UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE |
ACT OF 1934 |
For the quarterly period ended
APRIL 30, 2013
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 0-5449
COMARCO, INC.
(Exact name of registrant as specified in its charter)
____________________
California | 95-2088894 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification No.) |
25541 Commercentre Drive, Suite 250, Lake Forest, California 92630
(Address of principal executive offices and zip code)
(949) 599-7400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes | √ | 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 | √ | No |
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 | |||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes | No | √ |
The registrant had 7,614,95414,259,839 shares of common stock outstanding as of DecemberJune 7, 2012.
COMARCO, INC. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2012
TABLE OF CONTENTS
Page | |||||
PART I — FINANCIAL INFORMATION | |||||
ITEM 1. | FINANCIAL STATEMENTS | ||||
Condensed Consolidated Balance Sheets as of April 30, 2013 and January 31, 2013 | 3 | ||||
Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2013and 2012 | 4 | ||||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2013 and 2012 | 5 | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 6 | ||||
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 19 | |||
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 26 | |||
ITEM 4. | CONTROLS AND PROCEDURES | 26 | |||
PART II — OTHER INFORMATION | |||||
ITEM 1. | LEGAL PROCEEDINGS | 28 | |||
ITEM 1A. | RISK FACTORS | 28 | |||
ITEM 6. | EXHIBITS | 28 | |||
SIGNATURES | 30 | ||||
PART I — FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
COMARCO, INC. AND SUBSIDIARY
(In thousands, except share and par value amounts)
October 31, 2012 | January 31, 2012 (A) | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 560 | $ | 908 | ||||
| Accounts receivable due from customers, net of reserves of $1 and $6, respectively | 1,127 | 934 | ||||||
| Accounts receivable due from suppliers, net of reserves of $24 and $81, respectively | 833 | 673 | ||||||
| Inventory, net of reserves of $1,082 and $1,791, respectively | 1,219 | 1,131 | ||||||
| Other current assets | 33 | 63 | ||||||
| Total current assets | 3,772 | 3,709 | ||||||
| Property and equipment, net | 102 | 126 | ||||||
| Restricted cash | 82 | 92 | ||||||
| Total assets | $ | 3,956 | $ | 3,927 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 3,454 | $ | 3,912 | ||||
| Accrued liabilities | 1,583 | 1,315 | ||||||
| Loan payable, net of discount | 1,153 | — | ||||||
| Derivative liabilities | 1,754 | — | ||||||
| Total current liabilities | 7,944 | 5,227 | ||||||
| Deferred rent, net of current portion | 43 | 41 | ||||||
| Total liabilities | 7,987 | 5,268 | ||||||
| Commitments, Contingencies and Subsequent Events | ||||||||
| Stockholders’ Deficit: | ||||||||
| Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at October 31, 2012 and January 31, 2012, respectively | — | — | ||||||
| Common stock, $0.10 par value, 50,625,000 shares authorized; 7,614,954 and 7,388,194 shares issued and outstanding at October 31, 2012 and January 31, 2012, respectively | 762 | 739 | ||||||
| Additional paid-in capital | 15,535 | 15,443 | ||||||
| Accumulated deficit | (20,328 | ) | (17,523 | ) | ||||
| Total stockholders’ deficit | (4,031 | ) | (1,341 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 3,956 | $ | 3,927 | ||||
April 30, (Unaudited) | January 31, 2013 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 375 | $ | 104 | ||||
Accounts receivable due from customers, net of reserves of $0 | 1,573 | 1,307 | ||||||
Accounts receivable due from suppliers, net of reserves of $24 | 1,087 | 1,132 | ||||||
Inventory, net of reserves of $628 at April 30, 2013 and $631 at January 31, 2013, respectively | 604 | 466 | ||||||
Other current assets | 38 | — | ||||||
Total current assets | 3,677 | 3,009 | ||||||
Property and equipment, net | 104 | 120 | ||||||
Restricted cash | 82 | 82 | ||||||
Total assets | $ | 3,863 | $ | 3,211 | ||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 3,814 | $ | 3,688 | ||||
Accrued liabilities | 2,411 | 1,789 | ||||||
Loan payable | — | 2,000 | ||||||
Derivative liabilities | 3,857 | 2,466 | ||||||
Total current liabilities | 10,082 | 9,943 | ||||||
Deferred rent, net of current portion | 41 | 42 | ||||||
Loan payable, net of discount of $567 | 931 | — | ||||||
Total liabilities | 11,054 | 9,985 | ||||||
Commitments and Contingencies | ||||||||
Shareholders’ Deficit: | ||||||||
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at April 30, 2013 and at January 31, 2013, respectively | — | — | ||||||
Common stock, $0.10 par value, 50,625,000 shares authorized; 14,259,839 and 7,635,039 shares issued and outstanding at April 30, 2013 and at January 31, 2013, respectively | 1,426 | 764 | ||||||
Additional paid-in capital | 15,972 | 15,577 | ||||||
Accumulated deficit | (24,589 | ) | (23,115 | ) | ||||
Total shareholders’ deficit | (7,191 | ) | (6,774 | ) | ||||
Total liabilities and shareholders’ deficit | $ | 3,863 | $ | 3,211 | ||||
(A) Derived from the audited consolidated financial statements as of January 31, 2012.
The accompanying notes are an integral part of these condensed consolidated financial statements.
COMARCO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue | $ | 1,135 | $ | 2,252 | $ | 5,018 | $ | 7,128 | ||||||||
Cost of revenue (1) | 929 | 1,926 | 2,672 | 6,932 | ||||||||||||
Gross profit | 206 | 326 | 2,346 | 196 | ||||||||||||
| Selling, general, and administrative expenses | 903 | 563 | 2,303 | 2,628 | ||||||||||||
Engineering and support expenses | 640 | 497 | 1,884 | 1,471 | ||||||||||||
| 1,543 | 1,060 | 4,187 | 4,099 | |||||||||||||
Operating loss | (1,337 | ) | (734 | ) | (1,841 | ) | (3,903 | ) | ||||||||
Interest expense, net | (518 | ) | (26 | ) | (573 | ) | (62 | ) | ||||||||
| Loss due to change in fair value of derivative liabilities | (389 | ) | — | (389 | ) | — | ||||||||||
Other income, net | — | — | — | 34 | ||||||||||||
| Loss from continuing operations before income taxes | (2,244 | ) | (760 | ) | (2,803 | ) | (3,931 | ) | ||||||||
Income tax expense | — | — | (2 | ) | (2 | ) | ||||||||||
Loss from continuing operations | (2,244 | ) | (760 | ) | (2,805 | ) | (3,933 | ) | ||||||||
Loss from discontinued operations, net of income taxes | — | — | — | (21 | ) | |||||||||||
Net loss | $ | (2,244 | ) | $ | (760 | ) | $ | (2,805 | ) | $ | (3,954 | ) | ||||
| Basic and diluted loss per share: | ||||||||||||||||
| loss from continuing operations | $ | (0.29 | ) | $ | (0.10 | ) | $ | (0.37 | ) | $ | (0.54 | ) | ||||
| Loss from discontinued operations | — | — | — | — | ||||||||||||
| Net loss | $ | (0.29 | ) | $ | (0.10 | ) | $ | (0.37 | ) | $ | (0.54 | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 7,613 | 7,382 | 7,518 | 7,356 | ||||||||||||
| Diluted | 7,613 | 7,382 | 7,518 | 7,356 | ||||||||||||
Common shares outstanding | 7,615 | 7,388 | 7,615 | 7,388 | ||||||||||||
Three Months Ended | ||||||||
2013 | 2012 | |||||||
Revenue | $ | 1,413 | $ | 2,201 | ||||
Cost of revenue | 1,120 | 1,869 | ||||||
Gross profit | 293 | 332 | ||||||
Selling, general, and administrative expenses | 648 | 503 | ||||||
Engineering and support expenses | 279 | 541 | ||||||
| 927 | 1,044 | |||||||
Operating loss | (634 | ) | (712 | ) | ||||
Interest expense, net | 78 | — | ||||||
Loss due to change in fair value of derivative liabilities | 767 | — | ||||||
Other income, net | 5 | — | ||||||
Loss before income taxes | (1,474 | ) | (712 | ) | ||||
Income tax benefit | — | — | ||||||
Net loss | $ | (1,474 | ) | $ | (712 | ) | ||
Basic and diluted loss per share: | $ | (0.11 | ) | $ | (0.10 | ) | ||
Weighted average common shares outstanding: | ||||||||
Basic | 13,851 | 7,430 | ||||||
Diluted | 13,851 | 7,430 | ||||||
Common shares outstanding | 14,260 | 7,463 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
COMARCO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended October 31, | ||||||||
| 2012 | 2011 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (2,805 | ) | $ | (3,954 | ) | ||
Loss from discontinued operations | $ | — | $ | 21 | ||||
| Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: | ||||||||
| Depreciation | 75 | 342 | ||||||
| Loan origination fees | — | 53 | ||||||
| Amortization of loan discount | 492 | — | ||||||
| Loss (gain) on retirement of property and equipment | 11 | (1 | ) | |||||
| Stock-based compensation | 115 | 121 | ||||||
| Provision for doubtful accounts receivable | (62 | ) | 22 | |||||
| Provision for obsolete inventory | (709 | ) | (5 | ) | ||||
| Change in fair value of derivative liabilities | 389 | — | ||||||
| Supplier settlement | (1,443 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable due from customers | (188 | ) | 1,173 | |||||
| Accounts receivable due from suppliers | (636 | ) | 50 | |||||
| Inventory | 621 | 202 | ||||||
| Other assets | 30 | 3 | ||||||
| Accounts payable | 1,506 | (1,744 | ) | |||||
| Accrued liabilities | 306 | (1,192 | ) | |||||
| Deferred rent | 2 | 59 | ||||||
| Net cash used in continuing operating activities | (2,296 | ) | (4,850 | ) | ||||
| Net cash used in discontinued operating activities | — | (21 | ) | |||||
| Net cash used in operating activities | (2,296 | ) | (4,871 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | (62 | ) | (71 | ) | ||||
| Proceeds from sale of property and equipment | — | 1 | ||||||
| Change in restricted cash | 10 | (92 | ) | |||||
| Net cash used in investing activities | (52 | ) | (162 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from loan payable | 2,000 | — | ||||||
| Repayment of line of credit | — | (1,000 | ) | |||||
| Loan origination fees | — | (53 | ) | |||||
| Net cash provided by (used in) financing activities | 2,000 | (1,053 | ) | |||||
Net decrease in cash and cash equivalents | (348 | ) | (6,086 | ) | ||||
Cash and cash equivalents, beginning of period | 908 | 6,381 | ||||||
Cash and cash equivalents, end of period | $ | 560 | $ | 295 | ||||
Three Months Ended April 30, | ||||||||
2013 | 2012 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,474 | ) | $ | (712 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 20 | 32 | ||||||
Stock-based compensation expense | 27 | 40 | ||||||
Loss on retirement of equipment | — | 11 | ||||||
Amortization of loan discount | 55 | — | ||||||
Provision for doubtful accounts | — | (15 | ) | |||||
Provision for obsolete inventory | (3 | ) | (135 | ) | ||||
Change in fair value of derivative liabilities | 767 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable due from customers and suppliers | (221 | ) | (2,047 | ) | ||||
Inventory | (135 | ) | 479 | |||||
Other assets | (38 | ) | 2 | |||||
Accounts payable | 126 | 615 | ||||||
Accrued liabilities | 622 | 1,010 | ||||||
Deferred rent | (1 | ) | 2 | |||||
Net cash used in operating activities | (255 | ) | (718 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property and equipment | (4 | ) | (35 | ) | ||||
Net cash used in investing activities | (4 | ) | (35 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Loan repayment | (2,000 | ) | — | |||||
Loan proceeds | 1,500 | — | ||||||
Net proceeds from common stock issued | 1,030 | — | ||||||
Net cash provided by financing activities | 530 | — | ||||||
Net increase (decrease) in cash and cash equivalents | 271 | (753 | ) | |||||
Cash and cash equivalents, beginning of period | 104 | 908 | ||||||
Cash and cash equivalents, end of period | $ | 375 | $ | 155 | ||||
Noncash investing and financing activities: | ||||||||
Debt discount recorded upon issuance of convertible loan | $ | 624 | — | |||||
Issuance of common stock upon the vesting of restricted stock units | $ | 19 | $ | 7 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | — | $ | — | ||||
Cash paid for income taxes | $ | — | $ | — | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
COMARCO, INC. AND SUBSIDIARY
Nine Months Ended October 31, | ||||||||
| 2012 | 2011 | |||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Noncash investing and financing activities: | ||||||||
| Loan discount recorded in connection with issuance of warrants | $ | 1,365 | $ | — | ||||
| Issuance of common stock upon the vesting of restricted stock units | $ | 23 | $ | — | ||||
| Cash paid during the period for: | ||||||||
| Interest | $ | — | $ | 12 | ||||
| Income taxes, net of refunds | $ | 2 | $ | 2 | ||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization
Comarco, Inc., through its wholly ownedwholly-owned subsidiary Comarco Wireless Technologies, Inc. (collectively, “we,” “our,” “Comarco,” or the “Company”), is a developer and designer of mobileinnovative technologies and intellectual property currently used in power adapters used to simultaneously power and charge certain notebookbattery powered devices such as laptop computers, mobiletablets, smart phones smartphones, E-readers, iPads®, and iPods®.readers. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”), which was incorporated in the Statestate 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.
