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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - COMARCO INCd308178dex322.htm
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

 

    þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

     For the fiscal year ended January 31, 2012

OR

 

     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 000-05449

 

 

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, CA

(Address of Principal Executive Offices)

 

92630

(Zip Code)

 

 

Registrant’s telephone number, including area code:

(949) 599-7400

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.10 par value

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

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 ¨

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 ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 ¨       Accelerated filer ¨   Non-accelerated filer ¨   Smaller reporting company þ
    (do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of July 29, 2011, the last business day of our most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $2 million, based on the closing sales price of the registrant’s common stock as reported on the OTCQB market on such date. This calculation does not reflect a determination that persons are affiliates for any other purposes.

The number of shares of the registrant’s common stock outstanding as of April 25, 2012 was 7,463,194.

Documents incorporated by reference:

Portions of the registrant’s definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this annual report are incorporated by reference into Part III of this annual report. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement is not deemed to be filed as part of this annual report.

 

 

 


Table of Contents

COMARCO, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED JANUARY 31, 2012

TABLE OF CONTENTS

 

         Page      

PART I

     1   

ITEM 1. BUSINESS

     1   

ITEM 1A. RISK FACTORS

     7   

ITEM 1B. UNRESOLVED STAFF COMMENTS

     16   

ITEM 2. PROPERTIES

     16   

ITEM 3. LEGAL PROCEEDINGS

     16   

ITEM 4. MINE SAFETY DISCLOSURES

     17   

PART II

     18   

ITEM  5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     18   

ITEM 6. SELECTED FINANCIAL DATA

     19   

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     19   

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     29   

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     30   

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     55   

ITEM 9A. CONTROLS AND PROCEDURES

     55   

ITEM 9B. OTHER INFORMATION

     57   

PART III

     58   

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

     58   

ITEM 11. EXECUTIVE COMPENSATION

     58   

ITEM  12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     58   

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     58   

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     58   

PART IV

     59   

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     59   


Table of Contents

PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains statements relating to our future plans and developments, financial goals and operating performance that are based on our current beliefs and assumptions. These statements constitute “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 and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “could,” “may,” “should,” 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 as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements 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. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the section below entitled “Risk Factors,” as well as those discussed elsewhere in this report and in our other filings with the Securities and Exchange Commission, or the SEC. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, whether as a result of new information, future events or otherwise, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

ITEM 1. BUSINESS

General

Comarco, Inc., through its wholly-owned subsidiary Comarco Wireless Technologies, Inc. (collectively, “we,” “us,” “our,” “Comarco,” or the “Company”), is the leading developer and designer of innovative mobile power products. These standalone, multi-function mobile power adapters are used to simultaneously power and charge notebook computers, mobile phones, E-readers, iPads®, iPods®, and many other portable, rechargeable consumer electronic 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.

References to “fiscal” years in this report refer to our fiscal years ended January 31; for example, “fiscal 2012” refers to our fiscal year that ended on January 31, 2012.

We file or furnish annual, quarterly, and current reports, proxy statements, and other information with the SEC. Our SEC filings are available free of charge to the public via EDGAR through the SEC’s website at http://www.sec.gov. Our SEC filings are also available on our website at http://www.cmro.com as soon as reasonably practical following the time that they are filed with or furnished to the SEC. In addition, any document we file or furnish with the SEC can be read at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. For further information regarding the operation of the Public Reference Room, please call the SEC at (800) SEC-0330.

 

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Our Business

Our business addresses the needs of today’s mobile culture by providing innovative charging solutions for the myriad of battery powered devices most all consumers use today. Our innovative technology allows the consumer to charge multiple devices from a single charger, eliminating the need to carry multiple chargers while traveling. This technology was developed by Comarco and we own an extensive patent portfolio related to this technology.

Products

Our current and planned product offerings consist of standalone AC, DC, and AC/DC multi-function power adapters designed for the ideal mix of power output and functionality for most retail, original equipment manufacturer (“OEM”), and enterprise customers. Our ChargeSource® products vary power output, allowing those who use multiple rechargeable electronic devices to carry just one power adapter to support multiple electronic devices. By simply changing the compact SmartTip® connected to the end of the output cable, our standalone power adapters are capable of simultaneously charging and powering multiple devices from all major consumer electronics companies, including most notebook computers, mobile phones, E-readers, iPads®, iPods®, and many other portable, rechargeable consumer electronic devices without requiring a peripheral product or extra cable.

We believe our patented electrical designs will allow us to continue to offer customers cutting edge technology while significantly decreasing the size and weight of our devices compared to those offered by our competitors, as well as reducing the number of chargers customers need to carry to power multiple devices.

Marketing, Sales, and Distribution

Current demand for our mobile power products can be categorized into the following two distinct channels:

 

   

Retail; and

 

   

OEM-branded accessories.

Retail

To reach the retail consumer, we have historically entered into exclusive distribution agreements with a single distributor of consumer electronics products. During the second quarter of fiscal 2012 we changed our retail sales strategy to sell our products directly to consumers. To implement this strategy, we launched a retail website www.chargesource.com during the fourth quarter of fiscal 2012 to sell our newest generation of AC adapter branded ChargeSource®. The new direct-to-consumer sales strategy is expected to increase our gross profit margin earned on product sales. We are currently working on innovative and disruptive marketing and branding strategies that highlight the superior functionality of our best-in-class product to drive consumers to our website to purchase a ChargeSource® product. There can be no assurance that we will be able to successfully achieve our sales volume initiatives through the launch of our new website and the failure to achieve such initiatives could have a material adverse effect on our operations and financial condition.

Previously, our distribution partner would brand our products and distribute them to retailers, focusing on national “big-box” retail chains and office superstores. On March 16, 2009, we entered into a Strategic Product Development and Supply Agreement with Targus Group International, Inc. (the “Targus Agreement”). Under the Targus Agreement, we sold certain mobile power supply products exclusively to Targus, and Targus purchased such products and any products substantially similar to such products exclusively from Comarco; provided, however, that the Targus Agreement did not prohibit Comarco from selling any mobile power supply products covered by the Targus Agreement to OEMs that sell such products under their own name as long as such products did not incorporate any intellectual property of Targus. The Targus Agreement did not require Targus to purchase any specified number of units. On January 25, 2011, we received written notification from Targus of non-renewal of the Targus Agreement. We do not expect any future revenue from sales to Targus in the future. We began shipping products to Targus in June 2009 and revenues generated from shipments to Targus totaled $1.2 million and $19.3 million, or 15 percent and 67 percent of total fiscal 2012 and fiscal 2011 revenue, respectively.

 

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OEM-branded accessories

While we believe that we can increase sales and margins by selling our products directly to consumers, we plan to continue to sell select products in the OEM channel. The notebook computer OEMs offer an expansive selection of notebook computer accessories through their on-line retail portals, catalogs, and other channels. Many of these accessories have been designed to OEM specifications to be compatible with and/or to complement their specific notebook computers. Typically, the OEMs will brand these products and market them in conjunction with the sale of their notebook computers.

Late in the fourth quarter of fiscal 2008, we began volume production of a small form factor 90-watt AC/DC standalone power adapter designed and manufactured to the industry-leading stringent specifications of Lenovo Information Products Co., Ltd. (“Lenovo”), a leading notebook computer OEM. Commencing late in the third quarter of fiscal 2010, we began shipments to Lenovo of our newest generation adapter, the “Slim and Light” product. Revenues generated from sales to Lenovo for fiscal years 2012 and 2011 of the “Slim and Light” product totaled $5.3 million and $8.5 million, or 66 percent and 29 percent of revenues, respectively. Our fiscal 2012 sales decline to Lenovo was attributable primarily to fourth quarter production delays. As of the first quarter of fiscal 2013, we have resolved the cause of the delays and shipments have resumed.

In addition, on June 30, 2009, we announced that we were selected by Dell Inc. (“Dell”) to provide an innovative 90-watt DC adapter for use in automobiles and airplanes. We began shipping this product in May 2010. Revenue from sales to Dell totaled $1.4 million and $0.9 million, or 17 percent and 3 percent of revenues during fiscal 2012 and 2011, respectively. During fiscal 2012 we informed Dell that we were exiting this business for financial reasons. We made this decision due to several factors, including low margins earned on the product, administrative costs of managing delivery, inventory transfers, invoicing, and collection to multiple Dell third party warehouses and affiliates and the relatively flat sales volumes. We have ceased manufacturing the Dell product and expect the final sales to Dell to be delivered in the first quarter of fiscal 2013.

Competition

The industry in which we compete for the sale of our products is intensely competitive, subject to rapid technological change and significantly affected by new product introductions and market activities of other participants. Our currently marketed products are, and we expect that any future products we commercialize will be, subject to this intense competition. Numerous product manufacturers, including Delta Electronics, Inc., iGo, Inc., Belkin, Kensington, and American Power Conversion, sell products that compete directly with our products. Mobile telephone and personal computer OEMs also deliver competitors’ products to the market for our standalone power adapters. Many of these distributors and manufacturing competitors are larger and have greater financial resources than we do. In addition, they may have more established distribution networks, entrenched relationships with OEMs, and greater experience in launching, marketing, distributing and selling products. We believe that the patents that cover our products provide us with competitive advantages.

To compete successfully in this market, we believe we must:

 

   

Succeed in our newly launched direct-to-consumer sales model;

 

   

Differentiate our offerings through innovation and development of new or enhanced products;

 

   

Provide adequate customer service and support for our products;

 

   

Maintain a lasting relationship with Lenovo;

 

   

Manufacture and deliver on time, cost effective products in volume; and

 

   

Price our products competitively.

Key Customers

We derive a substantial portion of our revenue from a very limited number of significant customers. The loss of Targus, one of our significant customers, has had a material impact on our revenues and results of operations. We believe that we must build sales through our newly launched direct-to-consumer retail sales model during fiscal 2013 in order to drive increased sales in the future.

 

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During fiscal 2012 and fiscal 2011, shipments to Targus, our exclusive retail distributor, totaled $1.2 million and $19.3 million or 15 percent and 67 percent of total revenue, respectively. In fiscal 2012 and fiscal 2011, shipments to Lenovo, our most significant OEM customer, totaled $5.3 million and $8.5 million or 66 percent and 29 percent of total revenue, respectively. In addition, in fiscal 2012 and 2011, Dell accounted for revenue totaling $1.4 million and $0.9 million, or 17 percent and 3 percent of total revenue, respectively. For more information regarding our customers, see Note 4 of the Notes to the Consolidated Financial Statements included in Item 8 of this report.

As previously discussed, on January 25, 2011, we received written notification from Targus of non-renewal of the Targus Agreement. We do not expect any future revenue derived from sales to Targus. We are focused on increasing sales in fiscal 2013 through our recently launched website, www.chargesource.com. We are currently working on innovative and disruptive marketing and branding strategies that highlight the superior functionality of our best-in-class product to drive consumers to our website to purchase a ChargeSource® product. There is no guarantee we will be successful in increasing sales through our direct-to-consumer retail channel.

International Operations

We sell our products to customers located throughout the world. In fiscal 2012 and fiscal 2011, we derived 30 percent and 68 percent of total revenue, respectively, from customers in North America and 70 percent and 32 percent, respectively, from customers outside North America, as determined by the “ship to” address. The large percentage of sales outside of North America during fiscal 2012 was primarily due to sales to Lenovo which ships to mainland China. During fiscal 2012 and fiscal 2011 the sales to customers in North America were primarily due to sales to Targus, which primarily ships to their distribution facility in California. For more information regarding our revenues by geographic location, see Note 4 of the Notes to the Consolidated Financial Statements included in Item 8 of this report.

Research and Development

We sell our products in markets that are characterized by rapid technology changes, frequent new product introductions, changing consumer preferences and evolving technology standards. Accordingly, we devote significant resources to designing and developing new and enhanced products that can be manufactured cost effectively and sold at competitive prices. During fiscal 2012 and fiscal 2011, we incurred approximately $1.9 million and $3.2 million, respectively, in research and development expenses. To focus these efforts, we strive to maintain close relationships with our customers and develop products that meet their needs.

As of March 30, 2012, we had approximately 6 engineers and other technical personnel dedicated to our research and development efforts. Generally, our research and development and other engineering efforts are managed and focused on a product-by-product basis, and can generally be characterized as follows:

 

   

We collaborate closely with our customers and partners to design and manufacture new products or modify existing products to specifications required by our customers;

 

   

We design and manufacture enhancements and improvements to our existing products in response to our customers’ requests or feedback; and

 

   

We independently design and build new products in anticipation of the development of a variety of mobile electronic devices.

 

   

We generally do not directly pass research and development costs on to our customers.

Manufacturing and Suppliers

Our products are manufactured by third parties to our specifications and are generally delivered to us for test. Contract manufacturers located primarily in China are responsible for the manufacture of our products.

A significant portion of our inventory purchases is derived from a limited number of contract manufacturers and other suppliers. The loss of one or more of our significant suppliers could adversely affect our operations. For the fiscal year ended January 31, 2012, one of our contract manufacturers, Flextronics Electronics

 

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(“Flex”), accounted for 94 percent of the product costs included in cost of revenue. The loss of Flex as a contract manufacturer would result in delays of delivery of our products to Lenovo and could adversely impair our relationship with Lenovo, our business, results of operations and prospects. For the fiscal year ended January 31, 2011, two of our contract manufacturers, EDAC Electronics Co. Ltd., and Flex, collectively accounted for 81 percent of the product costs included in cost of revenue. For more information on our contract manufacturers and other suppliers, see Note 4 of the Notes to the Consolidated Financial Statements included in Item 8 of this report.

Patents, Trademarks and Other Intellectual Property

Our success depends in large part on our proprietary technology. We generally rely upon patent, copyright, trademark, and trade secret laws in the United States and in certain other countries, and upon confidentiality agreements with our employees, customers, and partners to establish and maintain and protect our intellectual property rights in our proprietary technology. As of January 31, 2012, we had approximately 70 issued patents and approximately 20 patent applications pending in the United States and in various foreign countries covering key technical aspects of our products. Our issued patents are scheduled to expire at various times beginning in 2014. The patents we believe to be the most valuable extend through 2024. In addition, we have registered trademarks in the United States for ChargeSource® and SmartTip®.

We cross-license certain patent rights related to powering electronic devices, including certain patent rights relating to automatic programmability and combination AC/DC capability, under the terms of a settlement agreement entered into with iGo, Inc. in 2003, described below.

While we spend significant resources to monitor and enforce our intellectual property rights, our intellectual property rights could be challenged, invalidated, or circumvented by competitors or others. Others could reverse engineer or otherwise obtain and use our proprietary technology and information. Our employees, customers or partners could also breach our confidentiality agreements, for which we may not have an adequate remedy available. We may not be able to timely detect the infringement of our intellectual property rights. Moreover, the laws of foreign countries may not afford the same protection to intellectual property rights as do the laws of the United States. The occurrence of any of the foregoing could harm our competitive position.

Litigation to enforce and protect our intellectual property rights, whether or not successful, is time-consuming and costly, diverts resources and management attention away from our operations and may result in our intellectual property rights being held invalid or unenforceable. Additionally, third parties have claimed, and may in the future claim, that we are infringing their intellectual property rights. These intellectual property infringement claims, whether we ultimately are found to be infringing any third party’s intellectual property rights or not, are time-consuming, costly to defend, and divert resources and management attention away from our operations. In this regard we were previously involved in litigation with iGo, Inc. (“iGo”). On June 8, 2007 iGo sued us alleging that two iGo patents were infringed by the mechanical keying arrangement between power adapters and programming kits used by us in our mobile power products sold through our distributors and to a computer manufacturer. We denied liability and countersued alleging that iGo had breached a settlement agreement entered into with us in 2003 and that iGo was liable for infringement of at least one of our patents. On May 26, 2009, at the request of both parties, the court dismissed the entire case, without prejudice, with each party to bear its own costs and attorneys’ fees. On September 9, 2011, we entered into a Settlement and Amended Cross-License Agreement (the “Agreement”) with iGo. The Agreement fully settled the dismissed litigation. Additionally the Agreement amended the Compromise Settlement Agreement and Release entered into by the parties on July 12, 2003. Separately, on September 1, 2011, ACCO Brands USA LLC and its Kensington Computer Products Group division (collectively “Kensington”) filed a lawsuit against us alleging that five of our patents relating to power technology are invalid and/or not infringed by products made and/or sold by Kensington. On February 29, 2012 we denied these claims and filed a cross-complaint alleging claims of infringement on each of these five patents. The Court has required that the parties mediate the dispute by the end of July, 2012. This matter is ongoing and the outcome is not determinable.

