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| CMRO > SEC Filings for CMRO > Form 10-Q on 12-Dec-2008 | All Recent SEC Filings |
12-Dec-2008
Quarterly Report
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 can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements.
Forward-looking statements in this report include those related to our objectives; our products and the availability of future products; our sales, revenues, and costs; the timing of fulfillment of purchase orders and completion of projects; demand for our products; the sufficiency of our cash and cash equivalent balances; our ability to obtain debt or equity financing; and the anticipated closing of the sale of substantially all of our wireless test solutions ("WTS") assets, including the timing thereof, and the estimated net proceeds from such anticipated transaction. Many important factors may cause the Company's actual results to differ materially from those discussed in any such forward-looking statements, including but not limited to the effects of consolidation in the wireless communications industry; the current economic slowdown which adversely impacts our customers' demand for our products and services and the difficulty of accurately estimating demand; our reliance on a limited number of customers for a significant portion of our revenue; increased competition; fluctuation in demand for our products; our ability to develop and introduce new products successfully; the risk of third parties infringing our intellectual property; difficulties and delays associated with our efforts to obtain cost reductions and to reduce the time to market for our ChargeSource ® products; general economic, political, and market conditions; risks associated with the volatility and uncertainty in the capital markets that may adversely impact our results of operations and our ability to raise additional capital; the risk that the proposed sale of WTS assets may fail to close for any reason, including the failure to satisfy the remaining closing conditions, and that actual taxes and transaction costs and fees may exceed our estimates; and litigation. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, we cannot assure that the results contemplated in forward-looking statements will be realized in the timeframe anticipated or at all. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. Accordingly, investors are cautioned not to place undue reliance on our forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In addition to the risks, uncertainties, and other factors discussed elsewhere in this 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, 2008 filed with the SEC, those contained in the Company's other filings with the SEC, and those set forth above. For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
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 subsidiary Comarco Wireless Technologies, Inc. (collectively, "we," "Comarco," or the "Company"), is a leading designer and manufacturer of external mobile power adapters used to power and charge notebook computers, mobile phones, BlackBerry® smartphones, iPods®, and other handheld devices. Comarco is also a provider of wireless test solutions for the wireless industry. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. ("CWT").
Our revenue and related cash flows are primarily derived from sales of our ChargeSource ® products and wireless test solutions ("WTS") products. We have two reportable segments: ChargeSource® and WTS. Performance measurement and resource allocation for the reportable segments are based on many factors and the primary financial measures utilized are revenue and gross profit. See "Business Segment Information" in Note 14 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
The following table sets forth our revenue for the business segments for the three and nine months ended October 31, 2008 and 2007:
Three Months Ended Nine Months Ended
October 31, October 31,
% %
2008 2007 Change 2008 2007 Change
(in thousands) (in thousands)
Revenue:
ChargeSource® $ 3,236 $ 1,893 71 % $ 10,215 $ 2,980 243 %
WTS 1,000 1,206 (17 %) 11,548 5,204 122 %
$ 4,236 $ 3,099 37 % $ 21,763 $ 8,184 166 %
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Management currently considers the following events, trends, and uncertainties to be important to understanding our two business segments and corresponding operating results for the three and nine months ended October 31, 2008.
ChargeSource®
• During the first quarter of fiscal 2008, we entered into a non-exclusive distribution arrangement with Kensington Technology Group ("Kensington"), thereby terminating our exclusive distribution agreement. Under the non-exclusive agreement, we have the right to penetrate all channels with multiple partners and Kensington has the right to purchase our products without volume minimums. Kensington is also able to purchase mobile power products from our competitors.
• In late January 2008, we began volume production of a small form factor 90-watt alternating current/direct current ("AC/DC") external power adapter designed to the stringent specifications of Lenovo, a leading notebook computer original equipment manufacturer ("OEM") headquartered in Beijing, China. This product is currently being marketed and sold as an OEM-branded aftermarket accessory.