Our business addressestargets the needs of today’s mobile culture by providing innovative charging solutions for the myriad of battery powered devices used by nearly all consumers 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.
2. Summary of Significant Accounting Policies
Future Operations, Liquidity and Capital Resources:
We have experienced substantial pre-tax losses from operations for the first fiscal quarters of January 31, 2012, which has been derived from our audited financial statements,fiscal 2014 and the unaudited2013 totaling $634,000 and $712,000, respectively. The condensed consolidated financial statements have been prepared in accordance with accounting principles and SEC rules applicableassuming that we will continue to interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included in this report contain all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the Company’s consolidated financial position as of October 31, 2012 and its consolidated results of its operations and cash flows for the three and nine months ended October 31, 2012 and 2011. The accounting policies followed by the Company are set forth in Note 2 to the Company’s audited financial statements included in its Annual Report on Form 10-K for its fiscal year ended January 31, 2012 (the “2012 10-K”), which was filed with the SEC on April 30, 2012. The consolidated results of operations for the three and nine months ended October 31, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2013 or any other interim period during such year.
Our business today is almost entirely driven by sales of our products to Lenovo (accounting for 97% of our fiscal 2014 first quarter revenue), and we continue to focus a significant percentage of our time and resources on providing outstanding products and service to Lenovo, our valued principal customer.
Our extensive patent portfolio covering key technical aspects of our products could potentially generate an additional revenue stream based upon royalties paid to us by others for the use of some or all of our patents in third party products. We are currently exploring opportunities to expand, protect, and monetize our patent portfolio, including through enforcement.
A positive outcome in our ongoing litigation with Chicony and Kensington, described in Note 10, if such an outcome were realized, could not only reduce our accumulated deficit, but could also provide us with a cash infusion. However, the outcome of our ongoing litigation matters is not determinable as of the date of filing this report.
Additionally our newest generation AC adapter, branded ChargeSource®, is currently available exclusively on our retail websitewww.chargesource.com.During the current fiscal year we had two significant customers, Lenovo and Dell Inc. and affiliates (“Dell”), both of which are original equipment manufacturers, or “OEM’s.” However, we exited the business with Dell, and sold Dell all remaining product in inventory in May 2012, due to low sales volumes and thin product margins.
We had negative working capital totaling approximately $4.2$6.4 million at October 31, 2012.April 30, 2013, of which $3.9 million relates to the fair value of derivative liabilities. In order for us to be able to continue operatingconduct our business for the next twelve months, to continue operations thereafter and to be able to discharge our liabilities and commitments in the normal course of business, we must increase sales, closely manage operating expenses, and raise additional funds, through either debt and/or equity financing to meet our working capital needs (See Note 10 Loan & Related Agreements).needs. 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. There is no assurance that we will succeed in doing so and if we are not successful in raising additional funds, we may have to evaluate other alternatives or partially, or entirely, curtailcease our operations.
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 shareholders may lose all or part of their investment in our common stock. The condensed consolidated financial statements do not reflect any adjustments related to the outcome of this uncertainty.
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Basis of Presentation
Our condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim reporting and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in our annual report on Form 10-K for the year ended January 31, 2013. The unaudited interim condensed consolidated financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the consolidated results for the interim periods presented. The consolidated results for the three months ended April 30, 2013 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2014.
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 unaudited interim condensed consolidated financial statements. Cash and cash equivalents are generally maintained in uninsured accounts, typically Eurodollar deposits with daily liquidity, which are subject to investment risk, including possible loss of principal invested.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements of the Company include the accounts of Comarco, Inc. and CWT. All material intercompany balances, transactions, and profits and losses have been eliminated.
Accounts Receivable Duedue from Customers
Our management offers unsecured credit terms to our OEM customers and performperforms ongoing credit evaluations of our customers. Accounts receivable balances result primarily from the timing of remittance payments by these customers to the Company. Accounts receivable are stated net of an allowance for doubtfuluncollectible accounts. Management develops its estimate of this reserve based upon specific identification of account balances that have indications of uncertainty of collection. Indications of uncertainty of collections may include the 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. Historically, such losses have been minimal and within management’s expectations and established reserves.
Accounts Receivable Duedue from Suppliers
Oftentimes we are able to source components locally that we later sell to our contract manufacturers (“CM’s”CMs”), who build the finished goods, and to 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 instead reclassifiedrecorded as a reduction to cost of revenue. During fiscal 2013, our relationship with Power System Technologies, Ltd. (formerly(“Power,” formerly Flextronics Electronics), the CM who builds the product we sell to our only significant customer, Lenovo transitioned from a relationship whereInformation Products Co., Ltd. (“Lenovo”) changed. Prior to fiscal 2013, we directly sourced just a few components in the bill of material to a process wherematerial. In fiscal 2013, we directly sourcebegan procuring all of the component parts in the bill of material.
Use of Estimates
The preparation of unaudited interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of AmericaGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements and the reported amounts of revenue and expenses during the period reported. Actual results could materially differ from those estimates.
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Certain accounting principles require subjective and complex judgments to be madeused in the preparation of financial statements. Accordingly, our reported assets and liabilities and results of operationsa different financial presentation could differ, possibly significantly,result depending on the judgments, estimates, or assumptions that are used. Such judgments, estimates and assumptions include, but are not specifically limited to, those required in the valuation of long-lived assets, allowance for doubtful accounts, reserves for inventory obsolescence, reserves for estimated warranty costs, (includingincluding product recall costs), valuation of derivative liabilities,costs, valuation allowances for deferred tax assets, valuation of derivative liabilities and determination of stock based compensation expense.
Derivative Liabilities
A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts and for hedging activities. As a matter of policy, the Company does not invest in separable financial derivatives or engage in hedging transactions. However, the Company has entered into certain financing transactions in fiscal 2013 and fiscal 2014 that involve financial equity instruments containing certain features that have resulted in the instruments being deemed derivatives. The Company may engage in other similar complex financing transactions in the future, but not with the intention to enter into derivative instruments. Derivatives are measured at fair value using the Monte Carlo simulation pricing model and marked to market through earnings. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions. Changes in these subjective assumptions can materially affect the estimate of the fair value of derivative liabilities and, consequently, the related amount recognized as loss due to change in fair value of derivative liabilities on the condensed consolidated statement of operations. Furthermore, depending on the terms of a derivative, the valuation of derivatives may be removed from the financial statements upon exercise or conversion of the underlying instrument into some other security.
We evaluate free-standing derivative instruments to properly classify such instruments within stockholders’shareholders’ equity or as liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument is reassessed at each balance sheet date. If the classification changes as a result of events during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.
During the second quarter of fiscal 2013, we adopted the guidance, as codified in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815-40,Derivatives and Hedging,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, that requires us to apply a two-step model in determining whether a financial instrument or an embedded feature is indexed to our own stock and thus enables it to qualify for equity classification. The warrants previously issued to Broadwood Partners, L.P. ("Broadwood"(“Broadwood”) contain provisions that adjust the exercise price in the event of certain dilutive issuance of our securities (see Note 10).securities. Accordingly, the Company considered the warrants to be subject to price protection and classified them as derivative liabilities at the date of issuance with a fair value of $1.3 million and a corresponding discount to the underlying loan payable (see Note 11)8).
Additionally, during the first quarter of fiscal 2014 we entered into a Loan Agreement with Elkhorn Partners Limited Partnership (“Elkhorn”) which contains convertible provisions that allow Elkhorn to convert the loan into common stock. The conversion price may be adjusted in the event of certain dilutive issuance of our securities. Accordingly, the Company considered the convertible debt to be subject to price protection and created a discount to the underlying loan payable and classified that value as derivative liabilities at the date of issuance with a fair value of $0.6 million (see Notes 8 and 9).
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, accounts receivable due from customers and suppliers, accounts payable, accrued liabilities, a short-term loan payable, and derivative liabilities. The carrying amount of cash and cash equivalents, accounts receivable due from customers and suppliers, accounts payable, and accrued liabilities are considered to be representative of their respective fair values because ofdue to the short-term nature of those instruments. The carrying amount of our loan, net of discount, approximates fair value since the loan balance is derived from the valuation of the derivative liabilities discussed below.
Legal expense classification
Our legal expenses are classified in either selling, general, and administrative expenses or engineering and support expenses depending on the nature of the legal expense. All legal expenses incurred related to our intellectual property, including associated litigation expense and maintenance of our patent portfolio, are included in engineering and support expenses in our condensed consolidated statement of operations. The legal expenses included in engineering and support expenses increased approximately $0.1 million and $0.8 million during the three and nine months ended October 31, 2012, respectively, when compared to the comparable periods of the prior fiscal year. The increase in legal expenses during the first three quarters of fiscal 2013 is predominantly due to the ongoing patent infringement litigation described in Note 12. All other legal expenses, including all other litigation expense and public company legal expense are included in selling, general, and administrative expenses in our condensed consolidated statement of operations.