Infringement claims by third parties also could subject us to significant damage awards or fines or require us to pay large amounts to settle such claims. Additionally, claims of intellectual property infringement might require us to enter into royalty or license agreements. If we cannot or do not license the infringed technology on acceptable terms or substitute similar technology from other sources, we could be prevented from or restricted in selling our products containing, or manufactured with, the infringed technology.

 

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During fiscal 2012, we notified approximately 11 companies that we believe they are manufacturing and distributing products that infringe on one or more of our patents. One of the companies entered into a license agreement with us shortly after being notified of the infringement. We intend to aggressively protect our intellectual property and are vigorously pursuing all potential infringers. Our patent infringement efforts are ongoing and the outcomes of these efforts are not determinable.

Environmental Laws

Compliance with federal, state, local and foreign laws enacted for the protection of the environment has to date had no significant effect on our financial results or competitive position.

Government Regulation

Many of our products are subject to various federal, state, local and foreign laws governing substances in products and their safe use, including laws regulating the manufacture and distribution of chemical substances and laws restricting the presence of certain substances in electronics products. We face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the chemical and materials composition of our products, their safe use, and their energy efficiency. In the event our products become non-compliant with these laws, they could be restricted from entering certain jurisdictions, and we could face other sanctions, including fines.

Industry Practices Impacting Working Capital

Our working capital and operating cash flow is affected by our need to balance inventory levels with customer demand. Existing industry practices that affect our working capital and operating cash flow include:

 

   

the level of variability of customer orders relative to the volume of production;

 

   

vendor lead times;

 

   

materials availability for critical parts;

 

   

inventory levels necessary to achieve rapid customer fulfillment; and

 

   

extended payment terms required by certain customers.

Historically, we have sold our products under purchase orders that are placed with short-term delivery requirements. Additionally, we have recently launched our website www.chargesource.com to sell our ChargeSource® products directly to consumers offering immediate delivery. As a result, we periodically maintain significant levels of inventory of long-lead components in order to meet our expected obligations. Delays in planned customer orders could result in higher inventory levels and negatively impact our operating results.

Our standard terms require customers to pay for our products in U.S. dollars. For those orders denominated in foreign currencies, we may limit our exposure to losses from foreign currency transactions through forward foreign exchange contracts. We do not currently have any sales denominated in foreign currency and, to date, sales denominated in foreign currencies have not been significant and we have not entered into any foreign exchange contracts.

Employees

As of March 30, 2012, we employed 14 full-time employees and 1 part-time employee. We believe our employee relations to be good. The majority of our employees are professional or technical personnel who possess training and experience in engineering and management. Our future success depends in large part on our ability to retain key technical and management personnel, and to attract and retain qualified employees, particularly the highly skilled engineers involved in the development of new products. Competition for such personnel can be intense, and the loss of key employees, as well as the failure to recruit and train additional technical personnel in a timely manner, could have a material adverse effect on our operating results.

 

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Discontinued Operations

Wireless Test Solutions

Through January 6, 2009, we designed and manufactured hardware and software tools for use by wireless carriers, equipment vendors, and service providers through our WTS business. We entered into an asset purchase agreement on September 26, 2008 with Ascom Holding AG and its subsidiary Ascom Inc. (“Ascom”) to sell our WTS business and related assets. Our shareholders approved the transaction on November 26, 2008 and the transaction closed on January 6, 2009.

For more information related to our discontinued WTS business, see Note 3 to the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K.

ITEM 1A. RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information contained in this annual report, before deciding whether to invest in shares of our common stock. If any of the following risks actually occur, our business, financial condition, operating results and prospects would suffer. In that case, the trading price of our common stock would likely decline and you might lose all or part of your investment in our common stock. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our operations and business results.

Our management and our independent registered public accounting firm have questioned our ability to continue as a going concern as a result of our recurring losses from operations, declining working capital and uncertainties surrounding our ability to raise additional funds.

Our audited consolidated financial statements for the fiscal year ended January 31, 2012, were prepared on a going concern basis in accordance with United States generally accepted accounting principles (“GAAP”). The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. In order for us to continue operations beyond the next twelve months 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. We cannot guarantee that we will be able to increase sales, reduce expenses, or obtain additional funds through either debt or equity financing transactions or that such funds, if available, will be obtainable on satisfactory terms. If we are unable to increase sales, reduce expenses, or raise additional capital through debt or equity financings, we may be unable to continue to fund our operations, develop our products or realize value from our assets and discharge our liabilities in the normal course of business. 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 consolidated financial statements, and stockholders may lose all or part of their investment in our common stock. The accompanying financial statements do not contain any adjustments for this uncertainty.

We will have to reduce our costs for products and achieve higher sales volumes for our business to become profitable, and if we fail to do so, we may not achieve or sustain profitability and our results of operations and prospects would be adversely impacted.

We experienced negative gross profit margins in the second and fourth quarter and the full fiscal year of fiscal 2012. We operate in a very competitive marketplace where reducing product costs to meet competitive pressures is a constant. If we are not able to charge high enough prices for our products to cover the costs of producing those products, we may continue to experience negative gross margins in the future. In order to reduce our cost of revenue, we must work closely with our contract manufacturers to carefully manage the price paid for the components used in our products along with the price we pay our contract manufacturers for the finished products they provide to us.

 

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Additionally, if we are not able to reduce our cost of revenue and increase our gross profit margins accordingly, our current level of sales is insufficient to absorb our operating expenses. Our ability to drive increased sales is dependent upon many factors including the following:

 

   

Successful ChargeSource® sales volumes from our direct-to-consumer sales in fiscal 2013 through our website www.chargesource.com;

 

   

Increasing sales to our OEM partner Lenovo.

There can be no assurances we will be successful in our efforts to increase sales or reduce our cost of revenue. If we fail to reduce our cost of revenue or achieve higher sales volumes, we may not achieve or sustain profitability and our results of operations and prospects would be adversely impacted.

Our expansion into retail internet sales may not achieve the sales volumes we anticipate.

We have limited experience in our newest market segment, www.chargesource.com, and we may not attract new customers. Our ChargeSource® product offerings may subject us to high return rates if customers are dissatisfied with these products. In addition, we may not be successful enough in this new segment to recoup our investments in marketing and branding. If any of this were to occur, we may not be successful in generating additional revenue from our ChargeSource® products.

We experienced a recall of one our power adapters in the first quarter of fiscal 2011, and in the future we may experience additional quality or safety defects in our products that could cause us to institute additional product recalls or require us to provide replacement products.

On April 30, 2010, the CPSC announced the recall of approximately 500,000 units of our Bronx 90-watt universal AC power adapter sold to our distributer, Targus. These units were sold from June 2009 through March 2010. Of the units affected by the Recall, we originally estimated that approximately 400,000 units were in the hands of consumers, while the remaining 100,000 were in the distribution channel. Since the announcement of the Recall, less than 5,000 consumer units have been returned and approximately 155,000 units have been returned from the distribution channel. During fiscal 2012 and 2011, we accrued an additional $0.2 million and $0.3 million charge to cost of revenue, respectively. We believe that we have accrued for and paid substantially all of our material financial obligations with respect to the Recall.

Included in our accounts payable at January 31, 2012 is $1.1 million payable to the contract manufacturer of the Bronx product subject to the Recall. We are seeking remuneration from the contract manufacturer. On April 26, 2011, the contract manufacturer sued us for payment as discussed in Item 3 of this report. The outcome of this matter is neither determinable nor estimable and for this reason, we have not adjusted the accounts payable balance. If we prevail in our dispute with the contract manufacturer, we will record a reduction in our accounts payable and potentially reduce the costs of the Recall that have been incurred to date.

The Recall resulted in material costs and expenses and any future recalls could materially and adversely affect our brand image, cause a decline in our sales and profitability, and reduce or deplete our financial resources. There is the risk that key customers may cancel orders, change order quantities or delay order delivery dates as a result of the Recall or any future product recalls. The Recall and any future product recalls could require substantial administrative resources which may detract management’s attention from our core business strategies. In addition, the Recall and any future product recalls may result in disputes with suppliers and customers or lead to adverse proceedings such as arbitration or litigation which can be costly and expensive.

In the course of conducting our business, we experience and attempt to address various quality and safety issues with our products, as our products must meet exacting technical and performance standards. Often product defects are identified during our design, development, and manufacturing processes, which we are able to correct in a timely manner. Sometimes, defects are identified after introduction and shipment of products. If we are unable to fix defects in a timely manner or adequately address quality control issues, our relationships with our customers may be impaired, our reputation may suffer and we may lose customers. Any of the foregoing could adversely affect our business, results of operations, customer relationships, reputation, and prospects.

 

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A significant portion of our revenue is derived from a few customers and we are dependent upon our relationships with them and upon their performance.

We have historically derived a significant portion of our revenue from a very limited number of customers. Our three key customers for fiscal 2012 accounted for $7.9 million, or nearly all of our total revenue. We expect that a limited number of customers will continue to represent a large percentage of our revenue in the future. As previously discussed Targus, which accounted for 67 percent of our fiscal 2011 revenue, sent written notification to us on January 25, 2011 of non-renewal of the Targus Agreement. At this time, we expect no future sales to Targus.

Any difficulty in collecting amounts due from one or more of our key customers, or any refusal or inability of one or more of our key customers to take delivery of ordered products, would negatively impact our results of operations and financial condition. In addition, any loss of, reduction, cancellation, or delay in purchases by our key customers would negatively impact our revenue, business, prospects, and operating results unless we are able to develop other customers who purchase products at comparable levels. While we have launched our direct-to consumer sales through our website www.chargesource.com, there is no guarantee that sales generated from this channel will provide sales volumes equal to or greater than those created by our former relationship with Targus.

If we fail to accurately forecast customer demand, we may have excess or insufficient product inventory, which may increase our operating costs and harm our business.

To ensure availability of our products for our customers, in some cases we commit to purchase the components and/or finished products based on forecasts provided by customers in advance of receiving purchase orders from them. As a result, we expect to continue to incur inventory costs in advance of anticipated revenue. Because demand for our products may not materialize as we expect, purchasing based on forecasts subjects us to risks of high inventory carrying costs and increased obsolescence and may increase our costs. For example, 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.

A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological development and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of revenue at the time of such determination. Therefore, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our operating results.

If we overestimate customer demand for our products or if purchase orders are cancelled or shipments delayed, we may end up with excess inventory that we cannot sell, which would harm our financial results. Similarly, if we underestimate demand, we may not have sufficient product inventory and may lose market share and damage customer relationships, which also could harm our business.

Our business and operational results are subject to the seasonal demand fluctuations of the consumer product and retail industries, as well as general economic and retail uncertainty.

The seasonality of the consumer product and retail industries will affect our business. For example, our OEM and retail distribution partners typically order the majority of the products they expect to sell during the holiday season during the first three calendar quarters. Accordingly, we expect that our sales may be concentrated during the first three calendar quarters and be lower in the fourth calendar quarter.

Additionally, our revenues depend significantly on consumer confidence and spending, which have been weak due to the continuing economic recession and continuing economic uncertainty. Continued economic uncertainty and weak consumer spending and consumer confidence may adversely affect our revenues, the sell through ability of our customers, or otherwise negatively impact our business strategy. If legislative actions taken to enhance the economy fail, or if the current economic situation deteriorates further, our business could be negatively impacted.

 

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Recent changes in our management may lead to instability and may negatively affect our business.

During April 2011, our President and Chief Executive Officer was terminated and our Chief Financial Officer resigned. Our board of directors appointed Fredrik Torstensson to serve as interim President and Chief Executive Officer, a position he held from April 2011 until August 2011, and appointed Alisha K. Charlton, our Vice President Controller & Corporate Secretary, as Chief Accounting Officer. During August 2011, Mr. Torstensson was terminated and Thomas W. Lanni, our Vice President and Chief Technology Officer, was appointed as President and Chief Executive Officer and also elected as a Director. Additionally, the board of directors experienced significant turnover during fiscal 2011 and the first quarter of fiscal 2012. We cannot be certain that the changes in management and the board of directors will not negatively affect our business in the future or that additional changes in management and in the composition of our board of directors will not occur.

Our customers may cancel their orders, change production quantities or delay production, any of which would reduce our sales and adversely affect our operating results.

Historically, most of our customers purchase our products from us on a purchase order basis, and they may cancel, change, or delay product purchase commitments with little notice to us. As a result, we are not always able to forecast with certainty the sales that we will make in a given period and sometimes we may increase our inventory, working capital, and overhead in expectation of orders that may never be placed, or, if placed, may be delayed, reduced, or canceled. The following factors, among others, affect our ability to forecast accurately our sales and production capacity:

 

   

Changes in the specific products or quantities our customers order; and

 

   

Electronic component long lead times and advance financial commitments for components required to complete actual/anticipated customer orders.

Delayed, reduced or canceled purchase orders also may result in our inability to recover costs that we incur in anticipation of those orders, such as costs associated with purchased raw materials and write-offs of obsolete inventory.

Failure to adjust our operations in response to changing market conditions or failure to accurately estimate demand for our products could adversely affect our operating results.

Consumer demand for our mobile power products has been subject to fluctuations as a result of our choices of distribution partners, market acceptance of our products, the timing and size of customer orders, and consumer demand for rechargeable mobile electronic devices. Accordingly, it has been difficult for us to forecast the demand for these products. We also are limited in our ability to quickly adapt our cost structures to changing market conditions because a significant portion of our design and other engineering and supply chain costs are fixed. If customer demand for our products declines or if we otherwise fail to accurately forecast reduced customer demand, we will likely experience excess inventory, which could adversely affect our operating results. Conversely, if market conditions improve, our inventory may not be adequate to fill increased customer demand. As a result, we might not be able to fulfill customer orders in a timely manner, which could adversely affect our customer relationships and operating results.

The products we make are complex and have short life cycles and if we are unable to rapidly and successfully develop and introduce new products, some of our products may become obsolete.

The consumer electronics industry is characterized by rapid technological changes, frequent new product introductions, changing consumer preferences, and evolving industry standards. Our mobile power products have short life cycles, and may become obsolete over relatively short periods of time. Our future success depends on our ability to develop, introduce, and deliver on a timely basis and in sufficient quantity new products, components, and enhancements. The success of any new product offering will depend on several factors, including our ability to:

 

   

Properly identify customer needs and technological trends;

 

   

Timely develop new technologies and applications;

 

   

Price our products and services competitively;

 

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Timely manufacture and deliver our products in sufficient volume to meet consumer demand; and

 

   

Differentiate our products from those of our competitors.

Development of new products requires high levels of innovation from both our engineers and our component suppliers. Development of a new product often requires a substantial investment before we can determine the commercial viability of the product. If we dedicate a significant amount of resources to the development of products that do not achieve broad market acceptance, our operating results may suffer. Our operating results may also be adversely affected due to the timing of product introductions by competitors, especially if a competitor introduces a new product before our own comparable product is ready to be introduced.

The consumer electronics industry is highly competitive, and our profitability will be adversely affected if we are not able to compete effectively.

The consumer electronics industry in which we sell our products is highly competitive. We compete on many levels, including the timing of development and introduction of new products, technology, price, quality, customer service, and support. Our competitors range from some of the industries’ largest corporations to relatively small and highly specialized firms. Many of our competitors possess advantages over us, including greater financial and marketing resources, greater name recognition, more established distribution networks, entrenched relationships with OEMs and greater experience in launching, marketing, distributing and selling products. Our competitors also may be able to respond more quickly to new or emerging technologies and changes in customer needs. If we do not have the resources or expertise necessary to compete or to match our competitors or otherwise fail to develop successful strategies to address these competitive disadvantages, we could lose customers and revenue.

The average selling prices of our products will likely decrease over their sales cycles, especially upon the introduction of new products, which may negatively affect our revenue and operating results.

Our products will likely experience a reduction in their average selling prices over their respective sales cycles and price pressures could negatively affect our operating results. Furthermore, as we introduce new or next-generation products, sales prices of legacy products may decline substantially. In order to sell products that have a falling average selling price and maintain margins at the same time, we need to continually reduce product costs. There can be no assurances we will be successful in our efforts to reduce these costs. In order to do so, we must work closely with our contract manufacturers to carefully manage the price paid for components used in our products, and the price we pay to these manufacturers for the finished product. In addition, inventory levels must be tightly managed. If we are unable to reduce the overall production cost of legacy products as new products are introduced, our average gross margins will likely decline and adversely affect our operating results.

Economic, political, and other risks associated with our international sales and operations could adversely affect our results of operations.

