After announcing the loss of its biggest customer, power adapter manufacturer Comarco Inc. (OTC: CMRO) has raised doubts about its ability to continue without liquidating.
In a Sept. 16 10-Q filing with the U.S. Securities and Exchange Commission the company says that uncertainty related to litigation, operating losses and the loss of Lenovo Information Products Co. Ltd. as its largest customer, are causing doubts about the company’s ability to continue as a going concern, or without the threat of liquidation.
“The company anticipates it will continue to operate at a deficit and will remain cash flow negative for the foreseeable future,” it says in an Aug. 22 SEC filing.
Comarco, headquartered in Lake Forest, Calif., develops and designs technology used in power adapters that charge battery powered devices, such as laptop computers, tablets, smart phones and e-readers. The company’s chargers allow users to charge multiple devices at once, with the aim of allowing customers to only carry one charger while they travel.
The company operates through Comarco Wireless Technologies Inc., which was spun off from Genge Industries Inc. in 1971 and has been publicly traded ever since.
Comarco’s business was driven by sales of its products to Lenovo, but in August, Lenovo announced it was going to stop offering Comarco’s “constellation” product, a power adapter, to its corporate clients. Comarco expects the change to adversely impact its operations, and has already started reducing and eliminating certain operating expenses to minimize losses, the company says in an SEC filing.
“Sales of the constellation product to Lenovo accounted for materially all of the company’s revenue for the fiscal year ended Jan. 31,” the company says in the Aug. 22 filing.
Comarco had an operating loss of $1.4 million for the six months ended July 31, and $504,000 for the six months ended July 31, 2012. Comarco had $7.1 million in negative working capital as of July 31.
The company generated $1.5 million in revenue for the three months ended July 31, down from $1.7 million that it generated in the three months ended July 31, 2012.
The company’s future depends on its ability to resolve litigation, capitalize on its patent portfolio, capitalize on its patent portfolio and borrow or raise capital to meet its liquidity needs.
If the litigation with Chicony Power Technology Co. Ltd. is resolved with a positive outcome for Comarco, the company could reduce its deficit. A deal could also provide it with a cash infusion. But if the litigation is not resolved in Comarco’s favor, the company’s financial condition will be hurt even more, and it may not be able to continue without the threat of liquidation.
On April 26, 2011, one of Comarco’s manufacturers, Chicony Power Technology Co. Ltd., sued the company for $1.2 million, alleging breach of contract and that Comarco hadn’t paid it for certain products. Chicony manufactured Comarco’s “Bronx” products, which was subject to a product recall in 2010.
Comarco denied liability and counter-sued Chicony in May 2011, seeking recovery of $4.9 million in damages that it says were the result of the recall in the product. Comarco alleges the recall was caused by Chicony’s failure to adhere to the technical specifications when it was manufacturing the product. Chicony raised the amount due to $1.7 million in May 2011, and Comarco increased the amount of the damages its seeking to at least $15 million in April. A trial for the suit is scheduled for some time in October.
The company is also involved in a lawsuit related to patented technology, which is set to go to trial in July 2014.
In order to conduct business for the next year and pay its bills, the company needs to raise more money, either through debt or equity financing, it says in the Sept. 16 filing.
Comarco has already taken some steps to obtain financing.
On Feb. 11, Comarco entered into a loan agreement with Elkhorn Partners LP for a $1.5 million senior secured loan that matures Nov. 30, 2014. Elkhorn also agreed to buy 6.25 million shares of Comarco’s common stock for $0.16 per share, which gave the company about $1 million in cash. Now Elkhorn, which previously owned about nine percent of the company, owns 49 percent. The Elkhorn loan bears interest at seven percent for the first 12 months, and then 8.5 percent after that until the loan is paid in full. If Comarco doesn’t pay the loan in full by its maturity date, Elkhorn has the option to convert the unpaid balance of the loan into shares of Comarco’s common stock.
Before that, in July 2012, Comarco entered into a senior secured six-month term loan agreement with Broadwood Partners LP, one of its shareholders. Broadwood loaned the company $2 million. The loan bore interest at five percent and matured on Jan. 28.
The company used $2.1 million of the $2.5 million to pay off its loan with Broadwood.
Calls to Comarco were not immediately returned for comment.
For the last edition of Turnaround Tuesday, see “GateHouse Seeks Support from Creditors to Restructure.”
For more on struggling companies, see Mergers & Acquisitions’ Distressed Company Watch List.