The legal expense included in selling, general and administrative expenses increased approximately $0.3 million during the three and nine months ended October 31, 2012 when compared to the comparable periods of the prior fiscal year. The increase is primarily attributable to the ongoing Bronx product litigation described in Note 12.
We grant stock awards for a fixed number of shares to employees, consultants, and directors pursuantwith an exercise price equal to the Company’s shareholder-approved equity incentive plans.
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. The fair value of stock options is determined using a Lattice Binomial model for options with performance-based vesting tied to the Company’sour stock price and the Black-Scholes valuation model for options with ratable term vesting. Both the Lattice Binomial and Black-Scholes valuation models require the input of subjective assumptions. These assumptions include estimating the length of time optioneesemployees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of our common stock price over the expected term, and the number of awards that will ultimately not complete their vesting requirements (“forfeitures”). Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related amount recognized as an expense on the consolidated statements of operations. As required under applicablethe accounting rules, we review our valuation assumptions at each grant date, and as a result, thewe are likely to change our valuation assumptions used to value employee stock-based awards granted in future periods are subject to possible change.periods. The values derived from using either the Lattice Binomial or the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires significant judgment. Actual changes in vesting and forfeitures,results, and future changes in estimates, may differ from our current estimates.
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The stock-based compensation expense recognized during the three and nine months ended October 31, 2012 and 2011 is summarized in the table below (in thousands, except per share amounts):
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Total stock-based compensation expense | $ | 39 | $ | 26 | $ | 115 | $ | 121 | ||||||||
| Impact on basic and diluted earnings per share | $ | 0.00 | $ | 0.00 | $ | 0.01 | $ | 0.02 | ||||||||
Three Months Ended | ||||||||
2013 | 2012 | |||||||
Total stock-based compensation expense | $ | 27 | $ | 40 | ||||
Impact on basic and diluted earnings per share | 0.00 | 0.01 | ||||||
The total compensation cost related to nonvested awards not yet recognized is approximately $159,000,$68,000, which will be expensed over a weighted average remaining life of 7.06 months.
During the three
We have stock-based compensation plans under which outside directors, consultants,employees and employees are eligible toconsultants receive stock options and other equity-based awards. The employee stock option plans and a director stock option plan provide that officers, key employees, directorsconsultants and consultantsdirectors may be granted optionsawards to purchase up to 2,675,000 shares of common stock of the Company at not less than 100 percent of the fair market value at the date of grant, unless the granteeoptionee is a 10 percent shareholder, of the Company, in which case the price must not be less than 110 percent of the fair market value.
Transactions and other information related to stock options granted under these plans for the ninethree months ended October 31, 2012April 30, 2013 are summarized below:
| Outstanding Options | ||||||||
| Number of Shares | Weighted-Average Exercise Price | |||||||
Balance, January 31, 2012 | 380,000 | $ | 3.93 | |||||
| Options granted | 465,000 | 0.40 | ||||||
| Options canceled or expired | (80,500 | ) | 7.90 | |||||
| Options exercised | — | — | ||||||
Balance, October 31, 2012 | 764,500 | $ | 1.48 | |||||
Stock Options Exercisable at October 31, 2012 | 179,325 | $ | 4.53 | |||||
Outstanding Options | ||||||||
Number of Shares | Weighted-Average Exercise Price | |||||||
Balance, January 31, 2013 | 764,500 | $ | 1.48 | |||||
Awards granted | — | — | ||||||
Awards canceled or expired | — | — | ||||||
Awards exercised | — | — | ||||||
Balance, April 30, 2013 | 764,500 | $ | 1.48 | |||||
Stock Options Exercisable at April 30, 2013 | 212,100 | $ | 4.00 | |||||
Transactions and other information related to restricted stock units (“RSU’s”) granted under these plans for the ninethree months ended October 31, 2012April 30, 2013 are summarized below:
Outstanding Restricted Stock Units | ||||||||
Number of Shares | Weighted-Average Stock Price on Grant Date | |||||||
Balance, January 31, 2013 | 304,326 | $ | 0.20 | |||||
RSU’s granted | — | — | ||||||
RSU’s canceled or expired | (112,700 | ) | 0.16 | |||||
RSU’s vested/Common stock issued | (187,300 | ) | 0.16 | |||||
Balance, April 30, 2013 | 4,326 | $ | 2.89 | |||||
| Outstanding Restricted Stock Units | ||||||||
| Number of Shares | Weighted-Average Stock Price On Grant Date | |||||||
Balance, January 31, 2012 | 293,651 | $ | 0.37 | |||||
| RSU’s granted | 300,000 | 0.16 | ||||||
| RSU’s canceled or expired | (32,565 | ) | 0.26 | |||||
| Common stock issued | (226,760 | ) | 0.31 | |||||
Balance, October 31, 2012 | 334,326 | $ | 0.20 | |||||
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The RSU’s canceled or expired in the table above represent the difference between the number of shares awarded and the number issued because the recipient elected a net award to cover personal income taxes.
The following table summarizes information about the Company’s stock awards (consisting of stock options and RSU’s) outstanding at October 31, 2012:
| Awards Outstanding | Awards Exercisable | |||||||||||||||||||||||
Range of Exercise/Grant Prices | Number Outstanding | Weighted-Avg. Remaining Contractual Life (years) | Weighted-Avg. Exercise/Grant Price | Number Exercisable | Weighted-Avg. Exercise/Grant Price | |||||||||||||||||||
| $ | 0.16 | to | 1.09 | 1,013,500 | 5.90 | $ | 0.47 | 98,325 | $ | 1.10 | ||||||||||||||
| 2.89 | to | 4.90 | 19,326 | 4.34 | 4.45 | 15,000 | 4.90 | |||||||||||||||||
| 8.08 | to | 10.43 | 66,000 | 2.71 | 9.56 | 66,000 | 9.56 | |||||||||||||||||
| 1,098,826 | 5.68 | 1.09 | 179,325 | 4.53 | ||||||||||||||||||||
Awards Outstanding | Awards Exercisable | |||||||||||||||||||||||
Range of | Number Outstanding | Weighted-Avg. Remaining Contractual Life (years) | Weighted-Avg. Exercise | Number | Weighted-Avg. Exercise | |||||||||||||||||||
| $ | 0.40 | to | 1.20 | 683,500 | 8.1 | $ | 0.62 | 131,100 | $ | 1.10 | ||||||||||||||
| 2.89 | to | 4.90 | 19,326 | 3.8 | 4.45 | 15,000 | 4.90 | |||||||||||||||||
| 8.08 | to | 10.43 | 66,000 | 2.3 | 9.56 | 66,000 | 9.56 | |||||||||||||||||
| 768,826 | 7.5 | 1.49 | 212,100 | 4.00 | ||||||||||||||||||||
At October 31, 2012,April 30, 2013, shares available for future grants under the Plans were 455,224.
4. Loss Per Share
The Company calculates basic earnings (loss)loss per share by dividing net income (loss)loss by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share reflects the effects of potentially dilutive securities. Since the Company incurred a net loss for each of the three and nine months ended October 31,April 30, 2013 and 2012, and 2011, basic and diluted net loss per share for both such periods were the same for those periods because the inclusion of potential common shares1,068,826 and of 847,151 potentially dilutive securities related to outstanding stock options in the calculationawards, respectively, would have been antidilutive.
5. Customer and Supplier Concentrations
Substantially all of the Company’s revenue is derived from a limited numbersingle customer, Lenovo. The loss of customers. lenovo would have a material impact on our revenues and results of operations.
The customers that accounted forproviding 10 percent or more of the Company’s revenuerevenues for anyeither quarter ended April 30, 2013 or 2012 are listed below (in thousands).
Three Months Ended April 30, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Total revenue | $ | 1,413 | 100 | % | $ | 2,201 | 100 | % | ||||||||
Customer concentration: | ||||||||||||||||
Lenovo Information Products Co., Ltd. | 1,378 | 98 | % | 2,137 | 97 | % | ||||||||||
| $ | 1,378 | 98 | % | $ | 2,137 | 97 | % | |||||||||
The Company’s revenues by geographic area, as determined by the “ship to” address, consisted of the periods presented below are listed here:
| Three Months Ended October 31, | ||||||||||||||||
| 2012 | 2011 | |||||||||||||||
| (In thousands) | ||||||||||||||||
Total revenue | $ | 1,135 | 100 | % | $ | 2,252 | 100 | % | ||||||||
| Customer concentration: | ||||||||||||||||
| Dell Inc. and affiliates | $ | — | — | $ | 376 | 17 | % | |||||||||
| Lenovo Information Products Co., Ltd. | 1,119 | 99 | % | 1,826 | 81 | % | ||||||||||
| $ | 1,119 | 99 | % | $ | 2,202 | 98 | % | |||||||||
| Nine Months Ended October 31, | ||||||||||||||||
| 2012 | 2011 | |||||||||||||||
| (In thousands) | ||||||||||||||||
Total revenue | $ | 5,018 | 100 | % | $ | 7,128 | 100 | % | ||||||||
| Customer concentration: | ||||||||||||||||
| Dell Inc. and affiliates | $ | 67 | 1 | % | $ | 1,061 | 15 | % | ||||||||
| Targus Group International, Inc. | — | — | % | 1,174 | 16 | % | ||||||||||
| Lenovo Information Products Co., Ltd. | 4,913 | 98 | % | 4,773 | 67 | % | ||||||||||
| $ | 4,980 | 99 | % | $ | 7,008 | 98 | % | |||||||||
Three Months Ended | ||||||||
2013 | 2012 | |||||||
North America | $ | 46 | $ | 41 | ||||
Asia | 1,364 | 2,155 | ||||||
Other | 3 | 5 | ||||||
| $ | 1,413 | $ | 2,201 | |||||
The customers comprising 10 percent or more of the Company’s gross accounts receivable due from customers at either October 31,April 30, 2012 or January 31, 2012 are listed below (in thousands, except percentages):
| October 31, 2012 | January 31, 2012 | |||||||||||||||
| Total gross accounts receivable due from customers | $ | 1,128 | 100 | % | $ | 940 | 100 | % | ||||||||
| Customer concentration: | ||||||||||||||||
Dell Inc. and affiliates. | — | — | % | 371 | 39 | % | ||||||||||
Lenovo Information Products Co., Ltd. | 1,119 | 99 | % | 562 | 60 | % | ||||||||||
| $ | 1,119 | 99 | % | $ | 933 | 99 | % | |||||||||
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
April 30, 2013 | January 31, 2013 | |||||||||||||||
Total gross accounts receivable due from customers | $ | 1,573 | 100 | % | $ | 1,307 | 100 | % | ||||||||
Customer concentration: | ||||||||||||||||
Lenovo Information Products Co., Ltd. | 1,532 | 97 | % | 1,291 | 99 | % | ||||||||||
| $ | 1,532 | 97 | % | $ | 1,291 | 99 | % | |||||||||
The suppliers that accounted forcomprising 10 percent or more of the Company’s gross accounts receivable due from suppliers at either October 31, 2012April 30, 2013 or January 31, 20122013 are listed below (in thousands, except percentages)thousands).
| October 31, 2012 | January 31, 2012 | |||||||||||||||
| Total gross accounts receivable due from suppliers | $ | 857 | 100 | % | $ | 754 | 100 | % | ||||||||
| Customer concentration: | ||||||||||||||||
EDAC Power Electronics Co. Ltd. (see Note 12) | $ | — | — | % | $ | 532 | 71 | % | ||||||||
Power Systems Technologies, Ltd. | 711 | 83 | % | 40 | 5 | % | ||||||||||
Zheng Ge Electrical Co., Ltd. | 122 | 14 | % | 122 | 16 | % | ||||||||||
| $ | 833 | 97 | % | $ | 694 | 92 | % | |||||||||
April 30, 2013 | January 31, 2013 | |||||||||||||||
Total gross accounts receivable due from suppliers | $ | 1,111 | 100 | % | $ | 1,156 | 100 | % | ||||||||
Supplier concentration: | ||||||||||||||||
Power Systems Technologies, Ltd. | 951 | 86 | % | 1,008 | 87 | % | ||||||||||
Zheng Ge Electrical Co., Ltd. | 122 | 11 | % | 122 | 11 | % | ||||||||||
| $ | 1,073 | 97 | % | $ | 1,130 | 98 | % | |||||||||
Zheng Ge Electrical Co., Ltd. (“Zheng Ge”) was a tip supplier for the Bronx product, which was subject to a recall.recall, announced in April 2010. We previously sourced some of the component parts that Zheng Ge used in the manufacture of the tips. We ceased paying Zheng Ge during the course of the product recall while we investigated the manufacturing defect which ultimately caused the recall and, likewise, Zheng Ge ceased paying us.