We currently outsource the manufacture of our products to contract manufacturers located in China and the United States. Additionally, international revenue accounted for approximately 70 percent of total revenue for fiscal 2012. Accordingly, our business is subject to worldwide economic and market conditions and risks generally associated with doing business abroad, such as fluctuating foreign currency exchange rates, weaknesses in the economic conditions in particular countries or regions, the instability of international monetary conditions, tariff and trade policies, domestic and foreign tax policies, foreign governmental regulations, political unrest and disruptions, and delays in shipments. Essentially, we currently do all business with our foreign supply base in U.S. dollars. Our costs increase in countries with currencies that are increasing in value against the U.S. dollar. Also, we cannot be sure that our international supply base will continue to accept orders denominated in U.S. dollars. If they do not, our costs will become more directly subject to foreign exchange fluctuations. These factors could adversely affect our ability to outsource our manufacturing and supply needs to foreign countries as well as our sales of products and services in international markets.

We rely on a limited number of contract manufacturers and suppliers.

We currently procure, and expect to continue to procure, certain components from single source manufacturers who provide unique component designs or who meet certain quality and performance requirements. In addition, we sometimes purchase customized components from single sources in order to take advantage of

 

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volume pricing discounts. In fiscal 2012, one contract manufacturer for our products provided $4.5 million or 94 percent of the product costs included in cost of revenue and in fiscal 2011, two of the contract manufacturers for our products provided a combined $16.9 million or 81 percent of the product costs included in cost of revenue.

The performance of our contract manufacturers and suppliers is largely outside of our control and involves various risks, including risks associated with limited control over price, procurement of raw materials, timely delivery, and quality. In the past we have experienced, and may continue to experience, shortages of products purchased from single sources or a limited number of suppliers. Our contract manufacturers and suppliers may fail to timely deliver products or fail to provide products of sufficient quality or that fail to meet required specifications. In the fourth quarter of fiscal 2012, our contract manufacturer failed to timely procure the raw materials needed to build our products and we had a six week production cessation. We cannot be sure that we will not experience a similar disruption in our manufacturing process in the future.

We believe that the Recall was a direct result of our contract manufacturer failing to meet our technical specifications. If our relationship with our contract manufacturers and suppliers is disrupted in any way, we may lose sales, or we may be required to adjust both product designs and/or production schedules or develop suitable alternative contract manufacturers and suppliers, which could result in delays in the production and delivery of products to our customers. Any such delays, disruptions or quality problems could adversely impact our ability to sell our products, harm our reputation, impair our customer relationships, and adversely affect our business, results of operations and prospects.

Included in our accounts payable at January 31, 2012 is $1.1 million payable to the contract manufacturer of the Bronx product subject to the Recall. We are seeking remuneration from the contract manufacturer. On April 26, 2011, the contract manufacturer sued us for payment as discussed in Item 3 of this report. The outcome of this matter is neither determinable nor estimable and for this reason, we have not adjusted the accounts payable balance. If we prevail, we will record a reduction in our accounts payable and potentially reduce the costs of the Recall that have been incurred to date.

Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation, settlement or licensing costs and expenses or be prevented from selling certain products.

Third parties have claimed, and may in the future claim, that we are infringing their intellectual property rights. These intellectual property infringement claims, whether we ultimately are found to be infringing any third party’s intellectual property rights or not, are time-consuming, costly to defend, and divert resources and management attention away from our operations. We have previously been subject to litigation alleging that our products infringed on a third party’s intellectual property. We denied liability and countersued and on May 26, 2009, at the request of the parties, the court dismissed the entire case, without prejudice, with each party to bear its own costs and attorneys’ fees. During fiscal 2012 we entered into a Settlement and Amended Cross-License Agreement (the “Agreement”) with this third party. The Agreement fully settles the previous litigation that was dismissed without prejudice.

Separately, on September 1, 2011, ACCO Brands USA LLC and its Kensington Computer Products Group division (collectively “Kensington”) filed a lawsuit against us alleging that five of our patents relating to power technology are invalid and/or not infringed by products made and/or sold by Kensington. On February 29, 2012 we denied these claims and filed a cross-complaint alleging claims of infringement on each of these five patents. The Court has required that the parties mediate the dispute by the end of July, 2012. This matter is ongoing and the outcome is not determinable.

Infringement claims by third parties also could subject us to significant damage awards or fines or require us to pay large amounts to settle such claims. Additionally, claims of intellectual property infringement might require us to enter into royalty or license agreements. If we cannot or do not license the infringed technology on acceptable terms or substitute similar technology from other sources, we could be prevented from or restricted in selling our products containing, or manufactured with, the infringed technology.

 

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Third parties may infringe our intellectual property rights, and we may be required to spend significant resources enforcing these rights or otherwise suffer competitive injury.

Our success depends in large part on our proprietary technology. We generally rely upon patent, copyright, trademark, and trade secret laws in the United States and in certain other countries, and upon confidentiality agreements with our employees, customers, and partners to establish and maintain our intellectual property rights in our proprietary technology. We are required to spend significant resources to monitor and enforce our intellectual property rights; however these rights might not necessarily provide us with a sufficient competitive advantage. Our future and pending patent applications may not be issued with the scope we seek, if at all. Others may independently develop similar proprietary technology or otherwise gain access to and disclose our proprietary information and technology, and our intellectual property rights could be challenged, invalidated, or circumvented by competitors or others, whether in the United States or in foreign countries. Our employees, customers, or partners also could breach our confidentiality agreements, for which we may not have an adequate remedy available. We also may not be able to timely detect the infringement of our intellectual property rights. The occurrence of any of the foregoing could harm our competitive position.

During fiscal 2012, we notified approximately 11 companies that we believe they are manufacturing and distributing products that infringe on one or more of our patents. One of the companies entered into a license agreement with us shortly after being notified of the infringement. We intend to aggressively protect our intellectual property and are vigorously pursuing all potential infringers. Litigation may be necessary to enforce and protect our intellectual property rights. Whether or not we are successful in enforcing and protecting our intellectual property rights, litigation is time-consuming and costly, diverts resources and management attention away from our operations, and may result in our intellectual property rights being held invalid or unenforceable.

If our products fail to comply with domestic and international government regulations, or if these regulations result in a barrier to our business, our revenue could be negatively impacted.

Our products must comply with various domestic and international laws, regulations and standards, which are complicated and subject to interpretation. In the event that we are unable to comply with any such laws, regulations or standards, we may decide not to conduct business in certain markets. Particularly in international markets, we may experience difficulty in securing required licenses or permits on commercially reasonable terms, or at all. In addition, we are generally required to obtain both domestic and foreign regulatory and safety approvals and certifications for our products. Failure to comply with existing or evolving laws or regulations, including export and import restrictions and barriers, or to obtain timely domestic or foreign regulatory approvals or certificates could negatively impact our revenue.

Our quarterly operating results are subject to significant fluctuations and, if our operating results decline or are worse than expected, our stock price could fall.

We have experienced, and expect to continue to experience, significant quarterly fluctuations in revenue and operating results. Our quarterly operating results may fluctuate for many reasons, including:

 

   

The size and timing of customer orders and shipments;

 

   

The degree and rate of growth in the markets in which we compete and the accompanying demand for our products;

 

   

Limitations in our ability to forecast our manufacturing needs;

 

   

Our ability to introduce, and the timing of our introductions of, new or enhanced products;

 

   

Product failures and recalls, product quality control problems and associated in-field service support costs;

 

   

Warranty expenses;

 

   

Availability and cost of components;

 

   

Changes in average sales prices, and

 

   

Normal market sales seasonality.

 

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Due to these and other factors, our past results are not necessarily reliable indicators of our future performance. In addition, a significant portion of our cost of sales and operating expenses are relatively fixed including operations and supply chain overhead in support of our contract manufacturers; engineering and sales/administrative expense. If we experience a decline in revenue, we may be unable to reduce our fixed costs quickly enough to compensate for the decline, which would magnify the adverse impact of such revenue shortfall on our results of operations. If our operating results decline or are below expectations of securities analysts or investors, the market price of our stock may decline significantly.

We cannot be certain of the availability of debt or equity financing.

As of the date of this filing, we have no debt or financing arrangement with any party. In fiscal 2013, we may require additional capital from debt or equity financing to fund our operations. We cannot be certain that any financing we may need will be available on terms acceptable to us, or at all. If we cannot secure financing in the future, we may be forced to liquidate our assets or discontinue operations and our shareholders may lose all or a part of their investment in our common stock.

We have concluded that our internal controls over financial reporting were not effective as of January 31, 2012 which could cause deficiencies in our financial reporting and investors to lose confidence in the reliability of our consolidated financial statements and result in a decrease in the value of our securities.

Our management has concluded that our internal controls over financial reporting were not effective as discussed in “Management’s Report on Internal Control Over Financial Reporting” in Item 9A of this report. Specifically, our management has concluded that due to a lack of accounting and information technology staff there is a lack of segregation of duties necessary for an appropriate system of internal controls.

While we will continue to implement our internal controls over financial reporting, because of inherent limitations, our internal controls over financial reporting may not prevent or detect all material misstatements, errors or omissions. Also, projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with our policies or procedures may deteriorate. We cannot be certain in future periods that other control deficiencies that may constitute one or more “significant deficiencies” (as defined by the relevant auditing standards) or material weaknesses in our internal control over financial reporting will not be identified. If we fail to implement adequate internal controls, including any failure to implement or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we could fail to be able to provide reasonable assurance as to our financial results or we could fail to meet our reporting obligations and there could be a material adverse effect on the price of our securities. Moreover, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our Restated Articles of Incorporation and our Amended and Restated Bylaws contain provisions which may discourage attempts by others to acquire or merge with us, which could reduce the market value of our common stock.

Provisions of our Restated Articles of Incorporation and our Amended and Restated Bylaws may discourage attempts by other companies to acquire or merge with us, which could reduce the market value of common stock. Provisions in our Restated Articles of Incorporation and Amended and Restated Bylaws may delay or deter other persons from attempting to acquire control of us. These provisions include:

 

   

the authorization of our board of directors to issue preferred stock with such rights and preferences as may be determined by the board of directors, without the approval of our shareholders;

 

   

the prohibition of action by the written consent of the shareholders;

 

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the establishment of advance notice requirements for director nominations and other proposals by shareholders for consideration at shareholder meetings;

 

   

the requirement that the holders of at least two-thirds of the outstanding common stock entitled to vote at a meeting are required to approve certain business combinations with interested stockholders; and

 

   

the requirement that the holders of at least two-thirds of the outstanding common stock entitled to vote at a meeting are required to approve certain changes to specific provisions of our Articles of Incorporation (including those provisions described above).

Our stock price has been and will likely remain highly volatile.

The stock market in general, and the stock prices of technology companies in particular, have experienced fluctuations that may be unrelated or disproportionate to the operating performance of these companies. Broad market and industry stock price fluctuations may adversely affect the market price of shares of our common stock. The market price of our stock has exhibited significant price fluctuations, which makes our stock unsuitable for many investors. Our stock price may also be affected by the following factors:

 

   

Our quarterly operating results;

 

   

Changes in the consumer electronics industries;

 

   

Changes in the economic outlook of the particular markets in which we sell our products and services;

 

   

The gain or loss of significant customers, including our ability to continue to conduct business with Lenovo;

 

   

Our ability to effectively generate direct to consumer sales through our website;

 

   

Reductions in demand or expectations of future demand by our customers;

 

   

Changes in stock market analyst recommendations regarding our competitors or our customers;

 

   

The timing and announcements of technological innovations or new products by our competitors or by us, and

 

   

Other events affecting other companies that investors deem comparable to us.

All of these factors, as well as others not discussed above, may contribute to the volatility of our stock price.

There is currently a limited trading market for our common stock, which may limit our stockholders' ability to sell shares of our common stock and may depress the price of our common stock.

Our common stock was traded on the Nasdaq Global Market under the symbol “CMRO” until November 11, 2010. Commencing on November 12, 2010 our common stock traded on the Nasdaq Capital Market and effective January 6, 2011 our common stock traded on the OTC Bulletin Board or the OTC:BB. The average trading volume of our common stock has historically been very low and the average trading volume may decline further as a result of trading on the OTC:BB. The reduced trading volume may result in a depression of the price of our common stock as investors adjust their perception of the value of our shares based on their perceived ability to subsequently sell the shares.

We may be subject to penny stock regulations and restrictions, which could make it difficult for stockholders to sell their shares of our stock.

SEC regulations generally define “penny stocks” as equity securities that have a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. If we do not fall

 

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within any exemptions from the “penny stock” definition, we will be subject to Rule 15g-9 under the Exchange Act, which regulations are commonly referred to as the “Penny Stock Rules.” The Penny Stock Rules impose additional sales practice requirements on broker-dealers prior to selling penny stocks, which may make it burdensome to conduct transactions in our shares. If our shares are subject to the Penny Stock Rules, it may be difficult to sell shares of our stock, and because it may be difficult to find quotations for shares of our stock, it may be impossible to accurately price an investment in our shares. In addition to the Penny Stock Rules, we are unable to utilize the safe harbor provisions of the Forward Looking Statements sections of the Exchange Act. There can be no assurance that our common stock will qualify for an exemption from the Penny Stock Rules, or that if an exemption currently exists, that we will continue to qualify for such exemption. In any event, we are subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of a penny stock if the SEC determines that such a restriction would be in the public interest.

The Financial Industry Regulatory Authority, or FINRA, sales practice requirements may also limit a stockholder's ability to buy and sell our stock.

In addition to the Penny Stock Rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our headquarters are located in Lake Forest, California. We entered into an amended and restated lease agreement with the landlord during fiscal 2012, upon the expiration of our original lease. Under the amended and restated lease we rent approximately 9,971 square feet of office space. The lease for this facility expires on August 31, 2016.

ITEM 3. LEGAL PROCEEDINGS

Chicony Power Technology Co., LTD., (“Chicony”) vs. Comarco, Inc., Case No. 30-2011-00470249, Superior Court of California County of Orange – Central Justice Center. On April 26, 2011, Chicony, which was the contract manufacturer of the Bronx product that was the subject of the Recall, filed a complaint against us for breach of contract seeking payment of $1.2 million for the alleged non-payment by us of products manufactured by Chicony. We denied liability and filed a cross-complaint on May 13, 2011 seeking the recovery of damages of $4.9 million caused by Chicony's failure to adhere to our technical specifications when manufacturing the Bronx product, which we believe resulted in the Recall of the product. The trial date is currently set for November 5, 2012. The outcome of this matter is not determinable as of the date of the filing of this report.

Acco Brands USA LLC (“Acco”) vs. Comarco Wireless Technologies, Inc., Case No. 5:11-cv-04378-HRL, U.S. District Court for the Northern District of California. On September 1, 2011, ACCO Brands USA LLC and its Kensington Computer Products Group division (collectively “Kensington”) filed a lawsuit against us alleging that five of our patents relating to power technology are invalid and/or not infringed by products made and/or sold by Kensington. On February 29, 2012 we denied these claims and filed a cross-complaint alleging claims of infringement on each of these five patents. The Court has required that the parties mediate the dispute by the end of July, 2012. This matter is ongoing and the outcome is not determinable.

 

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Comarco Inc. vs. EDAC Electronics Co. Ltd. (“EDAC”) Case No. 30-2012-00551827, Superior Court of California County of Orange – Central Justice Center. On March 6, 2012 we filed a lawsuit against EDAC for breach of contract seeking payment of $2.5 million for failure to deliver goods we ordered in the time, place, manner and price indicated by each purchase order. This matter is ongoing and the outcome is not determinable.

In addition to the matters described above, we are from time to time involved in various legal proceedings incidental to the conduct of our business. The legal proceedings potentially cover a variety of allegations spanning our entire business. Although the outcome of legal proceedings is inherently uncertain, we believe that the outcome of all such legal proceedings will not in the aggregate have a material adverse effect on its consolidated results of operations and financial position.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock was traded on the Nasdaq Global Market under the symbol “CMRO” until November 11, 2010. Commencing on November 12, 2010 our common stock traded on the Nasdaq Capital Market and effective January 6, 2011 our common stock traded on the OTC:BB under the symbol “CMRO:PK.” The following table sets forth, for the periods indicated the quarterly high and low closing prices per share as reported by each of the respective markets on which our stock was traded. These prices represent actual reported sales transactions.

 

     High      Low  

Year ended January 31, 2012:

     

First Quarter

   $ 0.38       $ 0.22   

Second Quarter

     0.49         0.26   

Third Quarter

     0.40         0.15   

Fourth Quarter

     0.30         0.16   

Year ended January 31, 2011:

     

First Quarter

   $ 3.24       $ 2.47   

Second Quarter

     3.00         2.10   

Third Quarter

     2.50         2.10   

Fourth Quarter

     2.03         0.34   

Holders

As of April 5, 2012, there were 306 holders of record of our common stock.

