted weighted average common shares for the three and six months ended July 31, 2010, as the
effect would have been antidilutive.
7. Customer and Supplier Concentrations
A significant portion of the Companys revenue is derived from a limited number of customers.
The customers providing 10 percent or more of the Companys revenue for the periods presented below
are listed here:
Three Months Ended July 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
(In thousands) | ||||||||||||||||
Total revenue |
$ | 1,926 | 100 | % | $ | 12,783 | 100 | % | ||||||||
Customer concentration: |
||||||||||||||||
Dell Inc. and affiliates |
$ | 314 | 16 | % | $ | 278 | 2 | % | ||||||||
Targus Group International, Inc. |
| | 10,016 | 78 | % | |||||||||||
Lenovo Information Products Co., Ltd. |
1,593 | 83 | % | 2,446 | 19 | % | ||||||||||
$ | 1,907 | 99 | % | $ | 12,740 | 99 | % | |||||||||
Three Months Ended July 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
(In thousands) | ||||||||||||||||
Total revenue |
$ | 4,876 | 100 | % | $ | 20,297 | 100 | % | ||||||||
Customer concentration: |
||||||||||||||||
Dell Inc. and affiliates |
$ | 685 | 14 | % | $ | 278 | 1 | % | ||||||||
Targus Group International, Inc. |
1,174 | 24 | % | 15,654 | 77 | % | ||||||||||
Lenovo Information Products Co., Ltd. |
2,947 | 60 | % | 4,251 | 21 | % | ||||||||||
$ | 4,806 | 98 | % | $ | 20,183 | 99 | % | |||||||||
In March 2009, the Company entered into the Targus Agreement with Targus. The Company began
shipments to Targus under the Targus Agreement during the second quarter of fiscal 2010. On January
25, 2011,
12
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Targus provided the Company with written notification of non-renewal of the Targus Agreement.
As such, there is no revenue from Targus in the second quarter of fiscal 2012 and there can be no
assurance that any revenue will be generated from Targus in the future.
The customers comprising 10 percent or more of the Companys gross accounts receivable due
from customers at either July 31, 2011 or January 31, 2011 are listed below (in thousands):
July 31, 2011 | January 31, 2011 | |||||||||||||||
Total gross accounts receivable due
from customers |
$ | 2,155 | 100 | % | $ | 3,603 | 100 | % | ||||||||
Customer concentration: |
||||||||||||||||
Dell Inc and affiliates |
329 | 15 | % | 434 | 12 | % | ||||||||||
Targus Group International, Inc. |
119 | 6 | % | 471 | 13 | % | ||||||||||
Lenovo Information Products Co., Ltd. |
1,696 | 79 | % | 2,683 | 74 | % | ||||||||||
$ | 2,144 | 100 | % | $ | 3,588 | 99 | % | |||||||||
The suppliers comprising 10 percent or more of the Companys gross accounts receivable due
from suppliers at either July 31, 2011 or January 31, 2011 are listed below (in thousands).
July 31, 2011 | January 31, 2011 | |||||||||||||||
Total gross accounts receivable
due from suppliers |
$ | 819 | 100 | % | $ | 791 | 100 | % | ||||||||
Customer concentration: |
||||||||||||||||
Edac Power
Electronics Co.Ltd. |
$ | 532 | 65 | % | $ | 532 | 67 | % | ||||||||
Flextronics Electronics |
125 | 15 | % | 99 | 13 | % | ||||||||||
Zheng Ge Electrical Co., Ltd. |
122 | 15 | % | 122 | 15 | % | ||||||||||
$ | 779 | 95 | % | $ | 753 | 95 | % | |||||||||
A significant portion of our inventory purchases is derived from a limited number of contract
manufacturers (CMs) and other suppliers. The loss of one or more of our significant CMs or
suppliers could materially adversely affect our operations. For the three and six months ended July
31, 2011 two of our CMs provided an aggregate of 50 and 88 percent, respectively, of total
product costs. For the three months ended July 31, 2010 three of our CMs provided an aggregate of
95 percent of total product costs. For the six months ended July 31, 2010 two of our CMs provided
an aggregate of 88 percent of total product costs.
At July 31, 2011, approximately $3.5 million or 94 percent, of the Companys accounts payable
of $3.7 million was payable to three contract manufacturers, only one of which provided the
majority of the product costs for the three and six months ended July 31, 2011. At July 31, 2011
and January 31, 2011, approximately $1.1 million or 30 percent and 21 percent, respectively, of the
Companys accounts payable was payable to Chicony Power Technology Co., Ltd., (Chicony) the
manufacturer of the Bronx product which was subject to the Recall. At present we are in litigation
with Chicony (see Note 11). At July 31, 2011 and January 31, 2011, approximately $2.0 million and
$2.6 million or 53 percent and 51 percent, respectively, of the Companys accounts payable was
payable to Edac Power Electronics Co. Ltd., the manufacturer of the Manhattan product sold to
Targus. At the present time we are in negotiations with this supplier to create a long-term
payment plan.
Additionally, at July 31, 2011, approximately $0.7 million or 70 percent of total uninvoiced
materials and services of $1.0 million, included in accrued liabilities were payable to three of
our contract manufacturers. At January 31, 2011 approximately $729,000, or 45 percent, of total
uninvoiced materials and services of $1.6 million, included in accrued liabilities were payable to
Flextronics Electronics and Zheng Ge Electrical Co., Ltd.