• During the first quarter of fiscal 2009, we entered into an additional non-exclusive distribution agreement with Trust International B.V. ("Trust") for our ChargeSource® products. We began
• ChargeSource® revenue for the third quarter of fiscal 2009 increased to $3.2 million compared to $1.9 million for the third quarter of fiscal 2008. ChargeSource® revenue for the nine months ended October 31, 2008 increased to $10.2 million compared to $3.0 million for the comparable prior fiscal year period. Sequentially, for the second and third quarters of fiscal 2009, ChargeSource® revenue remained flat.
• The current level of ChargeSource® sales is insufficient to fully absorb our fixed manufacturing and supply chain overhead. We believe that our ability to drive increased sales is dependent upon, among others, the following factors:
• Successful development and release for manufacture of certain AC and AC/DC external power adapter products designed to address the requirements of our retail and OEM accessories channels;
• Securing additional OEM customers and retail distribution partners under non-exclusive arrangements;
• Market and customer acceptance of our new products expected to be available by early fiscal 2010;
• Successfully executing our cost reduction initiatives, which include reducing our component costs; and
• Reducing manufacturing lead-time from demand to delivery.
• Our ChargeSource® products are based on proprietary patented construction technology that enables the production of slim and light power sources which can charge low power and high power mobile devices simultaneously from standard wall outlets, as well as power outlets in airplanes, cars, and other modes of transportation. Our new power adapter designed for the retail market was made available in the third quarter of fiscal 2009, and we shipped our first units of these new adapters to Trust.
Wireless Test Solutions
• During fiscal 2007, we entered into a cooperative alliance with Ascom (Schweiz) AG ("Ascom"), a leading specialist in wireless onsite communications solutions based in Switzerland, to develop, market, and support next-generation wireless network QoS, optimization, and test measurement systems. Together we have developed harmonized test and measurement systems and solutions for 3G and 4G wireless standards. These harmonized products and solutions are now available to the worldwide marketplace.
• Late in the fourth quarter of fiscal 2008, we received a purchase order from AT&T valued at approximately $10.1 million for the Symphony™ Multi system, jointly developed by Ascom and Comarco. We began delivery on this order during the first quarter of fiscal 2009, and completed delivery during the second quarter of fiscal 2009. We generated revenue during the first half of fiscal 2009 relating to this order of $8.2 million, net of revenue sharing payable to Ascom of $1.9 million. This excludes amounts deferred relating to post-contract support and warranty. Since receiving this original order from AT&T, we have continued to receive and deliver on additional purchase orders for single systems.
• Demand for our next-generation mobile test equipment remains unpredictable. Although we are encouraged by interest we have received for the Symphony™ Multi system, the timing and amount of anticipated orders from our customer base remains uncertain. WTS revenue for the nine months ended October 31, 2008 increased $6.3 million compared to the comparable period of the prior fiscal year due to the deliveries on the AT&T order during the first six months of fiscal 2009 discussed above. Revenue for the three months ended October 31, 2008 decreased $0.2 million from the comparable period of the prior year, reflective of the current economic downturn and the unpredictable demand in
• On September 26, 2008, we entered into an Asset Purchase Agreement to sell substantially all of our WTS assets to Ascom for a cash payment of $12,750,000, with $1,775,000 of the proceeds expected to be placed in escrow. At a special shareholders meeting held on November 26, 2008, the proposal to approve the anticipated asset sale was approved by approximately 85 percent of our shareholders. The Asset Purchase Agreement for the transaction provides that the closing of the contemplated asset sale is to take place on January 5, 2009, following the satisfaction or waiver of the remaining closing conditions to the obligations of the parties to the purchase agreement, or such other time as agreed upon by the parties.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from our estimates.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. No events occurred or circumstances changed during the three and nine months ended October 31, 2008 that required us to test goodwill for impairment. Management believes there have been no significant changes during the three and nine months ended October 31, 2008 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, 2008.