We expect to fully collect the accounts receivable balances as of October 31, 2012April 30, 2013 due from Power in the normal course andof business. Additionally, we expect to offset the receivables due from Zheng Ge from amounts owed, which are included in accrued liabilities in our condensed consolidated balance sheet. Further, we anticipate proposing a settlement to Zheng Ge upon the conclusion of our litigation with Chicony Power Technology, Co. Ltd. (“Chicony”).
The companies that accounted forsuppliers comprising 10 percent or more of ourthe Company’s gross accounts payable at either October 31, 2012April 30, 2013 or January 31, 20122013 are listed below (in thousands, except percentages)thousands).
| October 31, 2012 | January 31, 2012 | |||||||||||||||
Total gross accounts payable | $ | 3,454 | 100 | % | $ | 3,912 | 100 | % | ||||||||
| Accounts payable concentration: | ||||||||||||||||
EDAC Power Electronics Co. Ltd | $ | — | — | % | $ | 1,964 | 50 | % | ||||||||
Chicony Power Technology, Co. Ltd | 1,100 | 32 | % | 1,100 | 28 | % | ||||||||||
Pillsbury Winthrop Shaw Pittman, LLP. | 1,213 | 35 | % | 386 | 10 | % | ||||||||||
| $ | 2,313 | 67 | % | $ | 3,450 | 88 | % | |||||||||
April 30, 2013 | January 31, 2013 | |||||||||||||||
Total gross accounts payable | $ | 3,814 | 100 | % | $ | 3,688 | 100 | % | ||||||||
Supplier concentration: | ||||||||||||||||
Chicony Power Technology, Co. Ltd | 1,100 | 29 | % | 1,100 | 30 | % | ||||||||||
Pillsbury Winthrop Shaw Pittman, LLP. | 1,754 | 46 | % | 1,614 | 44 | % | ||||||||||
| $ | 2,854 | 75 | % | $ | 2,714 | 74 | % | |||||||||
Chicony was the manufacturer of the Bronx product, which was subject to a recall and we are currently in litigation with Chicony (see Note 12)10). We have made no payments to this supplierChicony during either fiscal 2013 to date2014 or 2012.fiscal 2013. The outcome of such litigation is not determinable at this time and we do not know whether or not we will be obligated to pay this liability. If we prevail in this case, based upon our causes of action, it is likely we will be relieved of this liability. There can be no assurance, however, as to the likely outcome of this litigation (see Note 12).
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”) is our legal counsel for the Kensington litigation as well as other patent and intellectual property matters (See Note 12)10). We have paidmade no payments to Pillsbury $0.3 million during the first three quarters of fiscal 2013 and are in discussions with Pillsbury to create a payment solution with respect to outstanding balances and future legal fees. There can be no assurances, however, as to the outcome of these discussions.
A significant portion of our inventory purchases is derived from a limited number of CM’scontract manufacturers and other suppliers. The loss of one or more of our significant CM’s or suppliers could materially and adversely affect our operations. For the three and nine months ended October 31, 2012, fourApril 30, 2013, two suppliers accounted for approximately $0.4 million or 42 percent of our suppliers provided an aggregate of 76 and 67 percent, respectively, ofthe total product costs.costs of $1.0 million recorded in cost of revenue. For the three and nine months ended October 31, 2011, one and twoApril 30, 2012, three suppliers accounted for approximately $654,000 or 44 percent of our CM’s provided an aggregate of 41 and 98 percent, respectively, ofthe total product costs. During the first quartercosts of fiscal 2013, we began procuring all$1.5 million recorded in cost of the components included in the bill of materials for the product we sell to Lenovo. In fiscal 2012, we procured the finished good directly from Power and they were responsible for procuring the components.
6. Inventory
Inventory, net of reserves, consists of the following (in thousands):
October 31, 2012 | January 31, 2012 | |||||||
Raw materials | $ | 825 | $ | 1,002 | ||||
Finished goods | 394 | 129 | ||||||
| $ | 1,219 | $ | 1,131 | |||||
April 30, 2013 | January 31, | |||||||
Raw materials | $ | 402 | $ | 397 | ||||
Finished goods | 202 | 69 | ||||||
| $ | 604 | $ | 466 | |||||
As of OctoberApril 30, 2013 and January 31, 2012,2013, approximately $680,000$596,000 and $720,000 of total gross inventory, respectively, was located at our corporate headquarters. The remaining balance is located at various contract manufacturer locations in the United States and Asia.
7. Accrued Liabilities
Accrued liabilities consist of historical warranty claims experience. These amounts are recordedthe following (in thousands):
April 30, 2013 | January 31, | |||||||
Accrued payroll and related expenses | $ | 136 | $ | 147 | ||||
Uninvoiced materials and services received | 1,750 | 1,269 | ||||||
Accrued legal and professional fees | 272 | 169 | ||||||
Accrued warranty | 68 | 68 | ||||||
Other | 185 | 136 | ||||||
| $ | 2,411 | $ | 1,789 | |||||
At April 30, 2013, approximately $1.5 million or 84 percent of total uninvoiced materials and services of $1.8 million, included in accrued liabilities were payable to Power and Zheng Ge. At January 31, 2013, approximately $1.1 million or 85 percent of total uninvoiced materials and services of $1.3 million, included in accrued liabilities, were payable to Power and Zheng Ge. We ceased paying Zheng Ge during the course of the Bronx product recall.
8. Loan Agreements
As previously reported, on February 11, 2013, the Company and Elkhorn Partners Limited Partnership (“Elkhorn”), entered into a Secured Loan Agreement (the “Elkhorn Loan Agreement”) and a Stock Purchase Agreement (the “Elkhorn SPA”), and certain related agreements, which are described below (collectively, the “Elkhorn Agreements”). Pursuant to those Agreements, Elkhorn has made a $1.5 million senior secured loan to the Company with a maturity date of November 30, 2014 and has purchased a total of 6,250,000 shares of the Company’s common stock at a cash purchase price of $0.16 per share, generating an additional $1.0 million of cash for the Company. The average of the closing prices of the Company’s common stock in the unaudited interim condensed consolidated balance sheets. Changes inover-the-counter market for the estimated warranty accruals are recorded when the change in estimate is identified. A summary of the warranty accrual activity as offive trading days immediately preceding February 11, 2013 was $0.14 per share and, for the nine months29 trading days that began on January 2, 2013 and ended October 31, 2012on February 8, 2013, was $0.158 per share. On February 11, 2013, the Company used approximately $2.1 million of the proceeds of $2.5 million from the Elkhorn Loan and 2011 is shown in the table below (in thousands):
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Secured Loan Agreement with Elkhorn Partners.
The Elkhorn Loan, which is evidenced by a promissory note (the “Elkhorn Note”), issued by the Company to Elkhorn, bears interest at 7% for the first 12 months of the Loan, increasing to 8.5% thereafter and continuing until the Loan is paid in full. The Loan matures on November 30, 2014 (the “Maturity Date”); however, the Company has the right, at its option, to prepay the Elkhorn Loan, in whole or in part, without penalty or premium.
The Elkhorn Loan Agreement provides that if and to the extent the Company does not pay the Elkhorn Loan in full by its Maturity Date, then, Elkhorn will have the right, at its option (but not the obligation), to convert the then unpaid balance of the Loan, in whole or in part, into shares of Company common stock at a conversion price of $0.25 per share. That conversion price is subject to possible adjustment on (i) certain sales of Company common stock at a price lower than $0.25 per share, (ii) stock splits of, stock dividends on and any reclassification of the Company’s outstanding shares, and (iii) certain mergers or reorganizations of the Company, as provided in Article III of the Elkhorn Loan Agreement.
The Elkhorn Loan Agreement contains customary representations and warranties of and affirmative and negative covenants on the part of the Company and CWT. The Agreement also provides that the Elkhorn Loan, together with accrued interest, will become immediately due and payable upon the occurrence of an Event of Default, which is defined in the Loan Agreement to include each of the following, among others: (i) a failure of the Company to pay the principal of or accrued interest on the Loan which continues unremedied for three calendar days (except that such grace period shall not apply to amounts due at the Maturity Date of the Loan), (ii) the Company or CWT commits a breach of any of their other material obligations under the Loan Agreement or under any of the Debt Related Agreements (described below) and the breach which remains uncured for a period ranging from 15 days to 30 days (depending on the nature of the breach) following receipt of notice of the breach from Elkhorn; (iii) any of the representations or warranties of the Company or CWT contained in the Loan Agreement prove to have been untrue or incorrect in any material respect, (iv) the Company or CWT fails to pay indebtedness in the amount of $200,000 or more owed to any other creditor, (v) one or more judgments are entered against the Company or CWT in an aggregate amount of $200,000 or more, which are not satisfied, discharged, stayed or bonded against within the succeeding 30 days, and (vi) the filing by the Company of a voluntary petition in bankruptcy or the Company’s failure to obtain the dismissal, within 60 days, of an involuntary petition filed against it in bankruptcy, or a receiver or liquidator is appointed over, or an attachment is issued against a substantial part of the assets of the Company or CWT, which in either case remains undismissed for the succeeding thirty (30) days.
Upon the occurrence and during the continuance of an Event of Default, interest on the Loan will accrue at the lesser of (i) 15% per annum or (ii) the highest rate permitted by applicable law.
Debt Related Agreements. In connection with the Elkhorn Loan Agreement, the Company and CWT entered into a Security Agreement and the Company entered into a Pledge Agreement (collectively, the “Debt Related Agreements”) with Elkhorn to secure the payment and performance by the Company and CWT of their respective obligations under the Loan Agreement and the Debt Related Agreements. Set forth below is a summary of those Agreements.