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Inventory
Inventory, net of reserves, consists of the following (in thousands):
July 31, | January 31, | |||||||
2011 | 2011 | |||||||
Raw materials |
$ | 1,145 | $ | 875 | ||||
Finished goods |
592 | 646 | ||||||
$ | 1,737 | $ | 1,521 | |||||
As of July 31, 2011, approximately $313,000 of total inventory was located at our corporate
headquarters. The remaining balance is located at various contract manufacturer locations primarily
in China.
9. Warranty Arrangements
The Company records an accrual for estimated warranty costs as products are sold. Warranty
costs are estimated based on periodic analysis of historical experience. These amounts are recorded
in accrued liabilities in the unaudited interim condensed consolidated balance sheets. Changes in
the estimated warranty accruals are recorded when the change in estimate is identified. During the
fourth quarter of fiscal 2010, the Company recorded an accrual of $4.6 million related to the
Recall announced on April 30, 2010. Approximately 500,000 Targus branded 90-watt universal AC power
adapters for laptops are affected by the Recall. A summary of the warranty accrual activity is
shown in the table below (in thousands):
As of And For the | ||||||||
Six Months Ended | ||||||||
July 31, | ||||||||
2011 | 2010 | |||||||
Beginning balance |
$ | 310 | $ | 4,759 | ||||
Accruals for warranties issued during the period |
399 | 203 | ||||||
Utilization |
(679 | ) | (3,513 | ) | ||||
$ | 30 | $ | 1,449 | |||||
The Company believes that the balance remaining as of July 31, 2011 is adequate to cover our
standard warranty costs. As discussed in Note 2 (Summary of Significant Accounting Policies Use
of Estimates) and Note 12 (Subsequent Events), Targus and Comarco entered into a Release and
Settlement Agreement (the Settlement Agreement) with respect to all matters concerning the Recall
in August 2011. In the third quarter, as part of the Settlement Agreement, Targus paid Comarco
approximately $290,000 which represents a refund of previous amounts withheld from payment in the
first quarter of fiscal 2012 and charged to cost of revenue. During the third quarter Comarco will
record the payment received from Targus and it will reduce previously recorded accruals for the
Recall to the extent the refund represents amounts in excess of Recall warranty costs.
10. Line of Credit
On February 11, 2009, the Company entered into a Loan and Security Agreement (the Loan
Agreement) with Silicon Valley Bank (SVB). The Loan Agreement was renewed on February 8, 2010
and again on February 9, 2011 and matures, on February 9, 2012, at which time, any outstanding
principal balance is payable in full.
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On August 3, 2011 we received a letter from SVB indicating that the Companys failure to meet
the minimum quick ratio of 1.25 to 1.00 for each of the periods ended February 28, 2011, March 31,
2011, April 30, 201l, May 31, 2011 and June 30, 2011 constituted an event of default.
As of the date of this filing, the Company remains in default of the quick ratio financial covenant.
We
currently have no borrowings outstanding under the Loan Agreement and
the Companys future ability to borrow under the Loan Agreement may continue to be suspended based upon our
failure to comply with the quick ratio covenant in the future. The Company is currently seeking
other forms of financing, however, we cannot be certain we will be able to secure additional
financing on terms acceptable to us, or at all.
11. Commitments and Contingencies
Purchase Commitments with Suppliers
The Company generally issues purchase orders to its suppliers with delivery dates from four to
six weeks from the purchase order date. In addition, the Company regularly provides significant
suppliers with rolling six-month forecasts of material and finished goods requirements for planning
and long-lead time parts procurement purposes only. The Company is committed to accepting delivery
of materials pursuant to its purchase orders subject to various contract provisions that allow it
to delay receipt of such order or allow it to cancel orders beyond certain agreed lead times. Such
cancellations may or may not include cancellation costs payable by the Company. In the past, the
Company has been required to take delivery of materials from its suppliers that were in excess of
its requirements and the Company has previously recognized charges and expenses related to such
excess material. During the second quarter of fiscal 2012 we accrued a charge of $380,000 relating
to such excess material relating to purchase commitments made to support the Targus business.
If the Company is unable to adequately manage its suppliers and adjust such commitments for
changes in demand, it may incur additional inventory expenses related to excess and obsolete
inventory. Such expenses could have a material adverse effect on the Companys business, results of
operations, and financial position.
Executive Severance Commitments
The Company has severance compensation agreements with certain key executives. These
agreements require the Company to pay these executives, in the event of certain terminations of
employment following a change of control of the Company, up to the amount of their then current
annual base salary and the amount of any bonus amount the executive would have achieved for the
year in which the termination occurs plus the acceleration of unvested options. The exact amount of
this contingent obligation is not known and accordingly has not been recorded in the unaudited
interim condensed consolidated financial statements.
Letter of Credit
During the first quarter of fiscal 2010, the Company obtained a $77,000 letter of credit from
SVB to allow for continuous and unlapsed compliance with a lease provision for the Companys
corporate offices. The letter of credit expires on October 26, 2011.
Legal Contingencies
On April 26, 2011, Chicony, the contract manufacturer of the Bronx product that is the subject
of the Recall, filed a complaint against the Company for breach of contract seeking payment of $1.2
million for the alleged non-payment by us of products manufactured by Chicony. The Company denies
liability and filed a cross-complaint on May 13, 2011 seeking the recovery of damages of $4.9
million caused by Chiconys failure to adhere to our technical specifications when manufacturing
the Bronx product, which the Company believes resulted in the Recall of the product. The outcome
of this matter is not determinable as of the date of the filing of this report.