Dividends

We did not declare any dividends during fiscal 2012 or fiscal 2011. We do not expect to pay cash dividends in the near future, as we intend to retain any future earnings to fund working capital and operations. Any determinations to pay dividends in the future will be at the discretion of our board of directors.

Repurchases

We did not repurchase any securities during fiscal 2012 or fiscal 2011.

Securities Authorized For Issuance Under Equity Compensation Plans

The information regarding securities authorized for issuance under our equity compensation plans is set forth in Item 12 of this report and is incorporated herein by this reference.

 

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ITEM 6. SELECTED FINANCIAL DATA

 

     Years Ended January 31,  
     2012     2011     2010  
     (In thousands, except per share data)  

Revenue

   $ 8,069      $ 28,949      $ 26,425   

Cost of revenue

     8,261        26,012        25,090   
  

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (192     2,937        1,335   

Selling, general and administrative expenses

     3,140        5,128        6,576   

Engineering and support expenses

     1,931        3,151        3,715   
  

 

 

   

 

 

   

 

 

 
     5,071        8,279        10,291   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (5,263     (5,342     (8,956

Other loss, net

     (24     (106     (1
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (5,287     (5,448     (8,957

Income tax benefit (expense)

     (2     75        757   
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (5,289     (5,373     (8,200
  

 

 

   

 

 

   

 

 

 

Net loss from discontinued operations, net of income taxes

     (21     (601     778   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,310   $ (5,974   $ (7,422
  

 

 

   

 

 

   

 

 

 

Basic and diluted loss per share:

      

Loss from continuing operations

   $ (0.72   $ (0.73   $ (1.12

Income (loss) from discontinued operations

            (0.08     0.11   
  

 

 

   

 

 

   

 

 

 

Net loss per share

   $ (0.72   $ (0.81   $ (1.01
  

 

 

   

 

 

   

 

 

 
     As of January 31,  
     2012     2011     2010  
     (In thousands)  

Working capital

   $ (1,518   $ 3,399      $ 8,485   

Total assets

     3,927        12,761        23,903   

Borrowing under line of credit

            1,000        1,000   

Long-term debt

                     

Stockholders’ equity (deficit)

     (1,341     3,819        9,461   

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included in Item 8 of this report as well as our risk factors included in Item 1A of this report. The following discussion contains forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” included in Item 1 of this report.

Overview

Comarco, Inc., through its wholly-owned subsidiary Comarco Wireless Technologies, Inc. (collectively, “we,” "us," "our," “Comarco,” or the “Company”), is the leading designer and manufacturer of standalone, multi-function mobile power adapters used to power and charge notebook computers, mobile phones, E-readers, iPads®, iPods®, and many other portable, rechargeable handheld devices. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”).

Prior to fiscal 2010, Comarco was also a provider of wireless test solutions for the wireless industry, as well as a provider of emergency call boxes and related maintenance services. We entered fiscal year 2009 with an

objective to focus on our mobile power adapter business and to maximize the value of our WTS and Call Box businesses. The assessment of our strategic initiatives with respect to these businesses culminated in the sale of these two businesses during fiscal 2009.

 

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Company Trends and Uncertainties

Designed with the needs of the mobile professional in mind, our ChargeSource® standalone, multi-function mobile power adapters provide superior functionality and compatibility in an industry-leading compact design. Our current and planned ChargeSource® product offerings consist of standalone AC/DC, AC, and DC power adapters designed for the right mix of power output and functionality for most retail, OEM, and enterprise customers. Our ChargeSource® products vary power output, allowing those who use rechargeable electronic devices to carry just one power adapter to support multiple electronic devices. By simply changing the compact SmartTip® connected to the end of the output cable, our standalone power adapters are capable of simultaneously charging and powering multiple devices from all major consumer electronics companies, including most notebook computers, mobile phones, E-readers, iPads®, iPods®, and many other portable, rechargeable consumer electronic devices without requiring a peripheral product or extra cable.

Personal computer manufacturers continue to design and manufacture notebook computers with enhanced functionality and features. These notebook computers generally have greater power requirements than other electronic devices such as mobile phones. As power requirements increase, so generally does the size of the OEM power adapter sold with each notebook computer. To address this industry-wide trend, we have developed a family of compact high-power ChargeSource® standalone power adapters that are compatible with most legacy, current, and planned notebook computers. These new standalone power adapters are able to deliver up to 120 watts of power in a very small form factor or compact size.

Management currently considers the following additional trends, events, and uncertainties to be important to an understanding of our business:

 

   

In December 2011, we launched our innovative direct-to-consumer retail sales channel through our website www.chargesource.com in an effort to increase retail sales and improve gross margins. We expect revenue generated from this sales channel in fiscal 2013 to be a significant percentage of total sales.

 

   

On January 25, 2011 we received written notification from Targus Group International, Inc. (“Targus”) of its non-renewal of the Strategic Product Development and Supply Agreement (the “Targus Agreement”). Approximately 15 percent of our revenue for fiscal 2012 was from sales to Targus. We expect no future revenue from sales to Targus at this time.

 

   

Revenue for fiscal 2012 decreased to $8.1 million compared to $28.9 million for fiscal 2011. The decrease is primarily attributable to the loss of Targus as a customer.

 

   

Late in the third quarter of fiscal 2011, we took action to significantly reduce expenses. These actions included a significant reduction in both personnel expenses and other expenses across all departments.

 

   

Our ChargeSource® products are based on proprietary patented construction technology that enables the production of slim and light power sources for many rechargeable mobile devices from standard wall outlets, as well as power outlets in airplanes, cars, and other modes of transportation.

 

   

Reducing our product costs is important to our continuing efforts to improve our margins and we are continually in negotiations with our contract manufacturers in this regard.

 

   

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.

Critical Accounting Policies

The preparation of our consolidated financial statements requires us to apply accounting policies and make certain estimates and judgments. All of our significant accounting policies are presented in Note 2 of the notes to the Consolidated Financial Statements in Item 8 of this report. Of our significant accounting policies, we believe the

 

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following are the most significant and involve a higher degree of uncertainty, subjectivity, and judgments. These policies involve estimates and judgments that are inherently uncertain. Changes in these estimates and judgments may significantly impact our annual and quarterly operating results.

Revenue Recognition

We recognize product revenue upon shipment provided there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collectability is probable. Generally, our products are shipped FOB named point of shipment, whether it is Lake Forest, which is the location of our corporate headquarters, or China, the shipping point for most of our contract manufacturers.

Stock-based Compensation

We recognize compensation costs for all stock-based awards made to employees, consultants, and directors. The fair value of stock based awards is estimated on the date of grant, and is recognized as expense ratably over the requisite service period. We currently use either a Lattice Binomial or the Black-Scholes option-pricing model to estimate the fair value of our share-based payments. Both the Lattice Binomial and the Black-Scholes option-pricing model are based on a number of assumptions, including expected volatility, expected forfeiture rates, expected life, risk-free interest rate and expected dividends. The prevailing difference between the two models is the Lattice Binomial model’s ability to enhance the simple assumptions that underlie the Black-Sholes model. The Lattice Binomial model allows for assumptions such as risk-free rate of interest, volatility and exercise rate to vary over time reflecting a more realistic pattern of economic and behavioral occurrences. If the assumptions change under either model, stock-based compensation may differ significantly from what we have recorded in the past.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits and related terms based upon payment history and the customer’s current credit worthiness. We continually monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Because our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.

Specifically, our management must make estimates of the collectability of our accounts receivable. Management analyzes specific customer accounts and establishes reserves for uncollectible receivables based upon specific identification of account balances that have indications of uncertainty of collection. Indications of uncertainty of collections may include the customer’s 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.

Valuation of Inventory

We value inventory at the lower of the actual cost to purchase and/or manufacture the inventory (calculated on average costs, which approximates first-in, first-out basis) or market value. We regularly review inventory quantities on hand and record a write down of excess and obsolete inventory based primarily on excess quantities on hand based upon historical and forecasted component usage. As demonstrated during prior periods, demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. In the future, if our inventory were determined to be overvalued, we would be required to recognize such costs in our cost of revenue at the time of such determination. Therefore, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our operating results.

 

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Income Taxes

We are required to estimate our provision for income taxes in each of the tax jurisdictions in which we conduct business. This process involves estimating our actual current tax expense in conjunction with the evaluation and measurement of temporary differences resulting from differing treatment of certain items for tax and accounting purposes. These temporary timing differences result in the establishment of deferred tax assets and liabilities, which are recorded on a net basis and included in our consolidated balance sheets. We then assess on a periodic basis the probability that our net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided with a corresponding charge to tax expense to reserve the portion of the deferred tax assets which are estimated to be more likely than not to be realized.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any required valuation allowance. We continue to maintain a full valuation allowance on the entire deferred tax asset balance. This valuation allowance was established based on management’s 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 loss carry forwards and temporary differences. Due to the current and prior years’ operating losses, the adjusted net deferred tax assets remained fully reserved as of January 31, 2012.

Valuation of Long-Lived Assets

We evaluate long-lived assets used in operations when indicators of impairment, such as reductions in demand or significant economic slowdowns that negatively impact our customers or markets, are present. Reviews are performed to determine whether the carrying value of assets is impaired based on comparison to the undiscounted expected future cash flows. If the comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using a weighted average of the market approach and the discounted expected future cash flows using a discount rate based upon our cost of capital. Impairment is based on the excess of the carrying amount over the fair value of those assets. Significant management judgment is required in the forecast of future operating results that is used in the preparation of expected discounted cash flows. It is reasonably possible that the estimates of anticipated future net revenue, the remaining estimated economic life of the products and technologies, or both, could differ from those used to assess the recoverability of these assets. In that event, additional impairment charges or shortened useful lives of certain long-lived assets could be required.

Warranty Costs

We provide limited warranties for products for a period generally not to exceed 24 months. We accrue for the estimated cost of warranties at the time revenue is recognized. The accrual is a fixed rate which is consistent with our actual claims experience. Should actual warranty claim rates differ from our estimates, revisions to the liability would be required.

We recorded accruals of $0.2 million and $0.3 million related to the Recall during fiscal 2012 and fiscal 2011, respectively. Significant management judgments and estimates have been made to determine the amount of the Recall accrual. We believe we have accrued and paid for substantially all of our material financial obligations with respect to the Recall. We are in on-going litigation with the manufacturer of the Bronx product that is the subject of the Recall.

 

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Results of Operations—Continuing Operations

The following tables set forth certain items as a percentage of revenue from our audited consolidated statements of operations for fiscal 2012 and fiscal 2011:

 

     Years Ended January 31,     2012  over
2011
% Change
 
     2012     2011    
     (In thousands)    
           % of
Revenue
          % of
Revenue
       

Revenue

   $ 8,069        100   $ 28,949        100     (72 %) 
  

 

 

     

 

 

     

Operating loss

   $ (5,263     $ (5,342    
  

 

 

     

 

 

     

Net loss from continuing operations

   $ (5,289     $ (5,373    
  

 

 

     

 

 

     

 

     Years Ended January 31,      2012 over
2011
% Change
 
     2012      2011     
     (In thousands)     

Revenue:

        

North America

   $ 2,397       $ 19,634         (88 %) 

Europe

     26         98         (73 %) 

Asia – Pacific

     5,646         9,217         (39 %) 
  

 

 

    

 

 

    
   $ 8,069       $ 28,949         (72 %) 
  

 

 

    

 

 

    
     Years Ended January 31,      2012 over
2011

% Change
 
     2012      2011     
     (In thousands)     

Revenue:

        

Dell

   $ 1,398       $ 861         62

Lenovo

     5,345         8,536         (37 %) 

Targus

     1,174         19,338         (94 %) 

Other

     152         214         (29 %) 
  

 

 

    

 

 

    
   $ 8,069       $ 28,949         (72 %) 
  

 

 

    

 

 

    

Revenue

The fiscal 2012 decrease in revenue of $20.1 million is attributable primarily 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 Targus Agreement. We expect no future revenue from Targus. Additionally, revenue to Lenovo decreased $3.2 million or 37 percent. The decrease was primarily due to a fourth quarter disruption in our supply chain. We have resolved the issues with our contract manufacturer and are working to fill the backlog in our first quarter of fiscal 2013. Additionally, part of the decrease was attributable to a drop in Lenovo’s business customer demand. We introduced the 90 watt DC adapter sold exclusively to Dell in May 2010. The increase in revenue of $0.5 million from Dell is primarily due to a full year’s sales versus a partial year in fiscal 2011. As previously discussed, we are exiting the Dell business and do not expect sales to Dell beyond the first quarter of fiscal 2013.

 

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Cost of Revenue and Gross Margin

 

     Years Ended January 31,     2012 over
2011

% Change
 
     2012     2011    
     (In thousands)    
            % of
Total
           % of
Total
       

Cost of Revenue:

            

Product costs

   $ 4,824         58   $ 20,973         81     (77 %) 

Accrued product recall costs

     248         3     310         1     (20 %) 

Supplier Settlement

     383         5                      

Supply chain overhead

     1,620         20     2,984         12     (46 %) 

Inventory reserve and scrap charges

     1,014         12     594         2     71

Freight, expedite, and other charges

     172         2     1,151         4     (85 %) 
  

 

 

   

 

 

   
   $ 8,261         100   $ 26,012         100     (68 %) 
  

 

 

   

 

 

   

 

      Years Ended January 31,     2012 over
2011 ppt
Change
 
     2012     2011    

Gross profit (loss) percent

     (2 %)      10     (12

The fiscal 2012 decrease in the total cost of revenue of $17.8 million compared to fiscal 2011 is attributable to reduced product costs, freight, expedite and other costs, supply chain overhead and Recall accruals incurred during fiscal 2012 offset by an increase in inventory reserve and scrap charges and a settlement with a former supplier. The product costs incurred in fiscal 2012 decreased by $16.1 million or 77 percent compared to fiscal 2011 which is generally consistent with our 72 percent decrease in revenue. As previously discussed, we announced a voluntary product safety recall of approximately 500,000 units of our Bronx 90-watt universal AC power adapter sold to our distributer, Targus. Included in the cost of revenue fiscal 2012 and fiscal 2011, is an accrual for the estimated product costs associated with the Recall of $0.2 million and $0.3 million, respectively.

During the second quarter of fiscal 2012 we accrued a charge of $0.4 million relating to a settlement reached with Anam Electronics (“Anam”) relating to purchase commitments made to support the Targus business. There are no similar charges in the prior fiscal year. The supply chain overhead expenses decreased $1.4 million or 46 percent in fiscal 2012 compared to fiscal 2011. In the fourth quarter of fiscal 2011, in conjunction with the notification received from Targus of the non-renewal of the Targus Agreement and the resulting uncertainty relating to the volume of future sales to Targus, we accelerated the depreciation on all Manhattan related tooling and equipment, which accounts for approximately $0.3 million of the prior year balance. The remaining decrease is due to reductions in personnel and related costs as we reduced our labor force across all departments late in the third quarter of fiscal 2011.

The inventory reserve and scrap charges of $1.0 million recorded in fiscal 2012 relates primarily to Manhattan product components that we procured from Anam during fiscal 2012 as well as reserves established for excess tips located in many warehouses as well as increases in our reserves due to slow-moving inventory. The inventory reserve and scrap charges of $0.6 million recorded in fiscal 2011 relate primarily to reserves established for Manhattan inventory as a result of the correspondence received from Targus.

The freight, expedite and other charges in fiscal 2012 decreased by $1.0 million or 85 percent compared to fiscal 2011. The fiscal 2011 freight, expedite and other charges included approximately $0.7 million in costs incurred to expedite delivery of Manhattan units to Targus in the second quarter of fiscal 2011, primarily as a result of our temporary production cessation which occurred in the first quarter of fiscal 2011 as a result of the Recall. There were no similar expenses incurred during fiscal 2012. Additionally, during fiscal 2011 we incurred freight costs of approximately $0.4 million to fulfill Dell orders. As Dell has worldwide inventory hubs, our shipping costs have increased due to the lower per shipment volume required by these various locations. During fiscal 2012, we were able to reduce our shipping costs to Dell by switching from air to sea freight and managing the inventory volumes desired by the various Dell warehouses.

 

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Operating Costs and Expenses

 

     Years Ended January 31,     2012 over
2011
% Change
 
     2012     2011    
     (In thousands)    
            % of
Revenue
           % of
Revenue
       

Operating expenses:

            

Selling, general, and administrative expenses, excluding corporate overhead

   $ 675         8   $ 1,355         5     (50 %) 

Corporate overhead

     2,465         31     3,773         13     (35 %) 

Engineering and support expenses

     1,931         24     3,151         11     (39 %) 
  

 

 

   

 

 

   
   $ 5,071         63   $ 8,279         29     (39 %) 
  

 

 

   

 

 

   

The fiscal 2012 decrease in selling, general and administrative expenses of $0.7 million compared to fiscal 2011 relates primarily to decreased personnel and related costs. During the third quarter of fiscal 2012, our former Vice President of Sales and Marketing and interim Chief Executive Officer was terminated and a settlement of $40,000 paid in the third fiscal quarter is included in the amounts above. At the present time the sales and marketing function is performed by various consultants who are focused on digital media and search engine optimization to assist with generation of sales on our newly launched website www.chargesource.com.

