**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**** 

**FORM 10-Q**

 

(Mark One)

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

For the quarterly period ended **June 30, 2011**.

 

o       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the transition period from                  to                 .

 

Commission file number: **000-51763**

 

**COMCAM INTERNATIONAL, INC.**

 (Exact name of registrant as specified in its charter)

 

| **Delaware**

(State or other jurisdiction of

incorporation or organization) | **23-2976562  **

 (I.R.S. Employer

Identification No.) |
|-------------------------------------------------------------------------------|-------------------------------------------------------------------------|

 

**1140 McDermott Drive, West Chester, Pennsylvania 19380**

 (Address of principal executive offices)    (Zip Code)

 

**(610) 436-8089**

 (Registrant’s telephone number, including area code)

 

**n/a**

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No o

 

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 o   Accelerated filer o   Non-accelerated filer o  Smaller reporting company þ

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of the issuer’s common stock, $0.0001 par value (the only class of voting stock), at August 19, 2011, was 16,530,697.

 

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| **TABLE OF CONTENTS**

**PART 1- FINANCIAL INFORMATION** |
|----------------------------------------------------------|
| Item1.                                         | Financial Statements: | 3 |
|                                                     | Consolidated Balance Sheets as of

June 30, 2011(unaudited) and December 31, 2010 | 4 |
|                                                     | Unaudited Consolidated Statements of Operations for the

Three and six month periods ended June 30, 2011 and June 30, 2010 | 5 |
|                                                     | Unaudited Consolidated Statements of Cash Flows for the

six month periods ended June 30, 2011 and June 30, 2010 | 6 |
|                                                     | Notes to Unaudited Consolidated Financial Statements | 7 |
| Item 2.                                             | Management's Discussion and Analysis of Financial Condition and Results of Operations | 12 |
| Item 3.                                                  | Quantitative and Qualitative Disclosures about Market Risk | 20 |
| Item 4.                                             | Controls and Procedures | 20 |
|  

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**PART II-OTHER INFORMATION**

  |   |
| Item 1.                                                  | Legal Proceedings | 20 |
| Item 1A.                                       | Risk Factors | 20 |
| Item 2.                                        | Unregistered Sales of Equity Securities and Use of Proceeds | 25 |
| Item 3.                                                  |   Defaults Upon Senior Securities | 25 |
| Item 4.                                                  | (Removed and Reserved) | 25 |
| Item 5.                                        | Other Information | 25 |
| Item 6.                                             | Exhibits | 25 |
|                                                     | Signatures | 26 |
|                                                     | Index to Exhibits | 27 |

 

 

 

 

2

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**PART I – FINANCIAL INFORMATION**

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**ITEM 1.          FINANCIAL STATEMENTS**

 

As used herein, the terms “Company,” “we,” “our,” and “us” refer to ComCam International, Inc., a Delaware corporation, unless otherwise indicated.  In the opinion of management, the accompanying unaudited financial statements included in this Form 10-Q reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented.  The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.

 