In addition to the pending matter described above, the Company is, from time to time, involved
in various legal proceedings incidental to the conduct of its business. The Company believes that
the outcome of all such legal
15
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
proceedings will not, in the aggregate, have a material adverse effect on its consolidated
results of operations and financial position.
12. Subsequent Events
Management has evaluated events subsequent to July 31, 2011 through the date that the
accompanying condensed consolidated financial statements were filed with the Securities and
Exchange Commission for transactions and other events which may require adjustment of and/or
disclosure in such financial statements.
On August 5, 2011 Targus and Comarco entered into a Release and Settlement Agreement (the
Settlement Agreement) with respect to all matters concerning the Recall. In the third quarter,
as part of the Settlement Agreement, Targus paid Comarco $290,000 which represents a refund of
amounts withheld from payment in the first quarter of fiscal 2012 and charged to cost of revenue.
During the third quarter Comarco will record the payment recived from Targus and it will reduce
previously recorded accruals for the Recall to the extent the refund represents amounts in excess
of Recall warranty costs.
On August 15, 2011, the Board of Directors terminated the employment of Fredrik Torstensson as
interim President and Chief Executive Officer and simultaneously appointed Thomas W. Lanni as
President and Chief Executive Officer. The Board of Directors also elected Mr. Lanni as a
Director.
On August 17, 2011, Comarco entered into a Settlement
Agreement with a supplier to settle commitments made through Comarco purchase orders that had been placed for
Manhattan product that was intended to be sold to Targus. Comarco accrued $380,000 to cost of
revenue during the second quarter which represents the amount that was unpaid as of July 31, 2011.
On September 9, 2011 the Company entered into a Settlement and Amended Cross-License Agreement
(the Agreement) with iGo, Inc. (formerly Mobility Electronics, Inc.) (iGo). The Agreement
fully settles previous litigation relating to various patent infringement causes of action that was
dismissed without prejudice on May 26, 2009. Additionally the Agreement amends the Compromise
Settlement Agreement and Release entered into by the parties on July 12, 2003.
16
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our unaudited
interim condensed consolidated financial statements and the related notes and other financial
information appearing elsewhere in this quarterly report on Form 10-Q.
Forward-Looking Statements
This report, including the following discussion and analysis, contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Words such as expects, anticipates, intends, plans,
believes, seeks, and estimates, and similar expressions or variations of such words are
intended to identify forward-looking statements, but are not deemed to represent an all-inclusive
means of identifying forward-looking statements included in this report. Additionally, statements
concerning future matters are forward-looking statements.
These forward-looking statements reflect current views about our plans, strategies, and
prospects, but are only based on facts and factors known by us as of the date of this report.
Consequently, forward-looking statements are inherently subject to risks and uncertainties, and
actual results and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements.
Forward-looking statements in this report include those related to our objectives; our
products and the availability of future products; our sales, revenues, and costs; the timing of
fulfillment of purchase orders and completion of projects; demand for our products; and the
sufficiency of our cash and cash equivalent balances. Many important factors may cause the
Companys actual results to differ materially from those discussed in any such forward-looking
statements, including but not limited to the impact of general economic and retail uncertainty and
perceived or actual weakening of economic conditions on customers and prospective customers
spending on our products; quarterly and seasonal fluctuations in our revenue or other operating
results; fluctuations in the demand for our products and the fact that a significant portion of our
revenue is derived from a limited number of customers; unexpected difficulties and delays
associated with our efforts to obtain cost reductions and achieve higher sales volumes for our
ChargeSource® products; failure to accurately forecast customer demand and the risk that our
customers may cancel their orders, change production quantities or delay production; the fact that
our products are complex and have short life cycles and the average selling prices of our products
will likely decrease over their sales cycles; disruptions in our relationships with our suppliers;
failure to meet financial expectations of analysts and investors, including failure from
significant reductions in demand from earlier anticipated levels; risks related to market
acceptance of our products and our ability to meet contractual and technical commitments with our
customers; activities by us and others regarding protection of intellectual property; competitors
release of competitive products and other actions; and costs and potential adverse determinations
arising out of adverse proceedings or litigation. Although we believe that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, we cannot assure that the results contemplated in forward-looking
statements will be realized in the timeframe anticipated or at all. In light of the significant
uncertainties inherent in the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by us or any other person that our
objectives or plans will be achieved. Accordingly, investors are cautioned not to place undue
reliance on our forward-looking statements. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise,
except as required by law.
In addition to the risks, uncertainties, and other factors discussed elsewhere in this
quarterly report on Form 10-Q, the risks, uncertainties, and other factors that could cause or
contribute to actual results differing materially from those expressed or implied in any
forward-looking statements include, without limitation, those set forth under
Part I, Item 1A Risk Factors in the Companys Annual Report on Form 10-K for the fiscal year
ended January 31, 2011 filed with the SEC, those contained in the Companys other filings with the
SEC, and those set forth above.
17
Table of Contents
Basis of Presentation
The financial information presented in this report is not audited and is not necessarily
indicative of our future consolidated financial position, results of operations, or cash flow. Our
fiscal year ends on January 31 and our fiscal quarters end on April 30, July 31, and October 31.