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. The decrease of $1.3 million for the year ended January 31, 2012 relates primarily to decreased personnel costs most significantly based upon changes and reductions in executive management. Our payroll and related costs decreased by $0.9 million in the current fiscal year as compared to the prior fiscal year. Additionally our legal fees, accounting and other professional services fees attributable to being a public company have decreased in the current fiscal year. Included in the corporate overhead expense for fiscal 2012 is approximately $0.2 million in amounts paid to our former Chief Executive Officer.

Engineering and support expenses generally consist of salaries, employer paid benefits, and other personnel related costs of our engineers and testing 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. The fiscal 2012 decrease in engineering and support costs includes approximately $0.7 million and $0.5 million, respectively, in decreased personnel costs and decreased material usage and lab fees in support of our on-going efforts to develop new products for our retail and OEM accessories channels. Offsetting these decreases is an increase in legal fees of $0.1 million incurred in connection with intellectual property matters during fiscal 2012.

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 former credit facility. During fiscal 2012, we earned $2,000 in interest income and incurred $65,000 in interest expense and loan origination fees related to our credit facility. In addition to interest income, we recorded other income of $35,000 in fiscal 2012 related to a final distribution of the sale of our investment in SwissQual AG from fiscal 2006. During fiscal 2011, we earned $20,000 in interest income and incurred $126,000 in interest expense and loan origination fees related to our former credit facility.

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. We continue to maintain a full valuation allowance on the entire deferred tax asset balance. This valuation allowance was established based on management’s 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 loss carry forwards and temporary differences. Due to the current and prior years’ operating losses, the adjusted net deferred tax assets remained fully reserved as of January 31, 2012.

 

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During fiscal 2012, we recorded a net loss of $5.3 million and recorded income tax expense of $1,600, which represents the minimum tax due in the state of California for the current fiscal year. The net deferred tax asset of $17.1 million, $1.5 million of which relates to net operating losses created in fiscal 2012, at January 31, 2012 continues to be fully reserved.

During fiscal 2011, we recorded a net loss of $6.0 million and recorded an income tax benefit of $75,000 to our continuing operations. The tax benefit recorded in fiscal 2011 relates to a reduction of $33,000 in our recorded tax liability in conjunction with the normal expiration of the statute of limitations in various states and an adjustment to our income tax receivable of $42,000 upon the filing of our consolidated tax returns for the fiscal year ended January 31, 2010. The net deferred tax asset of $15.1 million, $3.9 million of which relates to net operating losses created in fiscal 2011, was fully reserved at January 31, 2011.

Discontinued Operations, net of income taxes

Income from Discontinued Operations – Wireless Test Solutions

(in thousands except change)

 

     Years Ended January 31,  
     2012     2011  

Revenues

   $      $   
  

 

 

   

 

 

 

Loss from discontinued operations:

    

Loss on sale

   $ (21   $ (601

Income tax expense

              
  

 

 

   

 

 

 

Total loss from discontinued operations

   $ (21   $ (601
  

 

 

   

 

 

 

The sale of the wireless test solutions business was completed on January 6, 2009, between us and Ascom Holding AG and its subsidiary Ascom Inc., (collectively, “Ascom”), which resulted in a pre-tax gain of $5.9 million.

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 us for the sale of our WTS business to Ascom.

The fiscal 2011 loss from WTS discontinued operations of $0.6 million relates to a settlement with a former officer and employee of the WTS business, whereby we agreed to pay the former employee $0.5 million which amount included reimbursement for attorney and professional fees. The remaining loss relates primarily to our legal fees incurred relating to the matter.

Liquidity and Capital Resources

The following table is a summary of our Consolidated Statements of Cash Flows:

 

     Years Ended January 31,  
     2012     2011  
     (In thousands)  

Cash used in:

    

Operating activities

   $ (4,236   $ (3,212

Investing activities

     (184     (465

Financing activities

     (1,053     (69

Cash Flows from Operating Activities

The cash used in operating activities during fiscal 2012 of $4.2 million relates to our net loss of $5.3 million and is offset by non-cash depreciation and stock–based compensation of $0.4 million and $0.2 million, respectively. Accounts receivable collections from customers totaled $2.6 million in fiscal 2012. This source of cash is offset by a combined net decrease in accrued liabilities and accounts payable of $2.7 million related primarily to supplier payments.

 

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The cash used in operating activities during fiscal 2011 of $3.2 million relates to our net loss of $6.0 million and is offset by non-cash depreciation of $1.1 million. Accounts receivable collections from customers totaled $7.2 million in fiscal 2011. This source of cash is offset by a combined net decrease in accrued liabilities and accounts payable of $5.4 million related to supplier payments as well as Recall related expenditures and an increase in inventory of $0.5 million.

Cash Flows from Investing Activities

During fiscal 2012, we spent $0.1 million in capital equipment purchases, which primarily related to purchases of tooling and other equipment used by our contract manufacturers and engineers for the manufacture and design of our ChargeSource® products. Additionally, during fiscal 2012, we had restricted cash of $92,000, of which $77,000 relates to the security deposit of for our corporate lease, which became collateralized by cash in a separate bank account. Prior to the third quarter of fiscal 2012, the letter of credit was treated as a reduction in available borrowings available to us under our former credit facility. The remaining $15,000 of restricted cash relates to collateralized cash balances for chargebacks related to our merchant services account which we opened in the third quarter in anticipation of the launch of our retail website www.chargesource.com.

During fiscal 2011, we spent $0.5 million in capital equipment purchases, which primarily related to purchases of tooling and other equipment used by our contract manufacturers and engineers for the manufacture and design of our products.

Cash Flows from Financing Activities; Credit Facility

On February 11, 2009, we 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 originally matured, on February 9, 2012, at which time, any outstanding principal balance was to become payable in full.

During fiscal 2011, we incurred $69,000 in loan origination fees. During fiscal 2010, we borrowed $1.0 million against or credit facility with SVB and incurred $43,000 in loan origination fees.

During the first quarter of fiscal 2012, we repaid the $1.0 million that had been outstanding under the Loan Agreement and we incurred $53,000 in loan origination fees relating to its renewal. On September 15, 2011, we received a letter from SVB terminating the Loan Agreement effective September 22, 2011, due to our failure to meet the financial covenants of the Loan Agreement. We are 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.

Liquidity Requirements for the Next 12 Months

As of January 31, 2012, we had negative working capital of $1.5 million. In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must increase sales, establish profitable operations through both increased sales and a reduction of operating expenses, and potentially raise additional funds, through either debt and/or equity financing to meet our working capital needs. We cannot guarantee that we will be able to increase sales, reduce expenses or obtain additional funds when needed or that such funds, if available, will be obtainable on satisfactory terms. If we are unable to increase sales, reduce expenses or raise sufficient additional capital, we may be unable to continue to fund our operations, develop our products or realize value from our assets and discharge our liabilities in the normal course of business. 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.

As discussed above, there are several factors and events that could significantly affect our cash flows from operations, including, without limitation the following:

 

   

Our future retail sales of our ChargeSource® products generated from our recently launched website www.chargesource.com;

 

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The outcome of litigation with our contract manufacturer of the Bronx product, the subject product under the Recall;

 

   

Our ability to obtain debt or equity financing; and

 

   

The ability of our contract manufacturers of our products to manufacture our products at the level currently anticipated, and the ability of our products to meet any required specifications.

Our cash balance at February 27, 2012 was $1.1 million. 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. We are also considering the possibility of licensing our technology to a third party or liquidating our current inventory as a source of future capital, although we cannot be certain that we will be able to pursue either of these possibilities on terms acceptable to us.

Contractual Obligations

In the course of our business operations, we incur certain commitments to make future payments under contracts such as operating leases and purchase orders. Payments under these contracts are summarized as follows as of January 31, 2012 (in thousands):

 

     Payments due by Period  

Long Term Debt Obligations

   Less than
1 year
     1 to 3
years
     3 to 5
years
     More than
5 years
    
Total
 

Operating lease obligations

   $ 231       $ 487       $ 389       $       $ 1,107   

Purchase obligations

     663                                 663   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 894       $ 487       $ 389       $       $ 1,770   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We generally issue purchase orders to our suppliers with delivery dates from four to six weeks from the purchase order date. In addition, we regularly provide significant suppliers with rolling six-month forecasts of material and finished goods requirements for planning and long-lead time parts procurement purposes only. We are committed to accepting delivery of materials pursuant to our purchase orders subject to various contract provisions that allow us to delay receipt of such order or allow us to cancel orders beyond certain agreed lead times. Such cancellations may or may not include cancellation costs payable by us. In the past, we have been required to take delivery of materials from our suppliers that were in excess of our requirements and we have previously recognized charges and expenses related to such excess material. During fiscal 2012, we incurred expenses relating to cancellation of purchase orders to Anam in the amount of $0.4 million, which amount was recorded in cost of revenue in our consolidated statement of operations. If we are unable to adequately manage our suppliers and adjust such commitments for changes in demand, we may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on our business, results of operations, and financial position. Our fixed purchase commitments at January 31, 2012 totaled $0.7 million, of which approximately $0.2 million was cancelable as of January 31, 2012.

In addition to the amounts shown in the table above, we have unrecognized tax benefits in the amount of $0.8 million which we are uncertain as to if or when such amounts may be settled.

We have severance compensation and employment agreements with key executives. These agreements require us to pay these executives, in the event of a termination of employment following a change of control of the Company or other circumstances, their then current annual base salary and the amount of any bonus amount the executive would have achieved for the current year. The exact amount of this contingent obligation is not known and accordingly has not been recorded in the consolidated financial statements.

 

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Recent Accounting Pronouncements

In February 2011, the Financial Accounting Standards Board (“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.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04 (“ASU 2011-04”), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-04 will not have a significant impact on our consolidated balance sheet, results of operations or cash flow.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-05 will not have a material impact on our consolidated balance sheet, results of operations or cash flow.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

COMARCO, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

         Page      

Report of Independent Registered Public Accounting Firm – SQUAR, MILNER, PETERSON, MIRANDA  & WILLIAMSON, LLP

     31   

Report of Independent Registered Public Accounting Firm – BDO USA, LLP

     32   

Financial Statements:

  

Consolidated Balance Sheets, January 31, 2012 and 2011

     33   

Consolidated Statements of Operations, Years Ended January 31, 2012 and 2011

     34   

Consolidated Statements of Stockholders’ Equity (Deficit), Years Ended January 31, 2012 and 2011

     35   

Consolidated Statements of Cash Flows, Years Ended January 31, 2012 and 2011

     36   

Notes to Consolidated Financial Statements

     37   

Schedule II — Valuation and Qualifying Accounts, Years Ended January 31, 2012 and 2011

     63   

All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or the notes thereto.

 

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Comarco, Inc.

Lake Forest, California:

We have audited the accompanying consolidated balance sheet of Comarco, Inc. and subsidiary (the “Company”) as of January 31, 2012 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended. Our audit also included the financial statement schedule of Comarco, Inc. listed in Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comarco, Inc. and subsidiary as of January 31, 2012 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses and negative cashflow from operations, has had declining working capital and uncertainties surrounding the Company’s ability to raise additional funds. These factors, among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP

Newport Beach, California

April 30, 2012

 

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Comarco, Inc.

Lake Forest, California:

We have audited the accompanying consolidated balance sheet of Comarco, Inc. (the “Company”) as of January 31, 2011 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. We have also audited the information in the schedule listed in the accompanying index included under Item 15. These consolidated financial statements and this schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and this schedule based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comarco, Inc. at January 31, 2011 and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the information in the schedule presents fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, has had declining working capital and uncertainties surrounding the Company’s ability to borrow under its credit facility. These factors, among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ BDO USA, LLP

Costa Mesa, California

April 29, 2011

 

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COMARCO, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

     January 31,  
     2012     2011  

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 908      $ 6,381   

Accounts receivable due from customers, net of reserves of $6 and $53

     934        3,550   

Accounts receivable due from suppliers, net of reserves of $81and $66

     673        724   

Inventory, net of reserves of $1,791 and $1,581

     1,131        1,521   

Other current assets

     63        165   
  

 

 

   

 

 

 

Total current assets

     3,709        12,341   

Property and equipment, net

     126        420   

Restricted cash

     92          
  

 

 

   

 

 

 

Total assets

   $ 3,927      $ 12,761   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY(DEFICIT)

    

Current Liabilities:

    

Accounts payable

   $ 3,912      $ 5,180   

Accrued liabilities

     1,315        2,762   

Line of credit

            1,000   
  

 

 

   

 

 

 

Total current liabilities

     5,227        8,942   

Deferred rent, net of current portion

     41          
  

 

 

   

 

 

 

Total liabilities

     5,268        8,942   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Stockholders’ Equity (Deficit):

    

Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding

              

Common stock, $0.10 par value, 50,625,000 shares authorized; 7,388,194 and 7,343,869 shares issued and outstanding at January 31, 2012 and 2011, respectively

     739        734   

Additional paid-in capital

     15,443        15,298   

Accumulated deficit

     (17,523     (12,213
  

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (1,341     3,819   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity (deficit)

   $ 3,927      $ 12,761   
  

 

 

   

 

 

 

 

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COMARCO, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

     Year Ended January 31,  
     2012     2011  

Revenue

   $ 8,069      $ 28,949   

Cost of revenue

     8,261        26,012   
  

 

 

   

 

 

 

Gross profit (loss)

     (192     2,937   
  

 

 

   

 

 

 

Selling, general, and administrative expenses

     3,140        5,128   

Engineering and support expenses

     1,931        3,151   
  

 

 

   

 

 

 
     5,071        8,279   
  

 

 

   

 

 

 

Operating loss

     (5,263     (5,342

Other loss, net

     (24     (106
  

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (5,287     (5,448

Income tax expense (benefit)

     2        (75
  

 

 

   

 

 

 

Net loss from continuing operations

     (5,289     (5,373

Loss from discontinued operations, net of income taxes

     (21     (601
  

 

 

   

 

 

 

Net loss

   $ (5,310   $ (5,974
  

 

 

   

 

 

 

Basic and diluted loss per share:

    

Net loss from continuing operations

   $ (0.72   $ (0.73

Net loss from discontinued operations

            (0.08
  

 

 

   

 

 

 
   $ (0.72   $ (0.81
  

 

 

   

 

 

 

Weighted average common shares outstanding:

    

Basic

     7,365        7,332   
  

 

 

   

 

 

 

Diluted

     7,365        7,332   
  

 

 

   

 

 

 

Common shares outstanding

     7,388        7,344   
  

 

 

   

 

 

 

 

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COMARCO, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)

 

     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Total  

Balance at February 1, 2010, 7,326,569 shares

   $ 733       $ 14,967      $ (6,239   $ 9,461   

Net loss

                    (5,974     (5,974

Issuance of 17,300 shares of common stock upon the vesting of restricted stock units

     1         (1              

Stock based compensation expense

             332               332   
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at January 31, 2011, 7,343,869 shares

   $ 734       $ 15,298      $ (12,213   $ 3,819   

Net loss

                    (5,310     (5,310

Issuance of 44,325 shares of common stock upon the vesting of restricted stock units

     5         (5              

Stock based compensation expense

             150               150   
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at January 31, 2012, 7,388,194 shares

   $ 739       $ 15,443      $ (17,523   $ (1,341
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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COMARCO, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Year Ended January 31,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (5,310   $ (5,974

Loss from discontinued operations

     21        601   

Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:

    

Depreciation and amortization

     387        1,096   

Loss (gain) on sale/retirement of property and equipment

     (1     21   

Loan origination fees

     53        69   

Stock based compensation expense

     150        332   

Provision for doubtful accounts receivable

     32        (17

Provision for obsolete inventory

     210        (68

Changes in operating assets and liabilities:

    

Accounts receivable due from customers

     2,570        7,175   

Accounts receivable due from suppliers

     65        57   

Inventory

     180        (518

Other assets

     102        115   

Accounts payable

     (1,268     4,046   

Tax liability

            (33

Deferred rent, net of current portion

     41        (63

Accrued liabilities

     (1,447     (9,450
  

 

 

   

 

 

 

Net cash used in continuing operating activities

     (4,215     (2,611

Net cash used in discontinued operating activities

     (21     (601
  

 

 

   

 

 

 

Net cash used in operating activities

     (4,236     (3,212
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (93     (465

Proceeds from sale of property and equipment

     1          

Increase in restricted cash

     (92       
  

 

 

   

 

 

 

Net cash used in continuing investing activities

     (184     (465
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Line of credit repayment

     (1,000       

Loan origination fees

     (53     (69
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,053     (69
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (5,473     (3,746

Cash and cash equivalents, beginning of year

     6,381        10,127   
  

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 908      $ 6,381   
  

 

 

   

 

 

 

Noncash investing and financing activities:

    

Issuance of common stock upon the vesting of restricted stock units

   $ 5      $ 1   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid for income taxes, net of refunds

   $ 2      $   
  

 

 

   

 

 

 

Cash paid for interest

   $ 12      $ 56   
  

 

 

   

 

 

 

 

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COMARCO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Comarco, Inc., through its wholly-owned subsidiary Comarco Wireless Technologies, Inc. (collectively, “we,” “our”, “Comarco,” or the “Company”), is a leading designer and manufacturer of standalone mobile power adapters used to power and charge notebook computers, mobile phones, E-readers, iPads®, 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 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 consolidated financial statements.