Results of Operations
Consolidated
Revenue
Three Months Ended Nine Months Ended Year over Year
October 31, October 31, % Change
Three Nine
(in thousands except change) 2008 2007 2008 2007 Months Months
Revenue:
Products $ 4,222 $ 3,053 $ 21,720 $ 7,971 38 % 172 %
Services 14 46 43 213 (70 %) (80 %)
$ 4,236 $ 3,099 $ 21,763 $ 8,184 37 % 166 %
Operating loss $ (4,466 ) $ (4,322 ) $ (9,383 ) $ (11,828 )
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Revenue by Region
Three Months Ended Nine Months Ended Year over Year
October 31, October 31, % Change
Three Nine
(in thousands except change) 2008 2007 2008 2007 Months Months
Revenue:
North America $ 958 $ 2,017 $ 11,115 $ 5,539 (53 %) 101 %
Europe 696 604 1,505 1,218 15 % 24 %
Asia 2,531 210 8,787 552 1,105 % 1,492 %
Latin America 51 268 356 875 (81 %) (59 %)
$ 4,236 $ 3,099 $ 21,763 $ 8,184 37 % 166 %
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Revenue for the three and nine months ended October 31, 2008 increased by $1.1 million, or 37 percent, and $13.6 million, or 166 percent, respectively, compared to the corresponding periods of fiscal 2008. The increase is primarily attributable to an increase in revenue in our ChargeSource® business of $1.3 million for the three months ended October 31, 2008. The increase in revenue for the nine months ended October 31, 2008 is attributable to ChargeSource® and WTS revenue increases of $7.2 million and $6.3 million, respectively, compared to the same periods of the prior fiscal year. The increase in ChargeSource® revenue relates primarily to shipments to Lenovo that began in late January 2008 and sales to Trust of approximately $0.5 million in the third quarter of fiscal 2009. The year to date increase in WTS revenue primarily relates to deliveries in the first and second quarters of fiscal 2009 of the Symphony™ Multi units sold to AT&T.
Cost of Revenue and Gross Margin
Three Months Ended Nine Months Ended
October 31, October 31, Year over Year
2008 2007 2008 2007 % Change
% of % of % of % of
Related Related Related Related Three Nine
(in thousands except margin and change) Revenue Revenue Revenue Revenue Months Months
Cost of revenue:
Products $ 3,777 89 % $ 2,717 89 % $ 14,779 68 % $ 6,440 81 % 39 % 129 %
Amortization - software development - - 20 1 % - - 212 3 % (100 %) (100 %)
3,777 89 % 2,737 90 % 14,779 68 % 6,652 84 % 38 % 122 %
Services - - 80 174 % 119 277 % 253 119 % (100 %) (53 %)
$ 3,777 89 % $ 2,817 91 % $ 14,898 69 % $ 6,905 84 % 34 % 116 %
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Three Months Ended Nine Months Ended Year over Year
October 31, October 31, ppt Change
Three Nine
2008 2007 2008 2007 Months Months
Gross margin:
Products 11 % 10 % 32 % 16 % 1 16
Services - (74 %) (177 %) (19 %) 74 (158 )
Combined gross margin 11 % 9 % 31 % 16 % 2 15
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Cost of revenue for the three and nine months ended October 31, 2008 increased by $1.0 million, or 34 percent, and $8.0 million, or 116 percent, respectively, compared to the corresponding periods of fiscal 2008. These increases are consistent with the revenue increases for the three and nine months ended October 31, 2008. Combined gross margin is comparable for the three months ended October 31, 2008 compared to the prior year period. Combined gross margin for the nine months ended October 31, 2008 increased 15 percentage points from 16 percent to 31 percent compared to the comparable period of the prior year. As combined revenues increase, the Company is better able to absorb its fixed manufacturing overhead.