Unless otherwise stated, all dates refer to our fiscal year and fiscal periods.
Executive Summary
Comarco, Inc., through its wholly-owned subsidiary Comarco Wireless Technologies, Inc.
(collectively, we, Comarco, or the Company), is a leading developer and designer of mobile
power adapters used to simultaneously power and charge notebook computers, cellular telephones,
BlackBerry® smartphones, iPods®, and other portable, rechargeable handheld devices. Our operations
consist solely of the operations of Comarco Wireless Technologies, Inc. (CWT).
In addition to the risks, uncertainties and factors discussed elsewhere in this quarterly
report on Form 10-Q and in the Companys other filings with the SEC, management currently considers
the following additional trends, events, and uncertainties to be important to understanding our
results of operations for the quarter ended July 31, 2011:
| On August 5, 2011, the Company and Targus entered into a Release and Settlement Agreement (the Settlement Agreement) with respect to all matters concerning the previously announced Recall. In the third quarter, as part of the Settlement Agreement, Targus paid Comarco approximately $290,000 which represents a refund of previous amounts withheld from payment in the first quarter of fiscal 2012. The Company believes that it has accrued and paid for substantially all of its material financial obligations with respect to the Recall. | ||
| On August 3, 2011, the Company received a letter from Silicon Valley Bank (SVB) indicating that an event of default had occurred under the Loan and Security Agreement entered into by and between the Company and SVB on February 11, 2009 (as amended, the Loan Agreement). The event of default relates to the Companys failure to meet the minimum quick ratio financial covenant of 1.25 to 1.00 for each of the periods ending February 28, 2011, March 31, 2011, April 30, 2011, May 31, 2011 and June 30, 2011. The Companys ability to borrow under the Loan Agreement may continue to be suspended based upon our failure to comply with the quick ratio covenant in the future. Although the Company is currently seeking other forms of financing, we cannot be certain we will be able to secure additional financing on terms acceptable to us, or at all. | ||
| On January 25, 2011, the Company received written notification from Targus Group International, Inc. (Targus) of its non-renewal of the Strategic Product Development and Supply Agreement (the Targus Agreement). Although Targus confirmed its desire to continue a business relationship with Comarco in its written notification, the nature of our future business relationship remains unclear. At this time, future sales to Targus are uncertain. Sales to Targus accounted for approximately 79 percent of our revenue for the second quarter of fiscal 2011. | ||
| Revenue for the second quarter of fiscal 2012 decreased to $1.9 million compared to $12.8 million for the second quarter of fiscal 2011. The decrease is primarily attributable to the loss of sales to Targus. | ||
| On June 30, 2009, we announced that we were selected by Dell Inc. to provide an innovative 90 watt DC adapter for use in automobiles and airplanes. We began shipping this product in the latter part of May 2010 and revenue from sales to Dell totaled $0.4 million during the first quarter of fiscal 2012. | ||
| We are focused on preserving our cash balances by monitoring expenses, identifying costs savings, and investing only in those development programs and products that we believe will most likely contribute to our profitability. |
18
Table of Contents
Critical Accounting Policies
Managements Discussion and Analysis of Financial Condition and Results of Operations is based
upon our unaudited interim condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these unaudited interim condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities.
Management bases its estimates on historical experience and on various other assumptions that it
believes to be reasonable under the circumstances. The results of these estimates form the basis
for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ materially from our estimates.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made
based on assumptions about matters that are highly uncertain at the time the estimate is made, and
if different estimates that reasonably could have been used or changes in the accounting estimate
that are reasonably likely to occur could materially change the financial statements. Management
believes there have been no significant changes during the three and six months ended July 31, 2011
to the items that we disclosed as our critical accounting policies and estimates in Managements
Discussion and Analysis of Financial Condition and Results of Operations in our annual report on
Form 10-K for the fiscal year ended January 31, 2011.