Security Agreement. As security for the performance of their respective obligations under the Elkhorn Loan Agreement and the Debt Related Agreements, the Company and CWT have entered into a security agreement (the “Security Agreement”) granting Elkhorn a first priority perfected security interest in all of their assets, including their intellectual property rights. The Security Agreement provides that, on the occurrence and during the continuance of an Event of Default, whether by the Company or CWT, Elkhorn will become entitled to take possession of and to sell the assets of the Company and CWT to the extent necessary to recover the amounts due Elkhorn under the Loan Agreement and any other amounts that may be due and payable to Elkhorn under any of the Debt Related Agreements.
As of and for the Nine Months Ended October 31, | ||||||||
| 2012 | 2011 | |||||||
| Beginning balance | $ | 193 | $ | 310 | ||||
| Accruals for warranties issued during the period | — | 318 | ||||||
| Utilization | (125 | ) | (548 | ) | ||||
| $ | 68 | $ | 80 | |||||
TheCOMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Pledge Agreement. As additional security for the payment and performance of its obligations under the Elkhorn Loan Agreement, the Company believes that the balance remaining ashas entered into a Pledge Agreement (the “Pledge Agreement”) pursuant to which it has pledged and will deliver possession to Elkhorn of October 31, 2012 is adequate to cover standard warranty costs and believes that we have paid for substantially all of our materialCWT’s outstanding shares. The Pledge Agreement provides, among other things, that upon the occurrence and during the continuance of an Event of Default, Elkhorn will become entitled to transfer the CWT shares into its name, to vote those shares and, subject to applicable securities laws, to sell those shares in order to recover amounts owed to it by the Company.
Elkhorn Stock Purchase Agreement
Concurrently with the Company’s entry into the Loan Agreement, the Company and Elkhorn entered into the Elkhorn SPA. Pursuant to that Agreement, the Company sold 6,250,000 shares of its common stock to Elkhorn at a price of $0.16 per share, resulting in an aggregate purchase price of $1.0 million. As noted above, that purchase price compares to an average per share closing price for Comarco’s shares of $0.14 during the five trading days immediately preceding the sale of the shares to Elkhorn, and an average per share closing price of $0.158 for the 29 trading days that that began on January 1, 2013 and ended on February 8, 2013.
The purchase price of $0.16 per share paid by Elkhorn for those shares was determined by arms-length negotiations between Elkhorn and the members of a special committee of the Company’s Board of Directors, comprised of three of the directors who have no affiliation with Elkhorn and no financial obligationsinterest, other than their interests solely as shareholders of the Company, in either the loan or share transactions with respectElkhorn. That per share purchase price was determined based on a number of factors, including the Company’s inability, notwithstanding its best efforts, to raise additional capital from other prospective institutional investors during the Bronx product recall.
Senior Secured Six Month Term Loan Agreement
The Company entered into a Senior Secured Six Month Term Loan Agreement dated July 27, 2012 (the “Loan Agreement”) with Broadwood, a partnership managed by Broadwood Capital, Inc., the general partner of Broadwood. Broadwood is a significant shareholder of the Company.
Pursuant to that Agreement, Broadwood made a $2,000,000 senior secured six month loan (the “Loan”) to the Company and to CWT, as co-borrower. The Loan bearsloan bore interest at 5% per annum, ranksranked senior in right of payment to all other indebtedness of the Company and iswas due and payable in full on January 28, 2013. The Company is using the net proceeds of the Loan primarily to fund its working capital requirements and those of CWT, but may use up to $400,000 of those proceeds to fund capital expenditures required in the conduct of its business and the business of CWT. The Company intendsoriginally intended to repay the Loan and accrued interest from the $3.0 million in proceeds that was expected to be received from Broadwood in the fourth quarter of fiscal 2013, pursuant to the Broadwood Stock Purchase Agreement discussed below.
On January 28, 2013, the succeeding eight years.
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the first quarter of the Company’s outstanding shares and is the Company’s largest shareholder. Iffiscal 2014, the Company sells a total of 3,000,000 Shares to Broadwoodrepaid the amounts outstanding under the Stock PurchaseBroadwood Loan Agreement then Broadwood’s share ownership would increase to approximately 43 percent of the Company’s outstanding shares, and would further increase to approximately 55 percent of the Company’s outstanding shares, if Broadwood were to exercise the Warrants and the Additional Warrants in their entirety. The Warrants and Additional Warrant shares are recorded as derivative liabilities in our condensed consolidated balance sheet (see Note 11).
9. Fair Value Measurements
We follow FASB ASC 820, "Fair Value Measurements and Disclosures" (“ASC 820”), in connection with assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The guidance applies to our derivative liabilities. We had no assets or liabilities measured at fair value on a non-recurring basis for any period reported.
ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories. We measure the fair value of applicable financial and non-financial assets based on the following fair value hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.
The fair value of our recorded derivative liabilities is determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.
The hierarchy noted above requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. There were no transfers between Level 1, Level 2 and/or Level 3 during fiscal 2014. Our fair value measurements at the October 31, 2012April 30, 2013 reporting date are classified based on the valuation technique level noted in the table below (in thousands):
Description | April 30, 2013 | Quoted Prices in Active Markets for (Level 1) | Significant Other Observable (Level 2) | Significant Unobservable (Level 3) | ||||||||||||
Derivative Liabilities | $ | 3,857 | $ | -- | $ | -- | $ | 3,857 | ||||||||
| Description | October 31, 2012 | Quoted Prices in Active Markets for (Level 1) | Significant Other Observable (Level 2) | Significant Unobservable (Level 3) | ||||||||||||
| Derivative Liabilities | $ | 1,754 | $ | -- | $ | -- | $ | 1,754 | ||||||||
The following outlines the significant weighted average assumptions used to estimate the fair value information presented in connection with our outstanding and contingent warrants issued to Broadwood as described in Note 108 utilizing the Monte Carlo simulation model:
April 30, 2013 | ||||
| 1.16% | ||||
Average expected life (years) | 7.24 | |||
Expected volatility | 109.72% | |||
Expected dividends | None | |||
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following outlines the significant weighted average assumptions used to estimate the fair value information presented in connection with the derivative liabilities associated with our Elkhorn Loan as described in Note 8 utilizing the Monte Carlo simulation model:
April 30, 2013 | ||||
Risk free interest rate | 0.17% | |||
Average expected life (years) | 1.59 | |||
Expected volatility | 172.57% | |||
Expected dividends | None | |||
The table below sets forth a summary of changes in the fair value of our Level 3 financial instruments for the three months ended Octobersince January 31, 20122013 (in thousands):
January 31, | Recorded New Derivative | Change in estimated fair value recognized in results of operations | April 30, | |||||||||||||
Derivative liabilities | $ | 2,466 | $ | 624 | $ | 767 | $ | 3,857 | ||||||||
July 31, 2012 | Recorded New Derivative Liabilities | Change in estimated fair value recognized in results of operations | October 31, 2012 | |||||||||||||
| Derivative liabilities | $ | 1,365 | $ | – | $ | 389 | $ | 1,754 | ||||||||
Purchase Commitments with Suppliers
We generally issuesissue purchase orders to itsour suppliers with delivery dates from four to six weeks from the purchase order date. In addition, the Companywe regularly providesprovide significant suppliers with rolling six-month forecasts of material and finished goods requirements for planning and long-lead-timelong-lead time parts procurement purposes only. The Company isWe are committed to accepting delivery of materials pursuant to itsour purchase orders subject to various contract provisions that allow itus to delay receipt of such order or allow itus to cancel orders beyond certain agreed lead times. Such cancellations may or may not include cancellation costs payable by the Company.us. In the past, the Company haswe have been required to take delivery of materials from itsour suppliers that were in excess of itsour requirements, and the Company haswe have previously recognized charges and expenses related to such excess material. During the second quarter of fiscal 2012If we accrued a charge of $380,000 relating to such excess material relating to purchase commitments made to support the Targus business.
Executive Severance Agreements
We have severance compensation agreements with certain of our key executives. These agreements require the Companyus to pay these executives, in the event of certain terminationsa termination of employment following a change of control of the Company up toor other circumstances, the amount of their then current annual base salary and the amount equal toof any bonus whichamount the executive would have earnedachieved for the year in which the termination occurs plus the acceleration of unvested options. Since a change of control has not occurred, weWe have not recorded any liability in the unaudited interim condensed consolidated financial statements for these agreements.
Although the contemplated sale of shares of common stock and the issuance of the Warrants and possible issuance of the Additional Warrant Shares by the Company to Broadwood (See Note 8) could result in a "Changechange of Control"control for purposes of the severance compensation agreements, each of the executives who are parties to those agreements has waived their rights to receive payments under those agreements in the event that a "Changechange of Control"control occurs as a result of the sale of shares and the issuance of Warrants and Additional Warrants to Broadwood.
COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Additionally, as a result of the Company’s sale of the 6,250,000 shares of common stock to Elkhorn during the first quarter of fiscal 2014 (see Note 8), Elkhorn’s beneficial ownership of the Company has increased from approximately 9% to approximately 49% of the Company’s outstanding voting stock, making Elkhorn the Company’s largest shareholder and resulting in a change of control of for purposes of the severance compensation agreements. Each of the executives who are parties to those agreements has waived their rights to receive payments under those agreements as a result of the change in Elkhorn’s beneficial ownership of the Company.
Letter of Credit
During the first quarter of fiscal 2010, the Company obtained a $77,000 letter of credit from Silicon Valley Bank (“SVB”) to allow for continuous and unlapsed compliance with a lease provision for the Company’s corporate offices. The letter of credit expires on August 1, 2014.
Legal Proceedings and Contingencies
On April 26, 2011, Chicony, the contract manufacturer of the Bronx product that was the subject of a product recall, filed a complaint against us for breach of contract, seeking payment of $1.2 million for the alleged non-payment by us of amounts alleged by Chicony to be due it for products purchased from it by the Company. 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. On April 16, 2013, the court approved our first-amended cross-complaint, which adds intentional interference to our complaint and increases the damages we seek to at least $15.0 million. The trial date is currently set for April 8,October, 2013. In an effort to resolve this litigation before the existingprevious trial date of April, 2013, we sent Chicony a settlement offer, which has since lapsed. During the fourth quarter of fiscal 2013, we received reimbursement of previously incurred legal fees in the amount of $0.4 million from our insurance carrier under a reservation of rights. The outcome of this matter is not determinable as of the date of the filing of this report. We have previously accrued $1.1 million for the possibility that we could incur a liability to Chicony should it prevail in the lawsuit.
On September 1, 2011, subsequent to receiving an infringement notification from us, 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. The five Comarco patents are U.S. Patent Nos. 6,831,848 titled "Programmable Power Supply to Simultaneously Power a Plurality of Electronic Devices"; 7,495,941 titled "Power Supply Equipment with Matching Indicators on Converter and Connector Adaptors"; 7,613,021 titled "Small Form Factor Power Supply"; 7,863,770 titled "Power Supply Equipment for Simultaneously Providing Operating Voltages To a Plurality of Devices"; and 7,999,412 titled "Detachable Tip for Communicating with Adapter and Electronic Device.” On February 29, 2012, we denied these claims and filed a cross-complaint alleging infringement by Kensington of each of these five patents. The court required that the parties mediateEfforts to resolve the dispute, by the end of July, 2012. Although the parties met forcourt ordered mediation, the dispute was not settled.have been unsuccessful. Currently, the trial date is set for April,January, 2014. A number of these patents are currently the subject of re-examination proceedings initiated by Kensington or other third parties. This matter is ongoing and the outcome is not determinable, however if we do not prevail we will likely not obtain a license agreement to earn future license revenue from products sold by Kensington. Conversely, should we prevail the Company may be awarded a royalty which would generate license revenue to the Company in the future.