Operating Costs and Expenses
Three Months Ended Nine Months Ended
October 31, October 31, Year over Year
2008 2007 2008 2007 % Change
% of % of % of % of Three Nine
(in thousands except change) Revenue Revenue Revenue Revenue Months Months
Operating expenses:
SG&A expenses $ 964 23 % $ 1,131 37 % $ 4,289 20 % $ 3,229 40 % (15 %) 33 %
Allocated corporate overhead 2,136 50 % 1,297 42 % 6,005 28 % 3,782 46 % 65 % 59 %
Gross engineering and support expenses 2,177 51 % 2,176 70 % 6,642 30 % 6,096 74 % - 9 %
Capitalized software development (352 ) (8 %) - - (688 ) (3 %) - - - -
$ 4,925 116 % $ 4,604 149 % $ 16,248 75 % $ 13,107 160 % 7 % 24 %
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Selling, general, and administrative expenses for the three months ended October 31, 2008 decreased $0.2 million, or 15 percent, compared to the corresponding period of fiscal 2008. Selling, general, and administrative expenses for the nine months ended October 31, 2008 increased $1.1 million, or 33 percent, compared to the corresponding period of fiscal 2008. The increase was primarily caused by increased legal fees for the nine months ended October 31, 2008 related to the SwissQual and iGo litigation described in Note 15 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
Allocated corporate overhead consists of salaries and other personnel-related expenses of our accounting and finance, human resources and benefits, and other administrative personnel, as well as professional fees, directors' fees, and other costs and expenses attributable to being a public company. These costs are typically allocated to our two segments based on each business's percentage share of total Company costs and expenses. Allocated corporate overhead increased $0.8 million and $2.2 million, respectively, for the three and nine months ended October 31, 2008. The increase for the three months ended October 31, 2008 relates primarily to increased legal fees, compared to the corresponding period of fiscal 2008, in support of the pending sale of our WTS assets to Ascom. The increase of $2.2 million for the nine months ended October 31, 2008 relates to $1.0 million of non-recurring severance costs as well as increased legal fees of $1.0 million and increased consulting fees of $0.3 million compared to the same period of fiscal 2008.
Gross engineering and support expenses generally consist of salaries, employer paid benefits, and other personnel related costs of our hardware and software design engineers and testing and product support personnel, as well as facility and IT costs, professional and consulting fees, lab costs, material usages, and travel and related costs incurred in the development and support of our products. Engineering and support costs remained flat during the three months ended October 31, 2008 compared to the corresponding period of fiscal 2008. Engineering and support expenses for the nine months ended October 31, 2008 increased $0.5 million, or 9 percent, compared to the corresponding period of fiscal 2008. This increase is primarily due to increased ChargeSource® engineering expenses, consisting of material usage and lab fees in support of our on-going efforts to develop new products for our retail and OEM accessories channels.
We capitalize costs incurred for the development of software embedded in our WTS products subsequent to establishing technological feasibility. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenue and changes in hardware and software technologies. Costs that are capitalized include direct labor and related overhead. During the three and nine months ended October 31, 2008, we capitalized
software development costs related to Opti and QuOTA in the amount of $352,000 and $688,000, respectively. During the corresponding periods of fiscal 2008 we did not capitalize any software product development costs.
Other Income, net
Other income, net, consists primarily of interest income earned on invested cash balances. Interest income earned on invested cash balances for the three and nine months ended October 31, 2008 totaled $25,000 and $105,000, respectively. For the three and nine months ended October 31, 2007, interest income totaled $207,000 and $699,000, respectively. The current year decrease in interest income is due to decreased invested cash balances and decreased interest rates earned on invested cash balances.
Gain on Sale of Equipment, net
The gain on sale of equipment recorded during the first quarter of fiscal 2008 relates to the sale of WTS equipment, the majority of which was previously leased to outsourced engineering services providers. No similar transactions occurred during fiscal 2009.
Gain on Sale of Investment in SwissQual, net
For the three and nine months ended October 31, 2007, we received additional . . .
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