Results of Operations Continuing Operations
Revenue
(in thousands except % change)
(in thousands except % change)
Three Months Ended | Six Months Ended | Year over Year | ||||||||||||||||||||||
July 31, | July 31, | % Change | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | Three Months | Six Months | |||||||||||||||||||
Revenue |
$ | 1,926 | $ | 12,783 | $ | 4,876 | $ | 20,297 | (85 | %) | (76 | %) | ||||||||||||
Operating income (loss) |
$ | (1,895 | ) | $ | 42 | $ | (3,169 | ) | $ | (665 | ) | |||||||||||||
Net income (loss) from
continuing operations |
$ | (1,908 | ) | $ | 19 | $ | (3,173 | ) | $ | (707 | ) | |||||||||||||
Revenue by Region
(in thousands except % change)
(in thousands except % change)
Three Months Ended | Six Months Ended | Year over Year | ||||||||||||||||||||||
July 31, | July 31, | % Change | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | Three Months | Six Months | |||||||||||||||||||
Revenue: |
||||||||||||||||||||||||
North America |
$ | 303 | $ | 10,331 | $ | 1,715 | $ | 15,929 | (97 | %) | (89 | %) | ||||||||||||
Europe |
4 | 19 | 14 | 73 | (79 | %) | (81 | %) | ||||||||||||||||
Asia |
1,619 | 2,433 | 3,147 | 4,295 | (33 | %) | (27 | %) | ||||||||||||||||
$ | 1,926 | $ | 12,783 | $ | 4,876 | $ | 20,297 | |||||||||||||||||
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Revenue by Customer
(in
thousands except % change)
Three Months Ended | Six Months Ended | Year over Year | ||||||||||||||||||||||||||||||||||||||
July 31, | July 31, | % Change | ||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | Three Months | Six Months | |||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||||||||||
Revenue | Revenue | Revenue | Revenue | |||||||||||||||||||||||||||||||||||||
Revenue: |
||||||||||||||||||||||||||||||||||||||||
Dell |
314 | 16 | % | 278 | 2 | % | 685 | 14 | % | 278 | 1 | % | 13 | % | 146 | % | ||||||||||||||||||||||||
Lenovo |
1,593 | 83 | % | 2,446 | 19 | % | 2,947 | 61 | % | 4,251 | 21 | % | (35 | %) | (31 | %) | ||||||||||||||||||||||||
Targus |
| | 10,016 | 79 | % | 1,174 | 24 | % | 15,654 | 77 | % | (100 | %) | (93 | %) | |||||||||||||||||||||||||
Other |
19 | 1 | % | 43 | | 70 | 1 | % | 114 | 1 | % | (56 | %) | (38 | %) | |||||||||||||||||||||||||
$ | 1,926 | 100 | % | $ | 12,783 | 100 | % | $ | 4,876 | 100 | % | $ | 20,297 | 100 | % | (85 | %) | (76 | %) | |||||||||||||||||||||
Revenue for the three and six months ended July 31, 2011 decreased by $10.9 million, or
85 percent, and $15.4 million, or 76 percent, respectively, compared to the corresponding periods
of fiscal 2011. The decrease is attributable to the loss of Targus as a customer during fiscal
2012. As previously discussed, on January 25, 2011, we received written notification from Targus of
its non-renewal of the Strategic Product Development and Supply Agreement. Additionally, revenue
to Lenovo decreased during the three and six months ended July 31, 2011 compared to the
corresponding periods of the prior fiscal year. The decrease was due, primarily, to a drop in
Lenovos business customer demand. Finally, during the second quarter of fiscal 2011, we began
shipments of a 90-watt auto-air DC adapter to Dell.
20
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Cost of Revenue and Gross Margin
(in thousands except
margin and % change)
margin and % change)
Three Months Ended | Six Months Ended | Year over Year | ||||||||||||||||||||||||||||||||||||||
July 31, | July 31, | % Change | ||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | Three Months | Six Months | |||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||||||||||
Total | Total | Total | Total | |||||||||||||||||||||||||||||||||||||
Cost of revenue: |
||||||||||||||||||||||||||||||||||||||||
Product cost |
$ | 1,187 | 53 | % | $ | 9,001 | 85 | % | $ | 2,667 | 53 | % | $ | 14,003 | 85 | % | (87 | %) | (81 | %) | ||||||||||||||||||||
Accrued product
recall costs |
| | | | 350 | 7 | % | | | | | |||||||||||||||||||||||||||||
Supplier Settlement |
383 | 17 | % | | | 383 | 8 | % | | | | | ||||||||||||||||||||||||||||
Fixed supply
chain overhead |
608 | 27 | % | 943 | 9 | % | 1,031 | 21 | % | 1,739 | 10 | % | (36 | %) | (41 | %) | ||||||||||||||||||||||||
Inventory reserve
and scrap charges |
54 | 3 | % | 109 | 1 | % | 575 | 11 | % | 109 | 1 | % | (50 | %) | 428 | % | ||||||||||||||||||||||||
Freight, expedite,
and other charges |
| | 592 | 5 | % | | | 706 | 4 | % | (100 | %) | (100 | %) | ||||||||||||||||||||||||||
$ | 2,232 | 100 | % | $ | 10,645 | 100 | % | $ | 5,006 | 100 | % | $ | 16,557 | 100 | % | (79 | %) | (70 | %) | |||||||||||||||||||||
Three Months Ended | Six Months Ended | Year over Year | ||||||||||||||||||||||
July 31, | July 31, | ppt Change | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | Three Months | Six Months | |||||||||||||||||||
Gross margin (loss) |
(16 | %) | 17 | % | (3 | %) | 18 | % | (33 | ) | (21 | ) |
Cost of revenue for the three and six months ended July 31, 2011 decreased by $8.4
million, or 79 percent, and $11.6 million, or 70 percent, respectively, compared to the
corresponding periods of fiscal 2011. These decreases are primarily attributable to the decreases
in sales for the three and six months ended July 31, 2011 compared to the comparable prior year
periods. During the six months ended July 31, 2011, we recorded an additional accrual of $350,000
for our product Recall. No similar costs were incurred in the comparable periods of the prior
fiscal year. During the three and six months ended July 31, 2011, our fixed supply chain overhead
costs decreased by $0.3 million and $0.7 million or 36 percent and 41 percent, respectively, when
compared to the fixed supply chain overhead costs in the comparable prior year periods. These
decreases are a result of measures taken late in the third quarter of fiscal 2011 to reduce
personnel and other costs across all departments. Additionally, during the three months ended July
31, 2011 we accrued a charge of $380,000 relating to a settlement reached with a supplier
relating to purchase commitments made to support the Targus business. There are no
similar charges in the comparable prior year periods. During the first quarter of fiscal 2012 we
incurred scrap charges of $0.5 million relating to Manhattan product components that we procured
from a supplier during the first quarter of fiscal 2012. The Manhattan product was previously sold to
Targus and we have reserved for those components that can only be used in that product. We did not
incur any similar charges during the comparable periods of fiscal 2011. During the three and six
months ended July 31, 2011 we incurred freight expedite and other charges of $0.6 million and $0.7
million, respectively. These costs were incurred to expedite delivery of Manhattan units to
Targus. We had no similar costs in the corresponding periods of the current year.