Principles of Consolidation

Our consolidated financial statements include the accounts of Comarco, Inc. and CWT. All material intercompany balances, transactions, and profits have been eliminated.

Future Operations, Liquidity and Capital Resources

We have experienced substantial pre-tax losses from continuing operations for fiscal 2012 and fiscal 2011 totaling $5.3 million and $5.4 million, respectively. The consolidated financial statements have been prepared assuming that we will continue to operate as a going concern, which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business. Our consolidated financial statements do not reflect any adjustments related to the outcome of this uncertainty. Our future is highly dependent on our ability to sell our products at a profit and our ultimate return to overall profitability. To accomplish this, we must increase the sales volumes of our current and newly designed ChargeSource® products to absorb fixed administrative and contract manufacturing overhead. Currently we have two significant customers, Lenovo and Dell, both of which are original equipment manufacturers, or “OEM’s.” However, we have decided to exit the business with Dell, due to low sales volumes and thin product margins. We expect to sell Dell the remaining product in inventory by the end of the first quarter of fiscal 2013.

During the second quarter of fiscal 2012, we decided to change our sales strategy to sell our 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, we launched our website, www.chargesource.com during the fourth quarter of fiscal 2012, to sell our newest generation of AC adapter. There can be no assurance that we will be able to successfully achieve our sales volume initiatives through the launch of our new website and the failure to achieve such initiatives could have a material adverse effect on our operations and financial condition.

We had negative working capital totaling approximately $1.5 million at January 31, 2012. 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 September 15, 2011, we received a letter from Silicon Valley Bank (“SVB”) terminating the Loan and Security Agreement entered into by and between us and SVB on February 11, 2009 (as amended, the “Loan Agreement”) effective as of September 22, 2011. Although we are 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.

 

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COMARCO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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.

Use of Estimates

The preparation of 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 consolidated financial statements, and the reported amounts of revenue and expenses during the years reported. Actual results could materially differ from those estimates.

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 assessment of the impairment 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.

We announced a voluntary product safety recall (the “Recall”) during the first quarter of fiscal 2011. We accrued an estimate of the anticipated cost of the Recall during fiscal 2010 which estimate was adjusted during fiscal 2011 and 2012. During the third quarter of fiscal 2012, we entered into a Release and Settlement Agreement (the “Settlement Agreement”) with Targus with respect to all matters concerning the Recall. We believe that we have accrued and paid for substantially all of our material financial obligations with respect to the Recall. We are in on-going litigation with the manufacturer of the Bronx product that is the subject of the Recall (see Note 15).

Revenue Recognition

Revenue from product sales is recognized upon shipment of products provided there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collectability is probable. Generally, our products are shipped FOB named point of shipment, whether it is Lake Forest, which is the location of our corporate headquarters, or China, the shipping point for most of our contract manufacturers.

Cash and Cash Equivalents

All highly liquid investments with original 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 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.

Accounts Receivable due from Customers

Our management monitors collections and payments from our customers and maintains a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. Management analyzes specific customer accounts and establishes reserves for uncollectible receivables based upon specific identification of account balances that have indications of uncertainty of collection. Indications

 

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COMARCO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

of uncertainty of collections may include the customer’s 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. Because our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.

Accounts Receivable due from Suppliers

Oftentimes we are able to source components locally that we later sell to our 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 our contract manufacturers and other suppliers are excluded from revenue and are recorded as a reduction to cost of revenue.

Inventory

Inventory is valued at the lower of cost (calculated on average cost, which approximates first-in, first-out basis) or market value. We regularly review inventory quantities on hand and record a write down of excess and obsolete inventory based primarily on excess quantities on hand based upon historical and forecasted component usage.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Additions, improvements, and major renewals are capitalized; maintenance, repairs, and minor renewals are expensed as incurred. Depreciation and amortization is calculated on a straight-line basis over the expected useful lives of the property and equipment. The expected useful lives of office furnishings and fixtures are five to seven years, and of equipment and purchased software are two to five years. The expected useful life of tooling equipment, molds used for pre-production and mass production of our power adapters, is 18 months. The expected useful life of leasehold improvements, which is included in office furnishings and fixtures, is the lesser of the term of the lease or five years.

We evaluate property and equipment for impairment when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. Factors considered important which could trigger an impairment review include, but are not limited to, significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for our overall business, and significant negative industry or economic trends. If such assets are identified to be impaired, the impairment to be recognized is the amount by which the carrying value of the asset exceeds the fair value of the asset. During the fourth quarter of fiscal 2011, in conjunction with receiving the non-renewal notice from Targus of the Targus Agreement, we accelerated $279,000 of depreciation expense related to tooling and other equipment used in the manufacture of the Manhattan product previously sold to Targus.

Assets to be disposed of are separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

Research and Development Costs

Research and development costs are charged to expense as incurred and are reported as engineering and support costs. During fiscal 2012 and fiscal 2011, we incurred approximately $1.9 million and $3.2 million in research and development expense, respectively.

 

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Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our provision for income taxes in each of the tax jurisdictions in which we conducts business. This process involves estimating our actual current tax expense in conjunction with the evaluation and measurement of temporary differences resulting from differing treatment of certain items for tax and accounting purposes. These temporary timing differences result in the establishment of deferred tax assets and liabilities, which are recorded on a net basis and included in our consolidated balance sheets. On a periodic basis, we assess the probability that our net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, we conclude that it is more likely than not that we will not recover some portion or all of the net deferred tax assets, a valuation allowance is provided with a corresponding charge to tax expense to reserve the portion of the deferred tax assets which are estimated to be more likely than not to be realized.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any required valuation allowance. We continue to maintain a full valuation allowance on the entire deferred tax asset balance. This valuation allowance was established based on management’s 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 loss carry forwards and temporary differences. Due to the current and prior years’ operating losses, the adjusted net deferred tax assets remain fully reserved as of January 31, 2012.

We apply the uncertain tax provisions of the Income Taxes Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification”), which interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The topic also provides guidance on de-recognition, classification, interest, and penalties, accounting in interim periods, disclosure, and transition.

During fiscal 2012, we recorded a net loss of $5.3 million and recorded income tax expense of $1,600, which represents the minimum tax due in the state of California for the current fiscal year. The net deferred tax asset of $17.1 million, $1.5 million of which relates to net operating losses created in fiscal 2012, at January 31, 2012 continues to be fully reserved.

During fiscal 2011, we recorded a net loss of $6.0 million and recorded an income tax benefit of $75,000 to our continuing operations. The tax benefit recorded in fiscal 2011 related to a reduction of $33,000 in our recorded tax liability in conjunction with the normal expiration of the statute of limitations in various states and an adjustment to our income tax receivable of $42,000 upon the filing of our consolidated tax returns for the fiscal year ended January 31, 2010. The net deferred tax asset of $15.1 million at January 31, 2011 was fully reserved, and included $3.9 million of net operating loss carryforwards created in fiscal 2011.

Advertising

Advertising costs are expensed as incurred. We began advertising late in the fourth quarter of fiscal 2012 in order to drive internet users to visit our website, www.chargesource.com, and to make a purchase from our website. Advertising incurred during fiscal 2012, since the launch of the website, have been, approximately $5,000.

Warranty Costs

We provide limited warranties for products for a period generally not to exceed 24 months. We accrue for the estimated cost of warranties at the time revenue is recognized. The accrual is consistent with our actual claims experience. Should actual warranty claim rates differ from our estimates, revisions to the liability would be required.

 

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During, the fourth quarter of fiscal 2010, we recorded an accrual of $4.6 million related to the Recall. During the fourth quarter of fiscal 2011, we recorded an additional accrual of $0.3 million related to the Recall. During fiscal 2012, we recorded a net additional accrual of $0.2 million and also entered a Settlement Agreement with Targus with respect to all matters concerning the Recall. We believe that we have accrued and paid for substantially all of our material financial obligations with respect to the Recall.

Concentrations of Credit Risk

Our cash and cash equivalents are principally on deposit in a non-insured short-term asset management account at a large financial institution. Accounts receivable potentially subject us to concentrations of credit risk. Currently, our customer base is comprised primarily of two companies (see Note 4). We generally do not require collateral for accounts receivable. When required, we maintain allowances for credit losses, and to date such losses have been within management’s expectations. Once a specific account receivable has been reserved for as potentially uncollectible, our policy is to continue to pursue collections for a period of up to one year prior to recording a receivable write-off.

Loss Per Common Share

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period excluding the dilutive effect of potential common stock, which for us consists solely of stock awards. Diluted earnings per share reflects the dilution that would result from the exercise of all dilutive stock awards outstanding during the period. The effect of such potential common stock is computed using the treasury stock method (see Note 13).

Stock-Based Compensation

We grant 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.

We account 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.

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts receivable due from customers and suppliers, accounts payable, and accrued liabilities. The carrying amount of cash and cash equivalents, accounts receivable, 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 our former line of credit approximated fair value since the interest rate approximated the market rate for debt securities with similar terms and risk characteristics.

Restricted Cash

Our restricted cash balances are secured by separate bank accounts and represent i) a $77,000 letter of credit that serves as the security deposit for our corporate office lease and ii) $15,000 which serves as collateral for credit card chargebacks associated with our internet website.

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation.

 

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Subsequent Events

Management has evaluated events subsequent to January 31, 2012 through the date the accompanying consolidated financial statements were filed with the Securities and Exchange Commission for transactions and other events that may require adjustment of and/or disclosure in such financial statements.

3. Discontinued Operations

We entered into an Asset Purchase Agreement on September 26, 2008 with Ascom Holding AG and its subsidiary Ascom Inc., (collectively, “Ascom”) to sell our Wireless Test Solutions (“WTS”) business and related assets. The transaction closed on January 6, 2009. The results of the WTS business are now presented as discontinued operations for all periods in the consolidated financial statements.

Operating results of the WTS discontinued operations are as follows (in thousands):

 

     Years Ended January 31,  
     2012     2011  

Revenues

   $      $   
  

 

 

   

 

 

 

Loss from discontinued operations:

    

Loss on sale

   $ (21   $ (601

Income tax expense

              
  

 

 

   

 

 

 

Total loss from discontinued operations

   $ (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 us for the sale of our WTS business to Ascom.

The fiscal 2011 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 included reimbursement for attorney and professional fees. The remaining loss relates primarily to our legal fees incurred relating to the matter.

4. Customer and Supplier Concentrations

A significant portion of our revenue is derived from a limited number of customers. The loss of one or more of our significant customers would have a material impact on our revenues and results of operations.

 

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The customers providing 10 percent or more of our revenue for either of the years ended January 31, 2011 and 2010 are listed below (in thousands, except percentages).

 

     Years Ended January 31,  
     2012     2011  

Total revenue

   $ 8,069         100   $ 28,949         100
  

 

 

   

 

 

 

Customer concentration:

          

Dell Inc. and affiliates.

   $ 1,398         17   $ 861         3

Targus Group International, Inc.

     1,174         15     19,338         67

Lenovo Information Products Co., Ltd.

     5,345         66     8,536         29
  

 

 

   

 

 

 
   $ 7,917         98   $ 28,735         99
  

 

 

   

 

 

 

In March 2009, we entered into the Targus Agreement. We began shipments to Targus under the Targus Agreement during the second quarter of fiscal 2010. As previously described, on January 25, 2011, Targus provided us with written notification of non-renewal of the Targus Agreement. We do not expect any revenue from sales to Targus in the future.

Our revenues by geographic location for the years ended January 31, 2012 and 2011 are listed below (in thousands).

 

     Years Ended January 31,  
     2012      2011  

Revenue:

     

North America

     2,397         19,634   

Europe

     26         98   

Asia – Pacific

     5,646         9,217   
  

 

 

    

 

 

 
   $ 8,069       $ 28,949   
  

 

 

    

 

 

 

The customers comprising 10 percent or more of our gross accounts receivable at either January 31, 2012 or 2011 are listed below (in thousands, except percentages).

 

     January 31,  
     2012     2011  

Total gross accounts receivable due from customers

   $ 940         100   $ 3,603         100
  

 

 

   

 

 

 

Customer concentration:

          

Dell Inc. and affiliates.

   $ 371         39   $ 434         12

Lenovo Information Products Co., Ltd.

     562         60     2,683         74

Targus Group International, Inc.

                    471         13
  

 

 

   

 

 

 
   $ 933         99   $ 3,588         99
  

 

 

   

 

 

 

 

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The suppliers comprising 10 percent or more of our gross accounts receivable due from suppliers at either January 31, 2012 or 2011 are listed below (in thousands, except percentages).

 

     January 31,  
     2012     2011  

Total gross accounts receivable due from suppliers

   $ 754         100   $ 790         100
  

 

 

   

 

 

 

Supplier concentration:

          

EDAC Electronics Co. Ltd.

   $ 532         71   $ 532         67

Flextronics Electronics

     40         5     99         13

Zheng Ge Electrical Co., Ltd.

     122         16     122         15
  

 

 

   

 

 

 
   $ 694         92   $ 753         95
  

 

 

   

 

 

 

We expect to fully collect the accounts receivable due from suppliers listed above.

The suppliers comprising 10 percent or more of our gross accounts payable at either January 31, 2012 or 2011 are listed below (in thousands, except percentages).

 

     January 31,  
     2012     2011  

Total gross accounts payable

   $ 3,912         100   $ 5,180         100
  

 

 

   

 

 

 

Supplier concentration:

          

EDAC Electronics Co. Ltd.

   $ 1,964         50   $ 2,633         51

Chicony Power Technology, Co. Ltd.

     1,100         28     1,100         21

Flextronics Electronics.

     40         1     660         13
  

 

 

   

 

 

 
   $ 3,104         79   $ 4,393         85
  

 

 

   

 

 

 

A significant portion of our inventory purchases is derived from a limited number of contract manufacturers and other suppliers. The loss of one or more of our significant suppliers could adversely affect our operations. For the year ended January 31, 2012, one contract manufacturer provided 94 percent of the total product costs. For the year ended January 31, 2011, two of our contract manufacturers provided an aggregate of 81 percent of total product costs.

EDAC Electronics Co. Ltd. (“EDAC”) and Chicony Power Technology, Co. Ltd., (“Chicony”) are former contract manufacturers. Chicony was the manufacturer of the Bronx product which was subject to the Recall and we are currently in litigation with Chicony (see Note 15). We have made no payments to this supplier during fiscal 2012. EDAC was the manufacturer of the Manhattan product sold to Targus and we are currently in litigation with EDAC (see Note 15). Flextronics Electronics (“Flex”) is the contract manufacturer for the products we sell to Lenovo and Dell. During fiscal 2012, we began paying Flex in advance of the shipment date. At January 31, 2012, approximately $0.3 million or 54 percent of total uninvoiced materials and services of $0.6 million, included in accrued liabilities were payable to Zhengge Electrical Co. Ltd. (“Zhengge”). At January 31, 2011, approximately $0.7 million or 43 percent of total uninvoiced materials and services of $1.7 million, included in accrued liabilities were payable to Flex and Zhengge. Zhengge was a tip supplier for the Bronx product. We ceased paying Zhengge during the course of the Recall.