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 are unable to predict the ultimate outcome of these matters.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements, and the related notes and other financial information appearing elsewhere in this quarterly report on Form 10-Q.
Forward-Looking Statements
This report, including the following discussion and analysis, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” and similar expressions or variations of such words are intended to identify forward-looking statements but are not deemed to represent an all-inclusive means of identifying forward-looking statements included in this report. Additionally, statements concerning future matters are forward-looking statements.
These forward-looking statements reflect current views about our plans, strategies, and prospects but are only based on facts and factors known by us as of the date of this report. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements.
Forward-looking statements in this report include those related to our objectives; our products and the availability of future products; our future strategies, sales, revenues, and costs; the timing of fulfillment of purchase orders and completion of projects; demand for our products; and the sufficiency of our cash and cash equivalent balances. Many risk factors and uncertainties may cause our actual financial results to differ materially from those discussed in any such forward-looking statements. Those risk factors and uncertainties include, but are not limited to: the risk that we will be unable to continue our business as a going concern if our internally generated cash flows are not sufficient to fund our operations and we are unable to obtain funds from external sources to make up the resulting cash shortfall; deterioration or loss of our relationship with Lenovo, our principal customer; the impact of general economic and retail uncertainty and perceived or actual weakening of economic conditions on customers’ and prospective customers’ spending on our products; quarterly and seasonal fluctuations in our revenue or other operating results; fluctuations in the demand for our products and the fact that a significant portion of our revenue is derived from a limited number of customers,one customer, Lenovo, the loss of any of whichwhom would materially and adversely affect our revenues and prevent us from funding our operations in the future; unexpected difficulties and delays associated with our efforts to achieve higher sales volumes for our ChargeSource® products or to obtain cost reductions, including risks related to market acceptance of our products; failure to accurately forecast customer demand and the risk that our customerscustomer may cancel their orders, change production quantities or delay production; the fact that our products are complex and have short life cycles and the average selling prices of our products will likely decrease over their sales cycles; disruptions in our relationships with our suppliers; failure to meet financial expectations of analysts and investors; risks related to our ability to meet contractual and technical commitments with our customers;customer; activities by us and others regarding protection of intellectual property; competitors’ release of competitive products and other actions; product recalls and product liability claims; the loss of key employees; and costs and potential adverse determinations in pending litigation. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, we cannot assure that the results contemplated in forward-looking statements will be realized in the timeframe anticipated or at all. In light of the significant uncertainties inherent in the forward-looking information included in this report, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans or that our future financial results or outcomes, as set forth in the forward looking statements in this report will be achieved. Accordingly, investors are cautioned not to place undue reliance on our forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In addition to the risks, uncertainties, and other factors discussed above or elsewhere in this quarterly report on Form 10-Q, the risks, uncertainties, and other factors that could cause or contribute to actual results differing materially from those expressed or implied in any forward-looking statements include, without limitation, those set forth under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 20122013, filed with the SEC, as such risk factors are supplementedSecurities and amended in this Form 10-Q under Part II, Item 1A. below,Exchange Commission (the “SEC”) on April 30, 2013, those contained in the Company’s other filings with the SEC, and those set forth above. Readers of this report are urged to review the descriptions of those risks and uncertainties contained in those other reports.
Going Concern Qualification
The Company has experienced pre-tax losses from continuing operations in the nine months ended October 31, 2012 and 2011 totaling $2.8 million and $3.9 million, respectively. In addition, the Company experienced pre-tax losses from operations for the first fiscal 2012quarters of fiscal 2014 and fiscal 2013 totaling $5.3 million.$634,000 and $712,000, respectively. The Company also has negative working capital and uncertainties surrounding the Company’s future ability to obtain borrowings and raise additional capital. These factors, among others, raise substantial doubt about our ability to continue as a going concern.
Basis of Presentation
The financial information presented in this report is not audited and is not necessarily indicative of our future consolidated financial position, results of operations, or cash flow. Our fiscal year ends on January 31 and our fiscal quarters end on April 30, July 31, and October 31. Unless otherwise stated, all dates refer to our fiscal year and fiscal periods.
Executive Summary
Comarco, Inc., through its wholly-owned subsidiary Comarco Wireless Technologies, Inc. (collectively, “we,” "us," "our," “Comarco,” or the “Company”), is a developer and designer of innovative mobile power products. These standalone, multi-function mobiletechnologies and intellectual property currently used in power adapters are used to simultaneously power and charge notebookbattery powered devices such as laptop computers, mobiletablets, smart phones smartphones, E-readers, iPads®, and iPods®.readers. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”).
In addition to the risks, uncertainties and factors discussed elsewhere in this quarterly report on Form 10-Q and in the Company’s other filings with the SEC, management currently considers the following additional trends, events, and uncertainties to be important to an understanding of our results of operations for the quarter ended October 31, 2012:
● | On February 11, 2013, we entered into a Secured Loan Agreement (the “Loan Agreement”) with Elkhorn Partners Limited Partnership (“Elkhorn”). Pursuant to the Loan Agreement, on February 11, 2013, Elkhorn made a $1,500,000 senior secured term loan (the “Loan”) to us. The Loan bears interest at 7% per annum for the |
● | Concurrent with the execution of the Loan Agreement, Elkhorn entered into a Stock Purchase Agreement with us (the “Stock Purchase Agreement”). Pursuant to that Stock Purchase Agreement, we sold 6,250,000 shares of our |
● | As a result of our sale of the 6,250,000 shares of common stock to Elkhorn pursuant to the Elkhorn Stock Purchase Agreement, Elkhorn’s beneficial ownership has increased from approximately 9% to approximately 49% of our outstanding voting stock, making Elkhorn our largest shareholder. |
● | On January 28, 2013, Broadwood Partners, L.P. (“Broadwood”) informed us of its position that one or more of the conditions precedent to its obligation to purchase shares of our common stock pursuant to the SPA had not been satisfied and, as a result, Broadwood would not consummate that purchase. See Note 8 to our condensed consolidated financial statements contained elsewhere in this report for additional information. |
● | On July 28, 2012, |
● | On July 27, 2012, |
● | Revenue for the |
● | We are focused on |
Simultaneously, we are working to build sales of our newest generation AC adapter, branded ChargeSource®. This product line is currently available exclusively on our retail website www.chargesource.com. We anticipate analyzing additional marketing and sales avenues for our ChargeSource product line during the balance of calendar 2012 and into 2013. There can be no assurances, however, regarding the success of these efforts.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interim condensed consolidated financial statements, contained elsewhere in this report, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from our estimates.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Management believes that other than Derivative Liabilities and Classification, described in Note 2 of Part I, Item 1 of this report, there have been no significant changes during the three and nine months ended October 31, 2012April 30, 2013 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the fiscal year ended January 31, 2012.
Results of Operations – Continuing Operations
Three Months Ended October 31, | Nine Months Ended October 31, | Year over Year % Change | ||||||||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | Three Months | Nine Months | |||||||||||||||||||
Revenue | $ | 1,135 | $ | 2,252 | $ | 5,018 | $ | 7,128 | (50 | %) | (30 | %) | ||||||||||||
Operating loss | $ | (1,337 | ) | $ | (734 | ) | $ | (1,841 | ) | $ | (3,903 | ) | ||||||||||||
| Net loss from continuing operations | $ | (2,244 | ) | $ | (760 | ) | $ | (2,805 | ) | $ | (3,933 | ) | ||||||||||||
Three Months Ended October 31, | Nine Months Ended October 31, | Year over Year % Change | ||||||||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | Three Months | Nine Months | |||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
North America | $ | 11 | $ | 362 | $ | 57 | $ | 2,078 | (97 | %) | (97 | %) | ||||||||||||
Europe | 5 | 22 | 13 | 35 | (77 | %) | (63 | %) | ||||||||||||||||
Asia | 1,119 | 1,868 | 4,948 | 5,015 | (40 | %) | (1 | %) | ||||||||||||||||
| $ | 1,135 | $ | 2,252 | $ | 5,018 | $ | 7,128 | |||||||||||||||||
Three Months Ended October 31, | Nine Months Ended October 31, | Year over Year % Change | ||||||||||||||||||||||||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | Three Months | Nine Months | |||||||||||||||||||||||||||||||||||
| % of Revenue | % of Revenue | % of Revenue | % of Revenue | |||||||||||||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||||||||||||
Dell | $ | — | — | $ | 376 | 17 | % | $ | 67 | 1 | % | $ | 1,061 | 15 | % | (100 | %) | (94 | %) | |||||||||||||||||||||
Lenovo | 1,119 | 99 | % | 1,826 | 81 | % | 4,913 | 98 | % | 4,773 | 67 | % | (39 | %) | 3 | % | ||||||||||||||||||||||||
| Targus | — | — | — | — | — | — | 1,174 | 16 | % | — | (100 | %) | ||||||||||||||||||||||||||||
Other | 16 | 1 | % | 50 | 2 | % | 38 | 1 | % | 120 | 2 | % | (68 | %) | (68 | %) | ||||||||||||||||||||||||
| $ | 1,135 | 100 | % | $ | 2,252 | 100 | % | $ | 5,018 | 100 | % | $ | 7,128 | 100 | % | (50 | %) | (30 | %) | |||||||||||||||||||||
The following tables set forth certain items as a percentage of revenue from our unaudited interim condensed consolidated statements of operations for the three and nine months ended October 31, 2012April 30, 2013 and 2012:
Revenue
Three Months Ended April 30, | ||||||||||||||||||||
2013 | 2012 | 2013 over 2012 % Change | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||
% of Revenue | % of Revenue | |||||||||||||||||||
Revenue | $ | 1,413 | 100% | $ | 2,201 | 100% | (36% | ) | ||||||||||||
Operating loss | $ | (634 | ) | $ | (712 | ) | ||||||||||||||
Net loss | $ | (1,474 | ) | $ | (712 | ) | ||||||||||||||
Revenue by Geographic Region
Three Months Ended April 30, | ||||||||||||||
2013 | 2012 | 2013 over 2012 % Change | ||||||||||||
(In thousands) | ||||||||||||||
Revenue: | ||||||||||||||
North America | $ | 46 | $ | 41 | 12 | % | ||||||||
Asia | 1,364 | 2,155 | (37% | ) | ||||||||||
Other | 3 | 5 | (40% | ) | ||||||||||
| $ | 1,413 | $ | 2,201 | (36% | ) | |||||||||
The revenue by geographic region is determined by the ship to address. Sales to Lenovo, our only significant customer, ship to a fulfillment center in China, but their customers, the end-users of our products, are located domestically, as well as internationally.