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Operating Costs and Expenses
(in thousands except % change)
(in thousands except % change)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||
July 31, | July 31, | Year over Year % Change | ||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | Three Months | Six Months | |||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||||||||||
Revenue | Revenue | Revenue | Revenue | |||||||||||||||||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||||||||||||||
SG&A expenses,
excluding
corporate
overhead |
$ | 289 | 15 | % | $ | 258 | 2 | % | $ | 462 | 9 | % | $ | 662 | 3 | % | 12 | % | (30 | %) | ||||||||||||||||||||
Corporate overhead |
825 | 43 | % | 952 | 7 | % | 1,603 | 33 | % | 1,955 | 10 | % | (13 | %) | (18 | %) | ||||||||||||||||||||||||
Engineering and
support expenses |
475 | 25 | % | 886 | 7 | % | 974 | 20 | % | 1,788 | 9 | % | (46 | %) | (46 | %) | ||||||||||||||||||||||||
$ | 1,589 | 83 | % | $ | 2,096 | 16 | % | $ | 3,039 | 62 | % | $ | 4,405 | 22 | % | (24 | %) | (31 | %) | |||||||||||||||||||||
Selling, general, and administrative expenses for the three months ended July 31, 2011
increased $30,000, or 12 percent compared to the corresponding periods of fiscal 2011. The sales
and marketing department experienced a recovery of bad debt expense of $88,000 in the second
quarter of fiscal 2011 and had no similar recovery in the second quarter of the current fiscal
year. Selling, general, and administrative expenses for the six months ended July 31, 2011
decreased $0.2 million, primarily due to a reduction in personnel costs.
Corporate overhead consists of salaries and other personnel-related expenses of our accounting
and finance, human resources and benefits, and other administrative personnel, as well as
professional fees, directors fees, and other costs and expenses attributable to being a public
company. Corporate overhead decreased $0.1 million and $0.4 million for the three and six months
ended July 31, 2011, respectively when compared to the corresponding periods of the prior fiscal
year. The decreases in the current year relate primarily to a reduction in personnel costs.
Offsetting these decreases is an accrual for approximately $0.2 million related to an employee
termination matter.
Engineering and support expenses generally consist of salaries, employer paid benefits, and
other personnel related costs of our design engineers and testing and support personnel, as well as
facility and IT costs, professional and consulting fees, lab costs, material usages, and travel and
related costs incurred in the development and support of our products. Engineering and support
expenses for the three and six months ended July 31, 2011 decreased $0.4 million, or 46 percent,
and $0.8 million, or 46 percent, respectively. The decreases in the current year relate primarily
to a reduction in personnel costs. Additionally we experienced decreased material usage, lab fees
and testing and certification fees which varies with the timing of new product development for our
retail and OEM accessories channels. Additionally, legal fees decreased $0.2 million for the six
months ended July 31, 2011 compared to the same period of the prior fiscal year primarily due to
fees incurred in the prior fiscal year in support of an employment dispute with a former employee
that was resolved.
Other Income (loss), net
Other income (loss), net, consists primarily of interest income earned on invested cash
balances offset by interest expense related to our credit facility. For the three and six months
ended July 31, 2011, interest income was negligible. Interest income earned on invested cash
balances for the three and six months ended July 31, 2010 totaled $5,000 and $14,000, respectively.
Interest expense and loan fee expenses related to our credit facility totaled $13,000 and $38,000
for the three and six months ended July 31, 2011. During the three and six months ended July
31, 2010 we incurred $28,000 and $56,000, respectively in interest expense and amortization of
loan fees related to our credit facility. The current year decrease in interest income is due to
decreased invested cash balances and decreased interest rates earned on invested cash balances.
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Income Tax Benefit
Significant management judgment is required in determining our provision for income taxes, our
deferred tax assets and liabilities, and any required valuation allowance. The Company continues to
have a fully valued deferred tax asset. This valuation allowance was previously established based
on managements overall assessment of risks and uncertainties related to our future ability to
realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating
losses and carry forward temporary differences. Due to the losses incurred during the first six
months of fiscal 2012, the adjusted net deferred tax assets remain fully reserved as of July 31,
2011.
Discontinued Operations Wireless Test Solutions (WTS)
Income (loss) from Discontinued Operations
(in thousands)
(in thousands)
Three Months Ended | Six Months Ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Gain on sale, net
of income taxes of $0 |
$ | | $ | | $ | | $ | | ||||||||
Loss from
discontinued
operations, before
taxes |
(21 | ) | (594 | ) | (21 | ) | (601 | ) | ||||||||
Income tax expense |
| | | | ||||||||||||
Loss from
discontinued
operations |
$ | (21 | ) | $ | (594 | ) | $ | (21 | ) | $ | (601 | ) | ||||
The fiscal 2012 year to date loss from WTS discontinued operations of $21,000 relates to
a sales tax audit performed by the California State Board of Equalization during the second quarter
of fiscal 2012. The expensed amount represents the portion of the assessment that is to be borne
by Comarco for the sale of the WTS business to Ascom.