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| COMCAM INTERNATIONAL, INC.                                     |
|----------------------------------------------------------------|
| CONSOLIDATED BALANCE SHEETS                                    |
|                                                           |   |   |   |   |
|                                                           |   | June 30, |   | December 31, |
|                                                           |   | 2011 |   | 2010 |
| ASSETS                                                         |   | (Unaudited) |   | (Audited) |
|                                                           |   |   |   |   |
| Current assets:                                                |   |   |   |   |
| Cash                                                           | $ | 558,616 |   | 517,493 |
| Accounts receivable                                            |   | 767,395 |   |         836,342 |
| Costs and estimated earnings in excess of                      |   |   |   |   |
| billings on uncompleted contracts                              |   | 155,668 |   |         114,827 |
| Prepaid expenses                                               |   | 9,796 |   |           11,712 |
|                                                           |   |   |   |   |
| Total current assets                                           |   |      1,491,475 |   |      1,480,374 |
|                                                           |   |   |   |   |
| Property and equipment, net                                    |   | 132,677 |   | 157,263 |
| Intangible assets, net                                         |   | 393,467 |   |         447,389 |
| Other assets                                                   |   | 174,186 |   | 23,926 |
|                                                           |   |   |   |   |
| Total assets                                                   | $ |      2,191,805 |   |      2,108,952 |
|                                                           |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                 |   |   |   |   |
|                                                           |   |   |   |   |
| Current liabilities:                                           |   |   |   |   |
| Accounts payable                                               | $ | 571,459 |   | 381,153 |
| Accrued expenses                                               |   | 101,492 |   | 123,140 |
| Billings in excess of costs and estimated                      |   |   |   |   |
| earnings on uncompleted contracts                              |   |         136,449 |   |         387,923 |
| Line of credit                                                 |   |           50,000 |   |                  -   |
| Current portion of long-term debt                              |   |         865,000 |   | 841,650 |
|                                                           |   |   |   |   |
| Total current liabilities                                      |   |      1,724,400 |   |      1,733,866 |
|                                                           |   |   |   |   |
| Accrued expenses                                               |   | 159,600 |   |         176,000 |
| Long-term debt, net                                            |   | 221,018 |   |         641,568 |
|                                                           |   |   |   |   |
| Total liabilities                                              |   |      2,105,018 |   |      2,551,434 |
|                                                           |   |   |   |   |
| Commitments and contingencies                                  |   |   |   |   |
|                                                           |   |   |   |   |
| Stockholders' equity (deficit):                                |   |   |   |   |
| Preferred stock, $.0001 par value; 2,000,000                   |   |   |   |   |
|  shares authorized, no shares issued and outstanding      |   |                  -   |   |                  -   |
| Common stock, $.0001 par value; 100,000,000 shares             |   |   |   |   |
|   authorized, 16,288,312 and 13,684,312 shares issued and |   |   |   |   |
|   outstanding, respectively                               |   | 1,629 |   | 1,368 |
| Additional paid-in capital                                     |   | 8,738,110 |   | 7,194,492 |
| Deferred stock compensation                                    |   |         (15,030) |   |                  -   |
| Accumulated deficit                                            |   |    (8,637,922) |   |    (7,638,342) |
|                                                           |   |   |   |   |
| Total stockholders' equity (deficit)                           |   |           86,787 |   |       (442,482) |
|                                                           |   |   |   |   |
| Total liabilities and stockholders' equity (deficit)           | $ |      2,191,805 |   |      2,108,952 |

 

The accompanying notes are an integral part of these consolidated financial statements

4

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| COMCAM INTERNATIONAL, INC.                           |
|------------------------------------------------------|
| UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS      |
|                                                 |   |   |   |   |   |   |   |   |
|                                                 |   | Three Months Ended |   | Six Months Ended |
|                                                 |   | June 30, |   | June 30, |
|                                                 |   | 2011 |   | 2010 |   | 2011 |   | 2010 |
|                                                 |   |   |   |   |   |   |   |   |
| Revenues, net                                        | $ | 993,570 |   | 550,984 |   | 2,375,101 |   |         1,498,524 |
| Cost of revenues                                     |   | 681,168 |   | 375,499 |   | 1,731,498 |   |         966,728 |
|                                                 |   |   |   |   |   |   |   |   |
| Gross profit                                         |   |            312,402 |   |            175,485 |   |           643,603 |   |            531,796 |
|                                                 |   |   |   |   |   |   |   |   |
| Operating expenses:                                  |   |   |   |   |   |   |   |   |
| General and administrative expenses                  |   | 729,622 |   | 935,926 |   | 1,567,508 |   |         1,547,846 |
| Research and development expenses                    |   | 743 |   |              2,887 |   | 2,935 |   |                5,975 |
|                                                 |   |   |   |   |   |   |   |   |
|                                                 |   |            730,365 |   |          938,813 |   |        1,570,443 |   |         1,553,821 |
|                                                 |   |   |   |   |   |   |   |   |
| Loss from operations                                 |   |          (417,963) |   |         (763,328) |   |          (926,840) |   |       (1,022,025) |
|                                                 |   |   |   |   |   |   |   |   |
| Other income (expense):                              |   |   |   |   |   |   |   |   |
| Interest income                                      |   |                   251 |   |                 151 |   | 606 |   |                   570 |
| Interest expense                                     |   |            (35,873) |   |           (26,266) |   |            (61,346) |   |            (53,937) |
| Debt extinguishment income                           |   |                     -   |   |            13,725 |   |                     -   |   |              13,725 |
|                                                 |   |   |   |   |   |   |   |   |
|                                                 |   |            (35,622) |   |           (12,390) |   |            (60,740) |   |            (39,642) |
|                                                 |   |   |   |   |   |   |   |   |
| Loss before provision for income taxes               |   |          (453,585) |   |         (775,718) |   |          (987,580) |   |       (1,061,667) |
|                                                 |   |   |   |   |   |   |   |   |
| Provision (benefit) for income taxes                 |   |              (8,000) |   |                    -   |   |             12,000 |   |                     -   |
|                                                 |   |   |   |   |   |   |   |   |
| Net loss                                             | $ |          (445,585) |   |         (775,718) |   |          (999,580) |   |       (1,061,667) |
|                                                 |   |   |   |   |   |   |   |   |
| Net loss per common share - basic and diluted        | $ |                (0.03) |   |               (0.08) |   |                (0.06) |   |                (0.12) |
|                                                 |   |   |   |   |   |   |   |   |
| Weighted average common and common equivalent shares |   |       16,242,817 |   |       9,309,403 |   |      15,455,351 |   |         8,500,097 |