Revenue by Customer
Three Months Ended April 30, | ||||||||||||||
2013 | 2012 | 2013 over 2012 % Change | ||||||||||||
(In thousands) | ||||||||||||||
Revenue: | ||||||||||||||
Dell | $ | — | $ | 52 | (100% | ) | ||||||||
Lenovo | 1,378 | 2,137 | (36% | ) | ||||||||||
Other | 35 | 12 | 192 | % | ||||||||||
| $ | 1,413 | $ | 2,201 | (36% | ) | |||||||||
Revenue
The decrease in revenue of $0.8 million for the first quarter of fiscal 2014 compared with the first quarter of fiscal 2013 is primarily attributable to a reduction in revenue generated from Lenovo, who is currently our only significant customer. Revenue from shipments to Lenovo decreased by $1.1$0.8 million or 5036 percent and $2.1 million, or 30 percent,in the first quarter of fiscal 2014 compared to the corresponding periodsprior year period. The decrease in the first quarter of fiscal 2014 relates, in part, to our filling in the first quarter of fiscal 2013 a prior year backlog created by a supply chain disruption that occurred in the fourth quarter of fiscal 2012. AsAlso, as previously discussed,announced, we electeddecided to exit the Dell business due to low sales volumes and thin product margins. Revenue from shipments to Dell decreased $0.4 million or 100 percent and $1.0 million or 94 percent, respectively, during the three and nine months ended October 31, 2012. We completed the wind down of our Dell business relationship in May 2012. Additionally, revenue to Lenovo decreased during the three months ended October 31, 2012 by $0.7, compared to the corresponding period of the prior fiscal year. The decrease was due, primarily, to a drop in Lenovo’s business customer demand for the quarter. At present, we have no way to know whether this decline in demand is unique to this quarter or part of a longer term trend. Finally, we received no revenue from Targus during the first three quarters of fiscal 2013 and do not expect any revenues from Targus in the future. As previously discussed, on January 25, 2011, we received written notification from Targus of its non-renewal of the Strategic Product Development and Supply Agreement with us.
Cost of Revenue and Gross Margin
Three Months Ended October 31, | Nine Months Ended October 31, | Year over Year % Change | ||||||||||||||||||||||||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | Three Months | Nine Months | |||||||||||||||||||||||||||||||||||
| % of Total | % of Total | % of Total | % of Total | |||||||||||||||||||||||||||||||||||||
| Cost of revenue: | ||||||||||||||||||||||||||||||||||||||||
Product cost | $ | 770 | 83 | % | $ | 1,385 | 72 | % | $ | 3,420 | 128 | % | $ | 4,052 | 58 | % | (44 | %) | (16 | %) | ||||||||||||||||||||
Accrued product recall costs | — | — | (103 | ) | (5 | %) | — | — | 247 | 4 | % | (100 | %) | (100 | %) | |||||||||||||||||||||||||
Supplier settlement | — | — | — | — | (1,443 | ) | (54 | %) | 383 | 6 | % | — | (477 | %) | ||||||||||||||||||||||||||
Supply chain overhead | 147 | 16 | % | 422 | 22 | % | 611 | 23 | % | 1,453 | 21 | % | (65 | %) | (58 | %) | ||||||||||||||||||||||||
Inventory reserve and scrap charges | 12 | 1 | % | 222 | 11 | % | 84 | 3 | % | 797 | 11 | % | (95 | %) | (89 | %) | ||||||||||||||||||||||||
| $ | 929 | 100 | % | $ | 1,926 | 100 | % | $ | 2,672 | 100 | % | $ | 6,932 | 100 | % | (52 | %) | (62 | %) | |||||||||||||||||||||
Three Months Ended October 31, | Nine Months Ended October 31, | Year over Year ppt Change | ||||||||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | Three Months | Nine Months | |||||||||||||||||||
Gross profit | 18 | % | 14 | % | 47 | % | 3 | % | 4 | 44 | ||||||||||||||
Three Months Ended April 30, | ||||||||||||||||||||
2013 | 2012 | 2013 over 2012 % Change | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||
% of | % of | |||||||||||||||||||
Cost of revenue: | ||||||||||||||||||||
Product costs | $ | 960 | 86 | % | $ | 1,492 | 80 | % | (36% | ) | ||||||||||
Fixed supply chain overhead | 160 | 14 | % | 242 | 13 | % | (34% | ) | ||||||||||||
Inventory reserve and scrap charges | — | — | 135 | 7 | % | (100% | ) | |||||||||||||
| $ | 1,120 | 100 | % | $ | 1,869 | 100 | % | (40% | ) | |||||||||||
Three Months Ended April 30, | ||||||||||||||
2013 | 2012 | 2013 over 2012 ppt Change | ||||||||||||
Gross margin | 21 | % | 15 | % | 6 | |||||||||
The first quarter of fiscal 2014 decrease in cost of revenue for the three and nine months ended October 31, 2012 decreased by $1.0of $0.7 million or 52 percent, and $4.3 million, or 62 percent, respectively, compared to the corresponding periodsfirst quarter of fiscal 2012.2013 was attributable to several factors. The decreasedecline in product costs is primarily attributable toof 36 percent in the decreases in sales for the three and nine months ended October 31, 2012first quarter of fiscal 2014 compared to the comparable prior year periods.first quarter of fiscal 2013 compares to the corresponding decline in revenue of 36 percent. During the first quarter of fiscal 2012, we recorded an additional accrual of $350,000 for the recall of our Bronx product, however $103,000 of that amount was recovered in the third quarter due to a payment received from Targus pursuant to a settlement agreement executed between Targus and us resolving all matters related to the recall. No similar costs were incurred in the comparable periods of the current fiscal year. During the second quarter of fiscal 2013 we entered a Settlement Agreement with EDAC Power Electronics, Co. Ltd. (“EDAC”) ending the litigation among the parties. As a direct result of the settlement, the Company reversed previously incurred product and freight costs and discharged $1.4 million in net liabilities due to EDAC. Additionally, during the second quarter of fiscal 2012 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.
Operating Costs and Expenses
Three Months Ended October 31, | Nine Months Ended October 31, | Year over Year % Change | ||||||||||||||||||||||||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | Three Months | Nine Months | |||||||||||||||||||||||||||||||||||
% of Revenue | % of Revenue | % of Revenue | % of Revenue | |||||||||||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||||
| SG&A expenses, excluding corporate overhead | $ | 80 | 7 | % | $ | 140 | 6 | % | $ | 190 | 4 | % | $ | 602 | 8 | % | (43 | %) | (68 | %) | ||||||||||||||||||||
Corporate overhead | 823 | 73 | % | 423 | 19 | % | 2,113 | 42 | % | 2,026 | 28 | % | 95 | % | 4 | % | ||||||||||||||||||||||||
| Engineering and support expenses | 640 | 56 | % | 497 | 22 | % | 1,884 | 38 | % | 1,471 | 21 | % | 29 | % | 28 | % | ||||||||||||||||||||||||
| $ | 1,543 | 136 | % | $ | 1,060 | 47 | % | $ | 4,187 | 84 | % | $ | 4,099 | 57 | % | 46 | % | 2 | % | |||||||||||||||||||||
Three Months Ended April 30, | ||||||||||||||||||||
2013 | 2012 | 2013 over 2012 % Change | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating expenses: | % of | % of | ||||||||||||||||||
Selling, general, and administrative expenses, excluding corporate overhead | $ | 18 | 1 | % | $ | 65 | 3 | % | (72 | %) | ||||||||||
Corporate overhead | 630 | 45 | % | 438 | 20 | % | 44 | % | ||||||||||||
Engineering and support expenses | 279 | 20 | % | 541 | 25 | % | (48 | %) | ||||||||||||
| $ | 927 | 66 | % | $ | 1,044 | 47 | % | (11 | %) | |||||||||||
Selling, general, and administrative (“SG&A”) expenses fordecreased by approximately $47,000 during the three and nine months ended October 31, 2012 decreased $60,000 or 43 percent and $0.4 million or 68 percent, respectively,first quarter of fiscal 2014, compared to the corresponding periodssame period of fiscal 2012. In the prior fiscal year, through August 2011, we had an executive serving in the sales and marketing capacity.year. We currently have no employees in our sales and marketing departments,department, but instead utilizeduring fiscal 2013 we utilized various consultants who arewere focused on digital media and search engine optimization to assist us with generation of sales on our retail websitewww.chargesource.com, which was launched in the fourth quarter of fiscal 2012. Additionally, inDuring the thirdfirst quarter of fiscal 2013 we engaged a marketing firm2014, the expenses incurred relate mostly to address marketing and branding strategies ofsamples for new product for our ChargeSource product portfolio.customer, Lenovo.
Corporate overhead generally 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. CorporateThe increase in corporate overhead increased by $0.4of $0.2 million and by $0.1 million forduring the three and nine months ended October 31, 2012, respectively, whenfirst quarter of fiscal 2014 compared to the corresponding periodssame period of the prior fiscal year. The increases in the current year relaterelates primarily to an increase in legal expenses related to the Chicony litigation. The increase in legal expenses related to the Chicony litigation during the nine months ended October 31, 2012 was offset by decreases in other corporate overhead expenses of $0.3 million including board of director compensation, otherincreased legal fees insurance costs and rent and occupancy costs.
Engineering and support expenses generally consist of salaries, employer paid benefits, and other personnel related costs of our design engineers and testing and support personnel, as well as facility and IT costs, professional and consulting fees, patent annuity and maintenance fees, lab costs, material usages, and travel and related costs incurred in the development and support of our products. Engineering and support expenses forThe engineering costs decreased approximately $0.3 million in the three and nine months ended October 31, 2012 increased by $0.1 million or 29 percent and by $0.4 million or 28 percent respectively, duefirst quarter of the current year compared to the first quarter of fiscal 2013 primarily to increasedas a result of decreased legal fees relating to theof $0.2 million incurred in connection with our ongoing Kensington litigation and other patent infringement matters. intellectual property matters as well as a reduction in personnel costs of approximately $52,000.
Interest Expense
The legal fees increased $0.1 million and $0.7 million forcurrent year interest expense relates to accrued interest expense as well as amortization expense of the three and nine months ended October 31, 2012, respectively, compared todebt discount on the legal fees incurredElkhorn Loan. We had no similar expenses in the comparable periodsfirst quarter of the prior fiscal year. The increased legal fees for the nine months ended October 31, 2012 were partially, but not entirely, offset by decreases in the current fiscal year personnel costs, rent and occupancy costs and testing and certification fees, which vary with the timing of new product development.
Loss Due to Change in Fair Value of Derivative Liabilities
For the three and nine months ended October 31, 2012,April 30, 2013, we reported an increase in the fair value of our derivative liabilities of approximately $0.4$0.8 million (See Note 11 of Part I, Item 1 of9 to our condensed consolidated financial statements contained elsewhere in this report).
Other income (expense), net
Other income, net, generally consists primarily of interest income earned on invested cash balances. Our cash balances yielded negligible interest earnings during the first quarter of fiscal 2014 and 2013. However, during the first quarter of fiscal 2014 we received $5,000 in proceeds from the State of California from funds that had previously been escheated to the state.