The fiscal 2011 year to date loss from WTS discontinued operations of $601,000 relates to a
settlement with a former officer and employee of the WTS business, whereby Comarco agreed to pay
the former employee $508,000 which amount included reimbursement for attorney and professional
fees. The remaining loss relates primarily to Comarcos legal fees incurred relating to the matter.
Liquidity and Capital Resources
Cash and cash equivalents at July 31, 2011 decreased $4.8 million to $1.6 million as compared
to $6.4 million at January 31, 2011. The following table is a summary of our Condensed Consolidated
Statements of Cash Flows.
Six Months Ended July 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Cash used in: |
||||||||
Operating activities |
$ | (3,724 | ) | $ | (4,338 | ) | ||
Investing activities |
(48 | ) | (240 | ) | ||||
Financing activities |
(1,053 | ) | (56 | ) |
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Table of Contents
Operating Activities
Cash used in operating activities was $3.7 million for the six months ended July 31, 2011 and
was driven by our net loss from continuing operations of $3.2 million. On a combined basis, our
accounts payable and accrued liabilities decreased $2.0 million during the six months ended July
31, 2011. Offsetting these uses of cash, we collected a net $1.5 million in accounts receivable.
Cash used in operating activities was $4.3 million for the six months ended July 31, 2010 and
was driven by our net loss from continuing operations of $0.7 million offset by non-cash
depreciation of $0.4 million. Additionally our accounts receivable and inventory balances increased
by $3.7 million and $0.2 million, during the six months ended July 31, 2010, respectively,
primarily as a result of increased sales volumes.
Investing Activities
During the six months ended July 31, 2011, we purchased $48,000 of property and equipment,
which was primarily tooling and equipment used for the manufacture of our ChargeSource® products.
During the six months ended July 31, 2010, we purchased $0.2 million of property and
equipment, primarily tooling and equipment used for the manufacture of our ChargeSource® products.
Financing Activities
On February 11, 2009, the Company entered into a Loan and Security Agreement (the Loan
Agreement) with Silicon Valley Bank (SVB). The Loan Agreement was renewed on February 8, 2010
and again on February 9, 2011 and matures, on February 9, 2012, at which time, any outstanding
principal balance is payable in full.
During the six months ended July 31, 2011 we repaid our line of credit of $1.0 million and we
incurred $53,000 in loan origination fees relating to the renewal of the Loan Agreement with SVB.
During the six months ended July 31, 2010 we incurred $56,000 in loan origination fees
relating to the renewal of the Loan Agreement with SVB.
On August 3, 2011 we received a letter from SVB indicating that the Companys failure to meet
the minimum quick ratio of 1.25 to 1.00 for each of the periods ended February 28, 2011, March 31,
2011, April 30, 201l, May 31, 2011 and June 30, 2011 constituted an event of default under the Loan
Agreement.
As of the date of this filing, we have no borrowings outstanding under the Loan Agreement and
the Companys ability to borrow under the Loan Agreement may continue to be limited or unavailable
based upon our failure to comply with the quick ratio covenant in the future. The Company is
currently seeking other forms of financing, however, we cannot be certain we will be able to secure
additional financing on terms acceptable to us, or at all.
Future Operations and Liquidity Requirements for the Next 12 Months
As
of July 31, 2011 we had working capital of approximately $0.6 million. In order for us to
conduct our business for the next twelve months and to continue operations thereafter and be able
to discharge our liabilities and commitments in the normal course of business, we must increase
sales, reduce operating expenses, and potentially raise additional funds, through either debt
and/or equity financing to meet our working capital needs. Although the Company is currently
seeking other forms of financing, we cannot be certain we will be able
to secure additional financing on terms acceptable to us, or at all.
These uncertainties raise substantial doubt about our ability to continue as a going concern.
If we become unable to continue as a going concern, we may have to liquidate our assets, and might
realize significantly less than the values at which they are carried on our financial statements,
and stockholders may lose all or part of their investment in our common stock. The consolidated
financial statements do not reflect any adjustments related to the outcome of this uncertainty.
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Table of Contents
As discussed above, there are several factors and events that could significantly affect our
cash flows from operations, including, without limitation the following:
| The ability of our contract manufacturers of our ChargeSource® products to manufacture our products at the level currently anticipated, and the ability of our ChargeSource® products to meet any required specifications. | ||
| The timing of the development, delivery or release of our ChargeSource® products. | ||
| Our ability to execute our current strategy of direct sales of our products to consumers. | ||
| Our ability to raise additional funds, through either debt and/or equity financing. |
We are currently focused on preserving our cash balances by monitoring expenses, identifying
cost savings, and investing only in those development programs and products that we believe will
most likely contribute to our potential future profitability. As we execute on our current
strategy, however, we may require further debt and/or equity capital to fund our working capital
needs. In particular, we have experienced, and anticipate that we may experience a negative
operating cash flow in the future. We may attempt to raise additional funds through public or
private debt or equity financings if such financings become available on acceptable terms. We
cannot be certain that any additional financing we may need will be available on terms acceptable
to us, or at all. If adequate funds are not available or are not available on acceptable terms, we
may not be able to take advantage of opportunities, develop new products or otherwise respond to
competitive pressures, and our operating results and financial condition could be adversely
affected.