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

5

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| COMCAM INTERNATIONAL, INC.                        |
|---------------------------------------------------|
| UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS   |
| Six Months Ended June 30, 2011 and 2010           |
|                                              |   |   |   |   |
|                                              |   |   |   |   |
|                                              |   | 2011 |   | 2010 |
| Cash flows from operating activities:             |   |   |   |   |
| Net loss                                          | $ |      (999,580) |   |   (1,061,667) |
| Adjustments to reconcile net loss to net          |   |   |   |   |
|    cash used in operating activities:   |   |   |   |   |
| Stock, options, and warrants compensation expense |   |         603,730 |   |        375,000 |
| Amortization of conversion rights on debt         |   |             1,110 |   |                  -   |
| Depreciation and amortization                     |   |         121,571 |   |        210,925 |
| Loss on disposal of assets                        |   |                  -   |   |          10,449 |
| (Increase) decrease in:                           |   |   |   |   |
| Accounts receivable                               |   |           68,947 |   |        296,642 |
| Prepaid expenses                                  |   |             1,916 |   |                 27 |
| Costs and estimated earnings in excess of         |   |   |   |   |
| billings on uncompleted contracts                 |   |        (40,841) |   |        (27,093) |
| Other assets                                      |   |      (150,260) |   |        (14,303) |
| Increase (decrease) in:                           |   |   |   |   |
| Accounts payable                                  |   |         190,306 |   |      (192,183) |
| Accrued expenses                                  |   |         119,511 |   |          81,253 |
| Billings in excess of costs and estimated         |   |   |   |   |
| earnings on uncompleted contracts                 |   |      (251,474) |   |        (61,296) |
|                                              |   |   |   |   |
| Net cash used in operating activities             |   |      (335,064) |   |      (382,246) |
|                                              |   |   |   |   |
| Cash flows from investing activities:             |   |   |   |   |
| Payments received on note receivable              |   |                  -   |   |          36,667 |
| Purchase of intangible assets                     |   |        (42,734) |   |                  -   |
| Purchase of property and equipment                |   |             (329) |   |        (49,362) |
|                                              |   |   |   |   |
| Net cash used in investing activities             |   |        (43,063) |   |        (12,695) |
|                                              |   |   |   |   |
| Cash flows from financing activities:             |   |   |   |   |
| Payments on related party payable                 |   |                  -   |   |        (36,667) |
| Payments on long-term debt                        |   |      (415,000) |   |      (138,730) |
| Proceeds from line of credit                      |   |           50,000 |   |                  -   |
| Proceeds from issuance of debt                    |   |         450,000 |   |                  -   |
| Proceeds from issuance of common stock            |   |         334,250 |   |        674,500 |
|                                              |   |   |   |   |
| Net cash provided by financing activities         |   |         419,250 |   |        499,103 |
|                                              |   |   |   |   |
| Net increase in cash                              |   |           41,123 |   |        104,162 |
|                                              |   |   |   |   |
| Cash, beginning of period                         |   |         517,493 |   |        217,783 |
|                                              |   |   |   |   |
| Cash, end of period                               | $ |         558,616 |   |        321,945 |

 

The accompanying notes are an integral part of these consolidated financial statements.

# 

6

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COMCAM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

 

# **Note 1 – Organization and Summary of Significant Accounting Policies**

 

Organization

 

The consolidated financial statements consist of Comcam International, Inc. (“Comcam”) and its wholly owned subsidiary Pinnacle Integrated Systems, Inc. (“Pinnacle”). Collectively, these entities are referred to as the “Company”.

 

Comcam was organized under the laws of the state of Delaware on September 19, 1998. Its operations consist primarily of the research and development of advanced compact video systems that utilize built-in digital compression technology. Pinnacle is a security systems integrator focused on correctional facilities across the United States, providing turnkey system design and installation, maintenance contracts, and field support technicians.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared by management in accordance with the instructions in Form 10-Q and, therefore, do not include all information and footnotes required by generally accepted accounting principles and should, therefore, be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission. These statements do include all normal recurring adjustments which the Company believes necessary for a fair presentation of the statements. The interim operations are not necessarily indicative of the results to be expected for the full year ended December 31, 2011.