 

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5. Accounts Receivable

Accounts receivable due from customers consist of the following (in thousands):

 

     January 31,  
     2012     2011  

Accounts receivable due from customers

   $ 940      $ 3,603   

Less: Allowances for doubtful accounts

     (6     (53
  

 

 

   

 

 

 
   $ 934      $ 3,550   
  

 

 

   

 

 

 

Accounts receivable due from suppliers consist of the following (in thousands):

 

     January 31,  
     2012     2011  

Accounts receivable due from suppliers

   $ 754      $ 790   

Less: Allowances for doubtful accounts

     (81     (66
  

 

 

   

 

 

 
   $ 673      $ 724   
  

 

 

   

 

 

 

6. Inventory

Inventory, net of reserves, consists of the following (in thousands):

 

     January 31,  
     2012      2011  

Raw materials

   $ 1,002       $ 875   

Finished goods

     129         646   
  

 

 

    

 

 

 
   $ 1,131       $ 1,521   
  

 

 

    

 

 

 

As of January 31, 2012, approximately $268,000 of total inventory was located at our corporate headquarters. The remaining balance is located at various contract manufacturer locations in the United States and Asia.

7. Property and Equipment

Property and equipment consist of the following (in thousands):

 

     January 31,  
     2012     2011  

Office furnishings and fixtures

   $ 1,020      $ 1,308   

Equipment

     2,451        4,361   

Purchased software

     65        85   
  

 

 

   

 

 

 
     3,536        5,754   

Less: Accumulated depreciation and amortization

     (3,410     (5,334
  

 

 

   

 

 

 
   $ 126      $ 420   
  

 

 

   

 

 

 

As of January 31, 2012, equipment with a net book value of approximately $81,000, primarily tooling and fixtures, was located at various contract manufacturer locations in China.

During the fourth quarter of fiscal 2012, fully depreciated equipment and computer software with a cost basis of $2.0 million and $20,000, respectively, was retired through a process of physical inspection and management inquiry. Additionally, during the third quarter of fiscal 2012, in conjunction with the finalization of our move into a smaller space in our corporate headquarters and a new lease with our landlord, we retired fully amortized leasehold improvements with a cost basis of $0.3 million, reported in office furnishings and fixtures above.

 

 

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During fiscal 2011, nearly fully depreciated equipment with a cost basis of $881,000 was retired through a process of physical inspection and management inquiry. Additionally, during the fourth quarter of fiscal 2011, Manhattan-related tooling with a cost basis of $558,000 was fully depreciated in conjunction with receiving the notification from Targus regarding non-renewal of the Targus Agreement and the resulting uncertainty of future sales of this product, resulting in a charge of $0.3 million to cost of revenue in the fourth quarter of fiscal 2011.

Depreciation and amortization expense for fiscal 2012 and fiscal 2011 totaled $0.4 million and $1.1 million, respectively.

8. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

     January 31,  
     2012      2011  

Accrued payroll and related expenses

   $ 103       $ 226   

Uninvoiced materials and services received

     602         1,708   

Accrued legal and professional fees

     204         184   

Current portion of deferred rent

             62   

Accrued warranty

     193         310   

Amounts payable to contract manufacturer

             50   

Other

     213         222   
  

 

 

    

 

 

 
   $ 1,315       $ 2,762   
  

 

 

    

 

 

 

9. Warranty Arrangements

We record an accrual for estimated warranty costs as products are sold. These amounts are recorded in accrued liabilities in the consolidated balance sheets. Warranty costs are estimated based on periodic analysis of historical experience. Changes in the estimated warranty accruals are recorded when the change in estimate is identified. During fiscal 2012 and fiscal 2011, we recorded an accrual of $0.2 million and $0.3 million, respectively related to the Recall announced during the first quarter of fiscal 2011. A summary of the warranty accrual activity is shown in the table below (in thousands):

 

     January 31,  
     2012     2011  

Beginning balance

   $ 310      $ 4,759   

Accrual for product safety recall costs

     248        310   

Utilization of recall costs

     (378     (4,830

Accruals for warranties issued during the period

     80        370   

Utilization

     (67     (299
  

 

 

   

 

 

 
   $ 193      $ 310   
  

 

 

   

 

 

 

10. Loan Agreement

On February 11, 2009, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). During the first quarter of fiscal 2012, we repaid the $1,000,000 that had been outstanding under the Loan Agreement. On September 15, 2011, we received a letter from SVB terminating the Loan Agreement effective September 22, 2011, due to our failure to meet the financial covenants of the Loan Agreement. We are 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.

 

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11. Income Taxes

Income tax expense (benefit) on a consolidated basis consists of the following amounts (in thousands):

 

     Years Ended January 31,  
     2012      2011  

Federal:

     

Current

   $       $ (40

Deferred

               

State:

     

Current

     2         (35

Deferred

               

Foreign:

     

Current

               
  

 

 

    

 

 

 
   $ 2       $ (75
  

 

 

    

 

 

 

The effective income tax rate on loss from continuing operations differs from the United States statutory income tax rates for the reasons set forth in the table below (dollars in thousands).

 

     Years Ended January 31,  
     2012     2011  
     Amount     Percent
Pretax Income
    Amount     Percent
Pretax Income
 

Loss from continuing operations before income taxes and discontinued operations

   $ (5,287     100   $ (5,448     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Computed “expected” income tax benefit on loss from continuing operations before income taxes

   $ (1,798     (34 %)    $ (1,852     (34 %) 

State tax, net of federal benefit

     (192     (4 %)      (198     (4 %) 

Research and MIC credits

     (157     (3 %)      (201     (4 %) 

Change in valuation allowance

     2,009        38     2,358        43

Permanent differences

     3               9          

Benefit of five year carryback claim

                   (10       

Adjustment to unrecognized tax benefits

                   (33     (1 %) 

Return to provision adjustments

     116        2     75        1

Other, net

     21               (223     (4 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit

   $ 2             $ (75     (1 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The total income tax expense (benefit) recorded for the years ended January 31, 2012 and 2011 was as follows (in thousands):

 

     January 31,  
     2012      2011  

Tax expense (benefit) from continuing operations

   $ 2       $ (75

Tax expense from discontinued operations

               
  

 

 

    

 

 

 
   $ 2       $ (75
  

 

 

    

 

 

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at January 31, 2012 and 2011 are as follows (in thousands):

 

     January 31,  
     2012     2011  

Deferred tax assets:

    

Accounts receivable

   $ 37      $ 49   

Inventory

     748        671   

Property and equipment, principally due to differing depreciation methods

     671        457   

Employee benefits, principally due to accrual for financial reporting purposes

     32        71   

Accrued liabilities for financial reporting purposes

     158        173   

Net research and manufacturer investment credit carryforwards

     2,576        2,193   

Net operating losses

     11,894        10,436   

AMT credit carryforwards

     126        126   

Deferred rent

     16        41   

Stock based compensation

     796        744   

Warranty accrual

     73        149   

Other

     3        11   
  

 

 

   

 

 

 

Total gross deferred tax assets

     17,130        15,121   

Less: valuation allowance

     (17,130     (15,121
  

 

 

   

 

 

 

Net deferred tax assets

   $      $   
  

 

 

   

 

 

 

We have federal and state research and experimentation credit carryforwards of $1.7 million and $1.6 million, which expire through 2031 and indefinitely, respectively. We have a net operating loss carryforward of $31.4 million for federal and $30.1 million for state, which expire through 2031.

In assessing the probability that deferred tax assets will benefit future periods, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. There was a $17.1 million valuation allowance for deferred tax assets as of January 31, 2012, an increase of $2.0 million during the fiscal year, based on management’s overall assessment of risks and uncertainties related to our future ability to realize, and hence utilize, the deferred tax assets.

 

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A reconciliation of the beginning balance of our unrecognized tax benefits and the ending amount of unrecognized tax benefit is as follows (in thousands):

 

     Unrecognized
Tax Benefits
 

Balance at February 1, 2011

   $ 506   

Additions based on tax positions related to the current year

     254   

Reductions due to lapses of statute of limitations

       

Reductions for tax positions of prior years

       
  

 

 

 

Balance at January 31, 2012

   $ 760   
  

 

 

 

The unrecognized tax benefits recorded above, if reversed, would not impact our effective tax rate since we maintain a full valuation allowance against our deferred tax asset. We recognize interest and penalties associated with unrecognized tax benefits in the income tax expense line item of the consolidated statement of operations.

We and our subsidiary, CWT, file income tax returns in the U.S. federal jurisdiction and in certain state jurisdictions. With few exceptions, we are no longer subject to U.S. federal examinations or state income tax examinations by tax authorities for years before 2006 in those jurisdictions where returns have been filed.

12. Stock Compensation

We have 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 our common stock at not less than 100 percent of the fair market value at the date of grant, unless the grantee is a 10 percent shareholder, in which case the price must not be less than 110 percent of the fair market value.

Our Director Stock Option Plan (the “Director Plan”) expired in December 2010, and our former employee stock option plan (the “Employee Plan”) expired during May 2005. These plans provided for 637,500 and 825,000 shares issuable, respectively. As of January 31, 2012, the Director Plan and Employee Plan had stock options outstanding of 65,500 and 25,000, respectively. During December 2005, the Board of Directors approved and adopted our 2005 Equity Incentive Plan (the “2005 Plan”) covering 450,000 shares of common stock. The 2005 Plan was approved by our shareholders at our annual shareholders’ meeting in June 2006, and was subsequently amended at our 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, our shareholders approved the 2011 Equity Incentive Plan (the “2011” Plan) covering 750,000 shares of common stock, as well as the shares that remained available for issuance under the 2005 Plan plus shares that were the subject of outstanding awards under the 2005 Plan, which again become available for grant under that plan. Thus, the 2011 Plan combines the 2011 Plan and the 2005 Plan. Under the 2011 Plan, we may grant stock options, stock appreciation rights, restricted stock, restricted stock units, and performance based awards to employees, consultants and directors. In addition, under the 2011 Plan, awards vest or become exercisable in installments determined by the compensation committee of our Board of Directors. 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).

 

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COMARCO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

During fiscal 2012, 325,000 restricted stock units were granted and no stock options were granted. The fair value of the restricted stock units granted during fiscal 2012 was estimated using the stock price on the date of the grant of $0.31 and a forfeiture rate of 9.4 percent. During fiscal 2011, 80,000 restricted stock units were granted and 10,000 stock options were granted. The fair value of the restricted stock units granted during fiscal 2011 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 stock options is determined using a Lattice Binomial model for options with performance-based vesting tied to our stock price and the Black-Scholes valuation model for options with ratable term vesting. Both the Lattice Binomial and Black-Scholes valuation model require the input of subjective assumptions including estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the common stock price over the expected term, and the number of options 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. We review our valuation assumptions at each grant date and, as a result, are likely to change our valuation assumptions used to value stock-based awards granted in future periods. The values derived from using either the Lattice Binomial or Black-Scholes model are recognized as 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 materially differ from our current estimates.

The stock-based compensation expense recognized under ASC Topic 718 is summarized in the table below (in thousands except per share amounts):

 

     Years Ended
January 31,
 
     2012     2011  

Stock-based compensation expense

   $ 150      $ 332   

Impact on basic and diluted earnings per share

   $ (0.02   $ (0.05

The total compensation cost related to nonvested awards not yet recognized is approximately $0.2 million, which will be expensed over a weighted average remaining life of 12.5 months.

The fair value of the 10,000 options granted under our stock option plans during fiscal 2011 was estimated on the date of grant using the following weighted average assumptions:

 

     Year Ended
January 31,  2011

Weighted average risk-free interest rate

   1.0%

Expected life (in years)

   3.1

Expected stock volatility

   62%

Dividend yield

   None

Expected forfeitures

   10.6%

 

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COMARCO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Transactions and other information related to stock options granted under these plans for the years ended January 31, 2012 and 2011 are summarized below:

 

     Outstanding Options  
     Number of Shares     Weighted-Average
Exercise Price
 

Balance, February 1, 2010

     1,088,500      $ 3.91   

Options granted

     10,000        2.10   

Options canceled or expired

     (76,000     18.24   

Options exercised

              
  

 

 

   

 

 

 

Balance, January 31, 2011

     1,022,500      $ 2.81   

Options granted

              

Options canceled or expired

     (642,500     2.03   

Options exercised

              
  

 

 

   

Balance, January 31, 2012

     380,000      $ 3.93   
  

 

 

   

 

 

 

Stock Options Exercisable at January 31, 2012

     259,825      $ 5.57   
  

 

 

   

Transactions and other information related to restricted stock units (“RSU’s”) granted under these plans for the years ended January 31, 2012 and 2011 are summarized below:

 

     Outstanding Restricted Stock Units  
     Number
of Shares
    Weighted-Average
Stock Price

On Grant Date
 

Balance, January 31, 2010

     69,204      $ 2.89   

RSU’s granted

     80,000        2.35   

RSU’s canceled or expired

     (32,976     2.56   

Common Stock issued

     (17,300     2.39   
  

 

 

   

 

 

 

Balance, January 31, 2011

     98,928      $ 2.56   

RSU’s granted

     325,000        0.31   

RSU’s canceled or expired

     (85,952     1.63   

Common Stock issued

     (44,325     2.40   
  

 

 

   

 

 

 

Balance, January 31, 2012

     293,651      $ 0.37   
  

 

 

   

 

 

 

At January 31, 2011 and 2012, the stock awards outstanding had no intrinsic value based upon closing market prices of $0.34 and $0.16 per share, respectively.

The following table summarizes information about stock awards outstanding at January 31, 2012:

 

Range of

Exercise/Grant Prices

   Awards Outstanding      Options Exercisable  
   Number
Outstanding
     Weighted-Average
Remaining
Contractual Life
     Weighted-Average
Exercise/Grant Price
     Number
Exercisable
     Weighted-Average
Exercise Price
 

$ 0.18 to 4.90

     527,151         3.0       $ 0.80         113,325       $ 1.60   

6.29 to 8.08

     70,500         2.28         7.37         70,500         7.37   

8.38 to 10.43

     76,000         3.79         9.83         76,000         9.83   
  

 

 

          

 

 

    

0.18 to 10.43

     673,651         3.01 years         2.51         259,825         5.57   
  

 

 

          

 

 

    

 

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COMARCO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

There were 259,825 stock options exercisable at January 31, 2012 at a weighted-average exercise price of $5.57. Shares available under the plans for future grants at January 31, 2012 were 1,205,224.

13. Loss Per Share

We calculate basic loss per share by dividing net loss by the weighted average number of common shares outstanding during the reporting period. Diluted loss per share reflect the effects of potentially dilutive securities. Because we incurred net losses for the fiscal years ended January 31, 2012 and 2011, basic and diluted loss per share were the same because the inclusion of 673,651 and 1,121,428 potential common shares related to outstanding stock awards in the calculation would have been antidilutive. The summary of the basic and diluted earnings per share computations is as follows (in thousands, except per share data):

 

     Years Ended January 31,  
     2012     2011  

Basic & Diluted:

    

Loss from continuing operations

   $ (5,289   $ (5,373

Weighted average shares outstanding

     7,365        7,332   
  

 

 

   

 

 

 

Basic and diluted loss per share from continuing operations

   $ (0.72   $ (0.73
  

 

 

   

 

 

 

Loss from discontinued operations

   $ (21   $ (601

Weighted average shares outstanding

     7,365        7,332   
  

 

 

   

 

 

 

Basic and diluted loss per share from discontinued operations

   $ (0.00   $ (0.08
  

 

 

   

 

 

 

Net loss

   $ (5,310   $ (5,974

Weighted average shares outstanding

     7,365        7,332   
  

 

 

   

 

 

 

Basic and diluted loss per share

   $ (0.72   $ (0.81
  

 

 

   

 

 

 

14. Employee Benefit Plans

We have a Savings and Retirement Plan (the “Plan”) that provides benefits to eligible employees. Under the Plan, as restated effective January 1, 2010, employees are eligible to participate on the first of the month following 30 days of employment, provided they are at least 18 years of age, by contributing between 1 percent and 20 percent of pre-tax earnings. Company contributions match employee contributions at levels as specified in the Plan document. In addition, we may contribute a portion of our net profits as determined by our Board of Directors. Company contributions, which consist of matching contributions, with respect to the Plan for the years ended January 31, 2012 and 2011 were approximately $0.1 million each fiscal year. During fiscal 2012 and fiscal 2011, we made matching contributions of $32,000 and $110,000 respectively, through forfeited matching funds previously contributed to the Plan.

We have obligations to match employee contributions made to the Plan. Generally, our obligation is equal to 100 percent of up to 5 percent of employees’ contribution amounts. If we are unable to meet the requisite matching, the Plan may need to be amended.

 

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COMARCO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15. Commitments and Contingencies

Rental commitments under non-cancelable operating leases, principally on our office space, were $1.1 million at January 31, 2012, payable as follows (in thousands):

 

     Operating Leases  

Fiscal Year:

  

2013

   $ 231   

2014

     239   

2015

     248   

2016

     256   

2017

     133   
  

 

 

 

Total minimum lease payments

   $ 1,107   
  

 

 

 

Rental expense for the years ended January 31, 2012 and 2011 was approximately $0.3 million and $0.4 million, respectively.