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Table of Contents
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are not required to provide disclosure in response to Part 1: Item 3 of Form 10-Q because
we are considered to be a smaller reporting company.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are the controls and other procedures of an issuer that
are designed to ensure that information required to be disclosed by the issuer in the reports filed
or submitted by it under the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized, and reported within the time periods specified in the rules and
forms of the SEC. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an issuer in its
Exchange Act reports is accumulated and communicated to the issuers management, including its
principal executive and financial officers, as appropriate, to allow timely decisions regarding
required disclosure.
Under the direction and participation of our management, including our Principal Executive
Officer and Principal Financial Officer, we evaluated the effectiveness of our disclosure controls
and procedures as of July 31, 2011, the end of the period covered by this quarterly report on Form
10-Q. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures were not effective as of the end of the
period covered by this quarterly report on Form 10-Q due to changes in internal control identified
below. Notwithstanding the foregoing, a control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that it will detect or uncover failures within
the Company to disclose material information otherwise required to be set forth in the Companys
periodic reports.
Changes in Internal Control Over Financial Reporting
Internal control over financial reporting is a process designed by, or under the supervision
of, the issuers principal executive and financial officers, and effected by the issuers board of
directors, management, and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes those policies
and procedures that:
(1) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; | ||
(2) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and | ||
(3) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuers assets that could have a material effect on the financial statements. |
Our management has concluded that, as of July 31, 2011, our internal control over financial
reporting is not effective in providing reasonable assurance regarding the reliability of financial
reporting and the preparation of
financial statements for external purposes in accordance with United States generally accepted
accounting principles. Our managements finding of ineffective internal control over financial
reporting results primarily from the fact that during the second quarter and thereafter the Companys finance department has too few
employees to have adequate segregation of duties necessary for an appropriate system of internal controls.
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Table of Contents
While the lack of effective internal control over financial reporting during the fiscal
quarter ended July 31, 2011 did not result in any particular deficiency in our financial reporting
for the fiscal quarter ended July 31, 2011, management believes that the lack of effectiveness of
our internal control over financial reporting could result in a failure to provide reliable
financial reporting in the future. In order to remedy our existing internal control deficiency, we
will need to either (1) raise additional capital or improve our working capital position to allow
us to hire additional accounting staff, or (2) successfully train our existing staff to take
on additional responsibilities that will assist us in creating an effective system of internal
controls over financial reporting.
PART II OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
Chicony Power Technology Co. Ltd. (Chicony) vs. Comarco, Inc., Case No. 30-2011 Superior
Court of California. On April 26, 2011, Chicony, the contract manufacturer of the Bronx product
that is the subject of the Recall, filed a complaint against the Company for breach of contract
seeking payment of $1.2 million for the alleged non-payment by us of products manufactured by
Chicony. The Company denies liability and filed a cross-complaint on May 13, 2011 seeking the
recovery of damages of $4.9 million caused by Chiconys failure to adhere to our technical
specifications when manufacturing the Bronx product, which the Company believes resulted in the
Recall of the product. The outcome of this matter is not determinable nor estimable as of the date
of the filing of this report on Form 10-Q.
In addition to the matter described above, we are from time to time involved in various legal
proceedings incidental to the conduct of our business. We believe that the outcome of all such
pending legal proceedings will not in the aggregate have a material adverse effect on our
consolidated results of operations or financial condition.
ITEM 1A. | RISK FACTORS |
Our business, financial condition and operations are subject to a number of factors,
risks and uncertainties, including those previously disclosed under Part I. Item 1A Risk Factors
of our annual report on Form 10-K for the fiscal year ended January 31, 2011 as well as any
amendments thereto or additions and changes thereto contained in this quarterly report on Form 10-Q
and any subsequent filings of quarterly reports on Form 10-Q. The disclosures in our annual report
on Form 10-K, this quarterly report on Form 10-Q and our subsequent reports and filings are not
necessarily a definitive list of all factors that may affect our business, financial condition and
future results of operations. There have been no material changes to the risk factors as disclosed
in our annual report on Form 10-K for the fiscal year ended January 31, 2011.
ITEM 6. EXHIBITS
31.1
|
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS**
|
XBRL Instance Document | |
101.SCH**
|
XBRL Taxonomy Extension Schema Document | |
101.CAL**
|
XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB**
|
XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE**
|
XBRL Taxonomy Extension Presentation Linkbase Document |
** | XBRL (Extensible Business Reporting Language) information is furnished and filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
27
Table of Contents
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.
COMARCO, INC. |
||||
Date: September 14, 2011 | /s/ THOMAS W. LANNI | |||
Thomas W. Lanni | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: September 14, 2011 | /s/ ALISHA K. CHARLTON | |||
Alisha K. Charlton | ||||
Vice President and Chief Accounting Officer (Principal Financial and Accounting Officer) |
28
Table of Contents
EXHIBIT INDEX
Exhibit Description
31.1
|
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS**
|
XBRL Instance Document | |
101.SCH**
|
XBRL Taxonomy Extension Schema Document | |
101.CAL**
|
XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB**
|
XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE**
|
XBRL Taxonomy Extension Presentation Linkbase Document |
** | XBRL (Extensible Business Reporting Language) information is furnished and filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
29