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| CMRO > SEC Filings for CMRO > Form 10-Q on 14-Sep-2009 | All Recent SEC Filings |
14-Sep-2009
Quarterly Report
Form 10-Q. 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 of
external mobile power adapters used to power and charge notebook computers,
cellular telephones, BlackBerry® smartphones, iPods®, and other portable,
rechargeable handheld devices. Our operations consist solely of the operations
of Comarco Wireless Technologies, Inc. ("CWT").
The Company has experienced pre-tax losses from operations during the three
and six months ended July 31, 2009 and 2008 totaling $0.6 million and
$3.1 million and $3.5 million and $7.2 million, respectively. Further, the
Company did not generate a positive gross margin on the sale of its
ChargeSource® products until the second quarter of fiscal 2010. The Company's
future is highly dependent on its ability to sell its products at a profit and
its ultimate return to overall profitability. To accomplish this, the Company
must increase the sales volumes of its current and newly designed ChargeSource®
products to appropriately absorb fixed administrative and contract manufacturing
overhead. The Company believes that it has begun to address this concern with
its recently executed Strategic Product Development and Supply Agreement with
Targus Group International, Inc., pursuant to which the Company began shipment
of ChargeSource® products to Targus during the second quarter of fiscal 2010.
Further, the Company must successfully reduce its unit costs with its third
party contract manufacturers, for which negotiations are currently in process.
The inability of the Company to successfully achieve these objectives will have
a material adverse effect on the Company's operations and financial condition.
Management currently considers the following additional trends, events, and
uncertainties to be important to understanding our business:
• On June 30, 2009, we announced that we were selected by Dell Inc. to provide
an innovative 90 watt DC adapter for use in automobiles and airplanes. The
product is expected to ship early next calendar year.
• On March 16, 2009, we entered into an exclusive Retail Strategic Product Development and Supply Agreement (the "Targus Agreement") with Targus Group International, Inc., a Delaware corporation ("Targus"). The product offerings for Targus include the following:
- A programmable AC adapter that connects easily to a standard wall plug and includes a DC cable that supports charging two devices simultaneously. We expect this adapter will be packaged with up to 10 SmartTips®.
- A programmable AC adapter that includes both input and output cables (AC or AC/DC) and will be packaged with up to 10 SmartTips®.
We began shipments to Targus under this Targus Agreement during June 2009.
• Revenue for the second quarter of fiscal 2010 increased to $7.6 million compared to $3.2 million for the second quarter of fiscal 2009. The increase is primarily attributable to shipments made to Targus under the Targus Agreement discussed above. Revenue for the six months ended July 31, 2009 increased $2.6 million or 38 percent, compared to the comparable period of the prior fiscal year, and is also primarily attributable to sales to Targus.
• In late January 2008, we began volume production of a small form factor 90-watt AC/DC standalone power adapter designed to the stringent specifications of Lenovo, a leading notebook computer OEM. This innovative product is currently being marketed and sold as an OEM-branded aftermarket accessory. We are in the initial test production runs of our new product for Lenovo and we currently anticipate selling this new product in the second half of the current fiscal year.
• The fiscal 2009 level of sales was insufficient to fully absorb our fixed supply chain overhead, resulting in negative gross margins and we did not generate positive gross margins on the sale of our ChargeSource® products until the second quarter of fiscal 2010, when our sales levels increased and fully absorbed our fixed supply chain overhead. Our future is highly dependent on our ability to sell our products at a profit and out ultimate return to overall profitability. The Company remains focused on efforts to drive further increases in sales in order to absorb our fixed operating costs and to become profitable. Our ability to drive increased sales is dependent upon a number of factors, including, among others:
- Our ability to timely deliver existing, new and enhanced products meeting our customers' required specifications in sufficient quantities to satisfy demand of our customers including, but not limited to, the development and release for manufacture of certain AC and AC/DC standalone power adapter products designed to address the requirements of our retail and OEM accessories channels;
- Securing additional OEM partners; and
- Market and customer acceptance of our new products expected to be available by the end of fiscal 2010.
• Our ChargeSource® products are based on proprietary patented construction technology that enables the production of slim and light power sources for many rechargeable mobile devices from standard wall outlets, as well as power outlets in airplanes, cars, and other modes of transportation.
• Our ability to timely obtain sufficient quantities of products meeting our customers' required specifications from our third party contract manufacturers and our ability to reduce our unit costs for such products. Reducing our product costs is important to our continuing efforts to improve our margins and we are currently in negotiations with our contract manufacturers in this regard.
• We are focused on preserving our cash balances by monitoring expenses, identifying costs savings, and investing only in those development programs and products that we believe will most likely contribute to our profitability.