During fiscal 2012 we entered into an amended and restated office lease at our existing corporate headquarters reducing our occupied premises by 67% of the space occupied under the former lease. Our current lease expires on August 31, 2016, but allows for early termination on June 30, 2014 with advance written notice and payment of abated base rent of approximately $60,000 as well as a termination fee and other costs.

Purchase Commitments with Suppliers

We generally issues purchase orders to our suppliers with delivery dates from four to six weeks from the purchase order date. In addition, we 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. We are committed to accept delivery of materials pursuant to our purchase orders subject to various contract provisions that allow us to delay receipt of such order or allow us to cancel orders beyond certain agreed lead times. Such cancellations may or may not include cancellation costs payable by us. In the past, we have been required to take delivery of materials from our suppliers that were in excess of its requirements and we have 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 we are unable to adequately manage our suppliers and adjust such commitments for changes in demand, we may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on our business, results of operations, and financial position. Our fixed purchase commitments at January 31, 2012 totaled $0.7 million, of which approximately $0.2 million was cancelable as of January 31, 2012.

Executive Severance Commitments

We have severance compensation and employment agreements with certain of our key executives. These agreements require us to pay these executives, in the event of a termination of employment following a change of control of the Company or other circumstances, 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 consolidated financial statements.

 

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COMARCO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 us for breach of contract seeking payment of $1.2 million for the alleged non-payment by us of products manufactured by Chicony. We denied liability and filed a cross-complaint on May 13, 2011 seeking the recovery of damages of $4.9 million caused by Chicony's failure to adhere to our technical specifications when manufacturing the Bronx product, which we believe resulted in the Recall of the product. The trial date is currently set for November 5, 2012. The outcome of this matter is not determinable as of the date of the filing of this report.

On September 1, 2011, ACCO Brands USA LLC and its Kensington Computer Products Group division (collectively “Kensington”) filed a lawsuit against us alleging that five of our patents relating to power technology are invalid and/or not infringed by products made and/or sold by Kensington. On February 29, 2012 we denied these claims and filed a cross-complaint alleging claims of infringement on each of these five patents. The Court has required that the parties mediate the dispute by the end of July, 2012. This matter is ongoing and the outcome is not determinable.

On March 6, 2012 we filed a lawsuit against EDAC for breach of contract seeking payment of $2.5 million for failure to deliver goods ordered by us in the time, place, manner and price indicated by each purchase order. This matter is ongoing and the outcome is not determinable.

In addition to the pending matters 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 legal proceedings will not, in the aggregate, have a material adverse effect on our consolidated results of operations and financial position.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Resignation of Independent Registered Public Accounting Firm

As previously reported by us in a current report on Form 8-K that was filed with the SEC on April 11, 2011 (the "Current Report"), on April 5, 2011, BDO USA, LLP (“BDO”) provided written correspondence to us that they decline to stand for re-appointment after completion of the audit of our consolidated financial statements for fiscal 2011.

BDO’s reports on our consolidated financial statements as of and for the years ended January 31, 2010 and January 31, 2011, did not contain an adverse opinion or disclaimer of opinion nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During our fiscal years ended January 31, 2010 and January 31, 2011, there were no disagreements between us and BDO on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to BDO’s satisfaction, would have caused BDO to make reference to the matter of the disagreement in connection with its reports.

During the fiscal years ended January 31, 2010 and January 31, 2011 and through the date of BDO’s correspondence, none of the reportable events described under Item 304 (a)(1)(v) of Regulation S-K occurred.

We provided BDO with a copy of this disclosure. A copy of BDO’s letter to the SEC dated April 6, 2011, stating their agreement with the statements in this disclosure is attached as Exhibit 16.1 to the Current Report.

Engagement of New Independent Registered Public Accounting Firm

As previously reported by us in a current report on Form 8-K that was filed with the SEC on April 22, 2011, on April 20, 2011, we engaged Squar, Milner, Peterson, Miranda & Williamson, LLP ("Squar Milner") as our independent registered public accounting firm for the fiscal year ending January 31, 2012, to conduct reviews of the Company’s quarterly reports on Form 10-Q for the first three quarters of fiscal 2012 and to conduct the audit of our annual consolidated financial statements for fiscal 2012. Squar Milner’s engagement was unanimously approved by our Audit Committee.

During our fiscal years ended January 31, 2010 and 2011, respectively and the subsequent period ended April 20, 2011 (the date Squar Milner was engaged by us), neither we nor anyone acting on our behalf consulted Squar Milner regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed or the type of audit opinion that might be rendered on our financial statements, or (ii) any “disagreement” (as defined in Item 304(a)(1)(iv) of Regulation S–K) or “reportable event” as described in Item 304(a)(1)(v) of Regulation S-K.

 

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the periodic reports that we file or submit with the SEC 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, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as such term is defined under Rules 13a-15(e) and 15(d)-15(e) promulgated under the Exchange Act as of the end of the period covered by this report. Based upon this evaluation, our management, including our principal executive officer and principal financial officer, as more fully explained below, have concluded that, as of January 31, 2012, our disclosure controls and procedures were not effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Rule 13a-15(f) promulgated under the Exchange Act. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer, and effected by the Company’s Board of Directors, management, and other personnel. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly and in accordance with GAAP, that disclosures are adequate, and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our internal control over financial reporting includes 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 Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was ineffective as of January 31, 2012. Our management’s finding of ineffective internal control over financial reporting results primarily from a lack of sufficient accounting and information technology staff which results in a lack of segregation of duties necessary for an appropriate system of internal controls. While the lack of effective internal control over financial reporting during the fiscal year ended January 31, 2012 did not result in any particular deficiency in our financial reporting for the fiscal year, 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 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.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to either error or fraud will not occur at all or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks.

Because we are a smaller reporting company, the rules and regulations of the SEC do not require that we include a report of our independent registered public accounting firm regarding our internal control over financial reporting.

 

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Changes in Internal Control Over Financial Reporting

During the fourth quarter of the fiscal year ended January 31, 2012, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

None.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of January 31, 2012, and delivered to stockholders in connection with our 2012 annual meeting of shareholders.

 

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of January 31, 2012, and delivered to stockholders in connection with our 2012 annual meeting of shareholders.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of January 31, 2012, and delivered to stockholders in connection with our 2012 annual meeting of shareholders.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of January 31, 2012, and delivered to stockholders in connection with our 2012 annual meeting of shareholders.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The other information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of January 31, 2012, and delivered to stockholders in connection with our 2012 annual meeting of shareholders.

 

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)    1.     Financial Statements (See Item 8 of this report)

    2.     Financial Statement Schedule:

The following additional information for the years ended January 31, 2012 and 2011 is submitted herewith:

II Valuation and Qualifying Accounts

All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or the notes thereto.

    3.     Exhibits

    Articles of Incorporation; Bylaws

 

  3.1 Restated Articles of Incorporation. The Restated Articles of Incorporation are incorporated herein by reference to Exhibit 3.1 to the Company’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on December 12, 2000.

 

  3.2 Amended and Restated By-Laws. The Amended and Restated Bylaws, as amended through August 15, 2011, are incorporated herein by reference to Exhibit 3.02 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on August 18, 2011.

 

  3.3 Certificate of Determination of Series A Participating Preferred Stock. The Certificate of Determination is incorporated herein by reference to Exhibit 99.1 to the Company’s registration statement on Form 8-A (Filing No. 000-05449) filed with the Securities and Exchange Commission on February 6, 2003.

    Material Contracts

 

  10.1 Director Stock Option Plan dated July 1, 1987 is incorporated by reference from the Company’s annual report on Form 10-K for the year ended January 31, 1988. *

 

  10.2 1995 Employee Stock Option Plan is incorporated by reference to Exhibit 4.1 to the Company’s registration statement on Form S-8 (File No. 33-63219) filed with the Securities and Exchange Commission on October 5, 1995. *

 

  10.3 2005 Equity Incentive Plan, as amended, is incorporated by reference to Exhibit 4.3 to the Company’s registration statement on Form S-8 (File No. 33-156518) filed with the Securities and Exchange Commission on December 31, 2008. *

 

  10.4 2011 Equity Incentive Plan is incorporated by reference to Appendix A to the Company’s definitive Proxy Statement filed with the Securities and Exchange Commission on May 31, 2011. *

 

  10.5 Amended and Restated Severance Agreement, dated June 11, 2007, between the Company and Thomas W. Lanni is incorporated herein by reference to Exhibit 10.9 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2007. *

 

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  10.6 Severance Compensation Agreement, dated August 28, 2007, between the Company and Alisha Charlton is incorporated herein by reference to Exhibit 10.14 to the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on April 30, 2008. *

 

  10.7 Loan and Security Agreement, dated as of February 12, 2009, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon Valley Bank is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February 18, 2009.

 

  10.8 First Amendment to the Loan and Security Agreement, dated as of February 9, 2010, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon Valley Bank is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2010.

 

  10.9 Second Amendment to the Loan and Security Agreement, dated as of August 13, 2010, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon Valley Bank is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on August 18, 2010.

 

  10.10 Third Amendment to the Loan and Security Agreement, dated as of February 9, 2011, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon Valley Bank is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February 14, 2011.

 

  10.11 Strategic Product Development and Supply Agreement, dated as of March 16, 2009, by and among Comarco, Inc. and Targus Group International, Inc. is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on March 20, 2009. **

 

  10.12 Compromise Settlement Agreement and Release, dated as of July 12, 2003, among Comarco, Inc., Comarco Wireless Technologies, Inc., iGo, Inc. (formerly Mobility Electronics, Inc.) and the other parties identified therein is incorporated by reference to Exhibit 10.3 to the Company’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on June 15, 2009.

Other Exhibits

 

  21.1 Subsidiaries of the Company†

 

  23.1 Consent of Independent Registered Public Accounting Firm – SQUAR, MILNER, PETERSON, MIRANDA &WILLIAMON, LLP†

 

  23.2 Consent of Independent Registered Public Accounting Firm – BDO USA, LLP†

 

  31.1 Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002†

 

  31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002†

 

  32.1 Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002+†

 

  32.2 Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002+†

 

  101.INS

XBRL Instance Document W

 

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  101.SCH

XBRL Taxonomy Extension Schema Document W

 

  101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document W

 

  101.LAB

XBRL Taxonomy Extension Label Linkbase Document W

 

  101.PREXBRL

Taxonomy Extension Presentation Linkbase Document W  

 

 

Filed herewith.

 

+ Furnished herewith.

 

* These exhibits are identified as management contracts or compensatory plans or arrangements of the registrant pursuant to Item 15 of Form 10-K.

 

** Confidential Treatment has been requested with respect to certain provisions of this agreement. Omitted portions have been filed separately with the SEC.

 

W Pursuant to Rule 406T of Regulations S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of registration statement prospectus for purposes of Sections 11 or 12 of the Securities and Exchange Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on April 30, 2012.

 

COMARCO, INC.
/s/ THOMAS W. LANNI
Thomas W. Lanni
President and Chief Executive Officer

POWER OF ATTORNEY

We, the undersigned directors and officers of Comarco, Inc., do hereby constitute and appoint Thomas Lanni, as our true and lawful attorney-in-fact and agent with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which such attorney-in-fact and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

/s/ THOMAS W. LANNNI

  President and Chief Executive Officer   April 30, 2012
Thomas W. Lanni   (Principal Executive Officer), Director  

/s/ ALISHA K.CHARLTON

  Chief Accounting Officer   April 30, 2012
Alisha K. Charlton  

(Principal Financial Officer and

Principal Accounting Officer)

 

/s/ MICHAEL R. LEVIN

  Chairman of the Board,   April 30, 2012
Michael R. Levin   Director  

/s/ RICHARD T. LEBUHN

  Director   April 30, 2012
Richard T. LeBuhn    

/s/ WAYNE CADWALLADER

  Director   April 30, 2012
Wayne Cadwallader    

/s/ MICHAEL H. MULROY

  Director   April 30, 2012
Michael H. Mulroy    

/s/ PAUL BOROWIEC

  Director   April 30, 2012
Paul Borowiec    

 

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COMARCO, INC. AND SUBSIDIARY

SCHEDULE VALUATION AND QUALIFYING ACCOUNTS

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

Years Ended January 31, 2012 and 2011

(In thousands)

 

     Balance at
Beginning
of Year
     Charged to
Cost and
Expense
(Recovery)
    Deductions     Other Changes
Add (Deduct)
     Balance at
End of  Year
 

Allowance for doubtful accounts and provision for unbilled receivables (deducted from accounts receivable):

            

Year ended January 31, 2012

   $ 119       $ (29   $ (3   $       $ 87   

Year ended January 31, 2011

   $ 136       $ 17      $ (34   $       $ 119   

 

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Table of Contents

INDEX TO EXHIBITS

 

Exhibit

  

Description

3.1    Restated Articles of Incorporation. The Restated Articles of Incorporation are incorporated herein by reference to Exhibit 3.1 to the Company’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on December 12, 2000.
3.2    Amended and Restated By-Laws. The Amended and Restated Bylaws, as amended through August 15, 2011, are incorporated herein by reference to Exhibit 3.02 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on August 18, 2011.
3.3    Certificate of Determination of Series A Participating Preferred Stock. The Certificate of Determination is incorporated herein by reference to Exhibit 99.1 to the Company’s registration statement on Form 8-A (Filing No. 000-05449) filed with the Securities and Exchange Commission on February 6, 2003.
10.1    Director Stock Option Plan dated July 1, 1987 is incorporated by reference from the Company’s annual report on Form 10-K for the year ended January 31, 1988. *
10.2    1995 Employee Stock Option Plan is incorporated by reference to Exhibit 4.1 to the Company’s registration statement on Form S-8 (File No. 33-63219) filed with the Securities and Exchange Commission on October 5, 1995. *
10.3    2005 Equity Incentive Plan, as amended, is incorporated by reference to Exhibit 4.3 to the Company’s registration statement on Form S-8 (File No. 33-156518) filed with the Securities and Exchange Commission on December 31, 2008. *
10.4    2011 Equity Incentive Plan is incorporated by reference to Appendix A to the Company’s definitive Proxy Statement filed with the Securities and Exchange Commission on May 31, 2011. *
10.5    Amended and Restated Severance Agreement, dated June 11, 2007, between the Company and Thomas W. Lanni is incorporated herein by reference to Exhibit 10.9 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2007. *
10.6    Severance Compensation Agreement, dated August 28, 2007, between the Company and Alisha Charlton is incorporated herein by reference to Exhibit 10.14 to the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on April 30, 2008. *
10.7    Loan and Security Agreement, dated as of February 12, 2009, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon Valley Bank is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February 18, 2009.
10.8    First Amendment to the Loan and Security Agreement, dated as of February 9, 2010, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon Valley Bank is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2010.
10.9    Second Amendment to the Loan and Security Agreement, dated as of August 13, 2010, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon Valley Bank is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on August 18, 2010.
10.10    Third Amendment to the Loan and Security Agreement, dated as of February 9, 2011, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Silicon Valley Bank is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February 14, 2011.

 

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Table of Contents
10.11 Strategic Product Development and Supply Agreement, dated as of March 16, 2009, by and among Comarco, Inc. and Targus Group International, Inc. is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on March 20, 2009. **

 

10.12 Compromise Settlement Agreement and Release, dated as of July 12, 2003, among Comarco, Inc., Comarco Wireless Technologies, Inc., iGo, Inc. (formerly Mobility Electronics, Inc.) and the other parties identified therein is incorporated by reference to Exhibit 10.3 to the Company’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on June 15, 2009.

 

21.1 Subsidiaries of the Company†

 

23.1 Consent of Independent Registered Public Accounting Firm – SQUAR, MILNER, PETERSON, MIRANDA &WILLIAMSON, LLP†

 

23.2 Consent of Independent Registered Public Accounting Firm – BDO USA, LLP†

 

31.1 Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002†

 

31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002†

 

32.1 Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002+†

 

32.2 Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002+†

 

101.INS XBRL Instance Document W

 

101.SCH XBRL Taxonomy Extension Schema Document W

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document W

 

101.DEF XBRL Taxonomy Extension Definition Linkbase Document W

 

101.LAB XBRL Taxonomy Extension Label Linkbase Document W

 

101.PREXBRL

   Taxonomy Extension Presentation Linkbase Document   W      

 

Filed herewith.

 

+ Furnished herewith.

 

* These exhibits are identified as management contracts or compensatory plans or arrangements of the Registrant pursuant to Item 15 of Form 10-K.

 

** Confidential Treatment has been requested with respect to certain provisions of this agreement. Omitted portions have been filed separately with the SEC.

 

W Pursuant to Rule 406T of Regulations S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of registration statement prospectus for purposes of Sections 11 or 12 of the Securities and Exchange Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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