Income Tax Benefit
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any required valuation allowance. The Company continues to have a fully valued deferred tax asset. This valuation allowance was previously established based on 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 losses and carry forward temporary differences. Additionally, based upon a preliminary review, it appears that a Section 382 ownership change may have occurred during fiscal 2014 as a result of the Elkhorn SPA as discussed in Note 8 to our condensed consolidated financial statements contained elsewhere in this report. The effect of this ownership change may limit the utilization of our net operating loss carryforwards and research and experimentation credits to an annual amount of approximately $40,000. Due to the losses incurred during the first nine monthsquarter of fiscal 2013,2014, the adjusted net deferred tax assets remain fully reserved as of October 31, 2012.
Liquidity and Capital Resources
Cash and cash equivalents at October 31, 2012 decreasedApril 30, 2013 increased $0.3 million to $0.6$0.4 million as compared to $0.9$0.1 million at January 31, 2012.2013. The following table is a summary of our condensed consolidated statementsCondensed Consolidated Statements of cash flows contained elsewhere in this report.
| Nine Months Ended October 31, | ||||||||
| 2012 | 2011 | |||||||
| (in thousands) | ||||||||
| Cash provided by (used in): | ||||||||
Operating activities | $ | (2,296 | ) | $ | (4,871 | ) | ||
Investing activities | $ | (52 | ) | $ | (162 | ) | ||
Financing activities | $ | 2,000 | $ | (1,053 | ) | |||
Three Months Ended April 30, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Cash provided by (used in): | ||||||||
Operating activities | $ | (255 | ) | $ | (718 | ) | ||
Investing activities | (4 | ) | (35 | ) | ||||
Financing activities | 530 | — | ||||||
Operating Activities
Cash used in operating activities was $4.9of $0.3 million for the nine months ended October 31, 2011 andfirst quarter of fiscal 2014 was driven byprimarily attributable to our net loss from continuing operations of $3.9$1.5 million, offset by non-cash depreciation and stock-based compensation expensethe increase in the value of $0.5our derivative liabilities of $0.8 million. On a combined basis,Additionally, our accounts payable and accrued liabilities increased by $0.7 million, and our receivables increased by $0.2 million.
Cash used in operating activities of $0.7 million for the first quarter of fiscal 2013 was primarily attributable to our net loss of $0.7 million. Additionally, our accounts payable and accrued liabilities increased by $1.6 million, and our receivables increased by $2.0 million and our inventory decreased $2.9by $0.5 million duringdue to higher sales volume compared to the nine months ended October 31, 2011. Offsetting these usesfourth quarter of cash, we collected a net $1.2 million in accounts receivable.
Investing Activities
During the nine months ended October 31, 2012,first quarter of fiscal 2014 and 2013 we purchased $62,000$4,000 and $35,000, respectively, of property and equipment, primarily tooling and other equipment used by our contract manufacturers and engineers for the manufacture of our ChargeSource® products, and we reduced our cash collateralized for credit card chargebacks associated with our internet website by $10,000.
Financing Activities; Loan Agreements
On February 11, 2013, we and Elkhorn Partners Limited Partnership (“Elkhorn”), entered into a Secured Loan Agreement (the “Elkhorn Loan Agreement”) and a Stock Purchase Agreement (the “Elkhorn SPA”), and certain related agreements (collectively, the third quarter“Elkhorn Agreements”). Pursuant to those agreements, Elkhorn made a $1.5 million senior secured loan to us with a maturity date of fiscal 2012,November 30, 2014 (the “Elkhorn Loan”) and purchased a total of 6,250,000 shares of our security depositcommon stock at a cash purchase price of $77,000$0.16 per share, generating an additional $1.0 million of cash for our corporate lease became collateralized by cash in a separate bank account. Priorthe Company. On February 11, 2013, we used approximately $2.1 million of the proceeds of $2.5 million from the Elkhorn Loan and the sale of the shares to Elkhorn to pay the third quarterentire principal amount of fiscal 2012,and all accrued interest on the letter of credit was treated as a reduction in available borrowings available to the Company under the SVB Agreement described below.
On July 27, 2012, the Companywe entered into a Senior Secured Six Month Term Loan Agreement (the “Loan“Broadwood Loan Agreement”) with Broadwood.
Pursuant to the Broadwood Loan Agreement, on July 27, 2012, Broadwood made a $2,000,000 senior secured six month loan (the “Loan”“Broadwood Loan”) to the Company.us. The Broadwood Loan bearsbore interest at 5% per annum, ranksranked senior in right of payment to all of our other indebtedness, of the Company, iswas secured by a first priority security interest granted to Broadwood in all of our assets, and iswas due and payable in full on January 28, 2013. In conjunction with theThe Broadwood Loan Agreement we incurred $55,000was paid in loan fees that are reported in interest expense, net in our condensed consolidated statement of operations for the nine months ended October 31, 2012.
Future Operations and the Funding of Liquidity Requirements for the Next 12 Months
As of October 31, 2012,April 30, 2013, we had negative working capital of approximately $4.2 million. During the third quarter of fiscal 2013 the Company’s cash balance declined by approximately $1.1 million. Approximately $0.6$6.4 million, of the decline relatedwhich $3.9 million relates to the ongoing litigation described in Note 12 and approximately $0.1 million related to legal expenses associated with the loan and related agreements described in Note 11 and other public company legal counsel.fair value of derivative liabilities. In order for us to continue our operations for the next twelve months and to be able to discharge our liabilities and commitments in the normal course of business, it will be necessary for us to increase sales, effectively manage operating expenses, successfully conclude and /or prevail in our ongoing litigation and raise additional funds, through either debt and/or equity financing to meet our cash requirements during the next twelve months. No assurance can be given, however, that we will be successful in meeting those operating objectives or cash requirements.
There are several factors and events that could significantly affect our cash flows from operations, including, without limitation the following:
● | Our continued relationship with our primary customer |
● |
The cost and outcome of ongoing litigation with our former contract manufacturer of the Bronx product, the subject of a product recall, and with Kensington, the maker of competitive power adapters; |
● | Our ability to raise additional debt or equity financing; |
● | Our future retail sales of our ChargeSource® products generated from our websitewww.chargesource.com; |
● | Our patent enforcement efforts; |
● | The outcome of our dispute with Broadwood; and |
● | The ability of our contract manufacturers to manufacture our products at the level currently anticipated, and the ability of our products to meet any required specifications. |
As we execute 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 again experience, a negative operating cash flow. We are currently evaluating alternatives for raising additional capital beyond that contemplated by the Stock Purchase Agreement. However, there can be no assurance that the additional financing we willmay 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, enforce our intellectual property, develop new products or sales avenuesrevenue streams or otherwise respond to competitive pressures, our operating results and financial condition could be adversely affected and we may not be able to continue as a going concern. In fiscal 2012,
If we notified approximately 11 companies, including Kensington, thatbecome unable to continue as a going concern, we believemay have to liquidate our assets, and might realize significantly less than the values at which they are manufacturingcarried on our financial statements, and distributing products that infringe on oneshareholders may lose all or morepart of their investment in our patents. One of the companies entered into a license agreement with us shortly after being notified of the infringement. Our patent enforcement efforts are currently focused primarily on the Kensington litigation andcommon stock. The consolidated financial statements included in this report do not reflect any adjustments related to the outcome of this litigation isuncertainty.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are not determinable.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
“Disclosure controls and procedures” are the controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in ourthe reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by an issuer in its Exchange Act reports is accumulated and communicated to the issuer’s management, including our CEOits Principal Executive Officer and CAO,Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing
Our management believes that a disclosure control and evaluating our disclosure controls and procedures, our management recognized that anyprocedure system, of controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achievingthat it will detect or uncover failures within the desired control objectives, as ours are designedCompany to do, and management necessarily wasdisclose material information otherwise required to apply its judgmentbe set forth in evaluating the cost-benefit relationship of possible controlsCompany’s periodic reports.
Under the direction and procedures.
Changes in Rule 13a-15(e) under the Exchange Act). “InternalInternal Control Over Financial Reporting
“Internal control over financial reporting” is a process designed by, or under the supervision of, the issuer’s Principal Executive Officer and Principal Financial Officer, and effected by the issuer’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
(1) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; |
(2) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and |
(3) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements. |
Our management has concluded that, as of October 31, 2012,April 30, 2013, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Our 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 quarter ended October 31, 2012April 30, 2013 did not result in any particular deficiency in our financial reporting for the fiscal quarter then ended April 30, 2013, 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 raise additional capital or improve our working capital position to allow us to hire additional staff.
There waswere no changechanges in our internal controlcontrols over financial reporting that occurred during theour most recently completed fiscal quarter ended October 31, 2012 that has materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. | 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 a product recall, filed a complaint against us for breach of contract seeking payment of $1.2 million for the alleged non-payment by us for 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 attributable to Chicony's failure to adhere to our technical specifications when manufacturing the Bronx product, which we believe resulted in the recall of the product. We filed a first-amended cross-complaint which was approved by the court on April 16, 2013, which adds intentional interference to our complaint and increases the damages to at least $15.0 million. The trial date is currently set for April 8,October, 2013. 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 manufactured and/or sold by Kensington. On February 29, 2012, we denied these claims and filed a cross-complaint alleging infringement by Kensington of each of these five patents. Efforts to resolve the dispute, by court ordered mediation, have been unsuccessful. Currently, the trial date is scheduled for April,January, 2014. A number of these patents are currently the subject of re-examination proceedings initiated by Kensington or other third parties. This matter is ongoing and the outcome is not determinable as of the date of filing this report.
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. We are unable to predict the ultimate outcome of all such matters.
ITEM 1A. | RISK FACTORS |
Our business, future financial condition and results of operations are subject to a number of factors, risks and uncertainties, which areincluding those previously disclosed inunder Part I. Item 1A entitled “Risk Factors” in Part I of our 2012annual report on Form 10-K for the fiscal year ended January 31, 2013, as well as any amendments thereto or additions and changes thereto contained in this quarterly report on Form 10-Q for the quarter ended October 31, 2012. Additional information regarding someand any subsequent filings of those risks and uncertainties is contained in the notes to the condensed consolidated financial statements included elsewhere in this report and in Item 2, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I of this report. The risks and uncertainties disclosed in our 2012 10-K and in our quarterly reports on Form 10-Q. The disclosures in our annual report on Form 10-K, this quarterly report on Form 10-Q and our subsequent reports and filings are not necessarily a definitive list of all of the risks and uncertaintiesfactors that may affect our business, financial condition and future results of operations in the future.
ITEM 6. | EXHIBITS |
31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
______________
* |
The XBRL–related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Exchange Act of 1933 or the Securities Exchange Act of 1934. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| COMARCO, INC. | |||
| Date: | 2013 | /s/ | |
| Thomas W. Lanni | |||
| President and Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| Date: | /s/ ALISHA K. CHARLTON | ||
Alisha K. Charlton | |||
| Vice President and Chief Accounting Officer | |||
(Principal Financial and Accounting Officer) |
EXHIBIT INDEX
Exhibit | Description |
31.1 | Certification of |
31.2 | Certification of |
32.1 | Certification of |
32.2 | Certification of |
| 101.INS* | XBRL Instance Document |
| 101.SCH* | XBRL Taxonomy Extension Schema Document |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | XBRL Taxonomy Extension Definition |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
______________
* | The XBRL–related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Exchange Act of 1933 or the Securities Exchange Act of 1934. |
31