Critical Accounting Policies
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. Management
believes there have been no significant changes during the three and six months
ended July 31, 2009 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, 2009.
Results of Operations - Continuing Operations
Revenue
(in thousands except change)
Three Months Ended Six Months Ended Year over Year
July 31, July 31, % Change
Three Six
2009 2008 2009 2008 Months Months
Revenue $ 7,580 $ 3,158 $ 9,602 $ 6,979 140 % 38 %
Operating loss $ (653 ) $ (3,133 ) $ (3,522 ) $ (7,259 )
Net loss from
continuing operations $ (635 ) $ (2,534 ) $ (3,515 ) $ (5,660 )
Revenue by Region
(in thousands except change)
Three Months Ended Six Months Ended Year over Year
July 31, July 31, % Change
Three Six
2009 2008 2009 2008 Months Months
Revenue:
North America $ 5,779 $ 315 $ 5,820 $ 391 1,735 % 1,388 %
Europe 69 153 78 683 (55 %) (89 %)
Asia 1,732 2,690 3,704 5,905 (36 %) (37 %)
$ 7,580 $ 3,158 $ 9,602 $ 6,979
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Revenue by Customer
(in thousands except change)
Three Months Ended Six Months Ended Year over Year
July 31, July 31, % Change
Three Six
2009 2008 2009 2008 Months Months
% of % of % of % of
Revenue Revenue Revenue Revenue
Revenue:
Kensington $ 59 1 % $ 363 11 % $ 71 1 % $ 822 12 % (84 %) (91 %)
Lenovo 1,757 23 % 2,703 86 % 3,763 39 % 5,925 85 % (35 %) (36 %)
Targus 5,764 76 % - - 5,764 60 % - - 100 % 100 %
Other - - 92 3 % 4 - 232 3 % (100 %) (98 %)
$ 7,580 100 % $ 3,158 100 % $ 9,602 100 % $ 6,979 100 % 140 % 38 %
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Revenue for the three and six months ended July 31, 2009 increased by $4.4 million, or 140 percent, and $2.6 million, or 38 percent, respectively, compared to the corresponding periods of fiscal 2009. The increase is attributable to increases in revenue relating to shipments to Targus during the second quarter of fiscal 2010. In June, we began shipping a 90-watt AC adapter to Targus under the Targus Agreement. The number of units shipped to Lenovo decreased during the three and six months ended July 31, 2009 compared to the corresponding periods of the prior fiscal year resulting in declining revenue attributable to Lenovo during the three and six months ended July 31, 2009 compared to the comparable prior year periods. The Lenovo revenue decrease is due to reduced sales quantities of the current 90-watt slim and light product. We are preparing to ship a new product to Lenovo and we believe demand for the legacy slim and light product has declined in expectation of the release of the new product. We currently anticipate selling the new Lenovo product in the second half of the current fiscal year.
Cost of Revenue and Gross Margin
(in thousands except
margin and change)
Three Months Ended Six Months Ended Year over Year
July 31, July 31, % Change
Three Six
2009 2008 2009 2008 Months Months
% of % of % of % of
Total Total Total Total
Cost of revenue:
Product Cost $ 5,527 98 % $ 2,892 87 % $ 7,258 91 % $ 6,299 88 % 91 % 15 %
Under-absorption
of fixed supply
chain overhead 51 1 % 352 10 % 544 7 % 737 10 % (86 %) (26 %)
Inventory reserve
and scrap charges 83 1 % - - 194 2 % - - 100 % 100 %
Freight,
expedite, and
other charges 3 - 93 3 % 3 - 130 2 % (97 %) (98 %)
$ 5,664 100 % $ 3,337 100 % $ 7,999 100 % $ 7,166 100 % 70 % 12 %
Three Months Ended Six Months Ended Year over Year
July 31, July 31, ppt Change
Three Six
2009 2008 2009 2008 Months Months
Gross margin (loss) 25 % (6 %) 17 % (3 %) 31 20
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Cost of revenue for the three and six months ended July 31, 2009 increased by
$2.3 million, or 70 percent, and $0.8 million, or 12 percent, respectively,
compared to the corresponding periods of fiscal 2009. These increases are
attributable to the increase in sales for the three and six months ended
July 31, 2009 compared to the comparable prior year period. Gross margins
improved with the introduction of the 90-watt AC product sold to Targus and the
Company did not generate a positive gross margin on the sale of its
ChargeSource® products until the second quarter of fiscal 2010. The margins for
products distributed into retail channels through our exclusive relationship
with Targus are higher when compared to products developed for OEM customers due
to certain design requirements of our OEM customers. Additionally, as revenues
increased, combined gross margin improved over the three and six months ended
July 31, 2009 compared to the corresponding prior year periods, as the Company
was better able to absorb its fixed manufacturing overhead, which remained
fairly comparable during the three and six months ended July 31, 2009 and 2008.
Operating Costs and Expenses
(in thousands except change)
Three Months Ended Six Months Ended Year over Year %
July 31, July 31, Change
Three Six
2009 2008 2009 2008 Months Months
% of % of % of % of
Revenue Revenue Revenue Revenue
Operating
expenses:
SG&A expenses,
excluding
corporate overhead $ 511 7 % $ 832 26 % $ 1,325 14 % $ 2,114 30 % (39 %) (37 %)
Corporate overhead 1,086 14 % 1,361 43 % 1,958 20 % 3,581 51 % (20 %) (45 %)
Engineering and
support expenses 972 13 % 761 24 % 1,842 19 % 1,377 20 % 28 % 34 %
$ 2,569 34 % $ 2,954 93 % $ 5,125 53 % $ 7,072 101 % (13 %) (28 %)
|
Selling, general, and administrative expenses for the three and six months
ended July 31, 2009 decreased $0.3 million, or 39 percent, and $0.8 million, or
37 percent, respectively, compared to the corresponding periods of fiscal 2009.
The decreases are caused by decreased legal fees of $0.5 million and
$1.1 million, respectively, for the three and six months ended July 31, 2009
related to fees incurred in support of the iGo litigation which was dismissed in
May 2009. The decrease in legal fees was partially offset by increased personnel
and consulting costs of $0.2 million and $0.3 million in our sales and marketing
department.
Corporate overhead consists of salaries and other personnel-related expenses
of our accounting and finance, human resources and benefits, and other
administrative personnel, as well as professional fees, directors' fees, and
other costs and expenses attributable to being a public company. Corporate
overhead decreased $0.3 million and $1.6 million, respectively, for the three
and six months ended July 31, 2009 when compared to the corresponding periods of
the prior fiscal year. The decrease for the three months ended July 31, 2009
relates primarily to decreased consulting fees of $0.2 million and decreased
legal fees of $0.1 million in support of public company matters. The decrease of
$1.6 million for the six months ended July 31, 2009 relates to $1.0 million of
non-recurring severance costs as well as decreased consulting fees of
$0.3 million and decreased legal fees of $0.2 million.
Engineering and support expenses generally consist of salaries, employer paid
benefits, and other personnel related costs of our design engineers and testing
and support personnel, as well as facility and IT costs, professional and
consulting fees, lab costs, material usages, and travel and related costs
incurred in the development and support of our products. Engineering and support
expenses for the three and six months ended July 31, 2009 increased
$0.2 million, or 28 percent, and $0.5 million, or 34 percent, respectively.
These increases are primarily due to increased personnel costs and material
usage and lab fees in support of our on-going efforts to develop new products
for our retail and OEM accessories channels.
Other Income, net
Other income, net, consists primarily of interest income earned on invested
cash balances offset by interest expense related to our credit facility.
Interest income earned on invested cash balances for the three and six months
ended July 31, 2009 totaled $20,000 and $53,000, respectively. For the three and
six months ended July 31, 2008, interest income totaled $23,000 and $77,000,
respectively. The current year decrease in interest income is due to decreased
invested cash balances and decreased interest rates earned on invested cash
balances.
Income Tax Expense
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. Due to the losses
incurred during the first six months of fiscal 2010, the adjusted net deferred
tax assets remain fully reserved as of July 31, 2009. In accordance with
paragraph 140 of Statement of Financial Accounting Standard ("SFAS") No. 109,
"Accounting for Income Taxes," a tax benefit has been recorded utilizing a
combined effective rate of 39.2 percent for the three and six months ended
July 31, 2008, to reflect the utilization of losses from current operations to
offset the income from discontinued operations. No similar tax allocation was
made during the three and six months ended July 31, 2009 as the results from
discontinued operations were minor.
The Company adopted the provisions of FASB Interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109," ("FIN 48"), on February 1, 2007 and recorded an $86,000
decrease in retained earnings and increased non-current liabilities by $86,000.
The FIN 48 liability recorded during the first quarter of fiscal 2008 has not
changed since it was initially recorded.
Discontinued Operations - Call Box
Income (loss) from Discontinued Operations
(in thousands except change)
Three Months Ended Six Months Ended Year over Year
July 31, July 31, % Change
Three Six
2009 2008 2009 2008 Months Months
Gain on sale, net of
income taxes of
. . .
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