# **** 

Reclassifications

 

Certain amounts for 2010 have been reclassified to conform to the 2011 presentation.

 

Convertible Debts

 

In accordance with ASC 470-20, the Company calculated the value of any beneficial conversion features embedded in its convertible debts. If the debt is contingently convertible, the intrinsic value of the beneficial conversion feature is not recorded until the debt becomes convertible.

 

Convertible debts are split into two components: a debt component and a component representing the embedded derivatives in the debt. The debt component represents the Company’s liability for future interest coupon payments and the redemption amount. The embedded derivatives represent the value of the option that debt holders have to convert into ordinary shares of the Company.  If the number of shares that may be required to be issued upon conversion of the convertible debt is indeterminate, the embedded conversion option of the convertible debt is accounted for as a derivative instrument liability rather than equity in accordance with ASC 815-40. 

# **** 

The debt component of the convertible debt is measured at amortized cost and therefore increases as the present value of the interest coupon payments and redemption amount increases, with a corresponding charge to finance cost – other than interest. The debt component decreases by the cash interest coupon payments made. The embedded derivatives are measured at fair value at each balance sheet date, and the change in the fair value is recognized in the income statement. 

# **** 

 

 

# 

7

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COMCAM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

 

# **Note 1 – Organization and Summary of Significant Accounting Policies - continued**

 

# Additional Footnotes Included By Reference

 

Except as indicated in the following Notes, there have been no other material changes in the information disclosed in the notes to the financial statements included in the Company’s Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission. Therefore, those footnotes are included herein by reference.

**** 

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**Note 2 – Going Concern**

 

As of June 30, 2011, the Company has negative working capital and has incurred losses since inception. These factors taken alone raise substantial doubt about the Company’s ability to continue as a going concern. However, management is in the process of procuring additional financing to expand marketing efforts and product development which actions, if successful, will enable the Company to continue as a going concern. Nevertheless, there can be no assurance that sufficient financing will be available to the Company to successfully pursue its marketing and product development efforts.

 

 

# **Note 3 – Line of Credit**

# **** 

# The Company maintains a revolving line of credit with a bank which allows the Company to borrow up to $100,000. The line of credit bears interest at prime (3.25% at June 30, 2011) plus 1.25%, but not less than 4.75%; thus the line of credit’s rate at June 30, 2011 is 4.75%.  Interest accrues monthly and must be paid by the end of the following month. The line of credit is secured by a money market account with the same bank which has a June 30, 2011 balance of $100,000.  The line of credit matures on November 1, 2011 and the balance outstanding as of June 30, 2011 is $50,000.

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| 8 |
|---|

8

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COMCAM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

 

# **Note 4 – Long-Term Debt**

 

Long-term debt consists of the following:

 

|                                                                                                                                                                                                                                                                     |   | June 30,                                                                                                       |   | December 31,                                                                                                               |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                     |   | 2011                                                                                                           |   | 2010                                                                                                                       |
|                                                                                                                                                                                                                                                                     |   | (Unaudited)                                                                                                    |   | (Audited)                                                                                                                  |
|                                                                                                                                                                                                                                                                     |   |                                                                                                           |   |                                                                                                                       |
| Note payable to Robert Betty, bearing interest at 3%, secured by the common stock and 

assets of Pinnacle, and due in five monthly installments of $200,000, beginning February 2010.                                                                                   | $      |                  -   |   |           841,650                                                             |
|                                                                                                                                                                                                                                                                     |   |                                                                                                           |   |                                                                                                                       |
| Notes payable to Paul Higbee, bearing interest at 8%, due March 2012, secured by the intellectual property of the Company.                                                                                                                                               |   |         465,000                                                             |   |           465,000                                                             |
|                                                                                                                                                                                                                                                                     |   |                                                                                                           |   |                                                                                                                       |
| Notes payable to Doug Bartek, bearing interest at 18%, secured by the common stock and assets of Pinnacle, and due February 2012.                                                                                                                                        |   |         400,000                                                             |   |                    -   |
|                                                                                                                                                                                                                                                                     |   |                                                                                                           |   |                                                                                                                       |
| Unsecured note payable to Global Megatrend, bearing interest at 7.5% and due December 2012. The note may be converted to common 

shares of the Company, at the option of the holder, based on certain terms related to outstanding shares and per share prices.         |   |         176,568                                                             |   |           176,568                                                             |
|                                                                                                                                                                                                                                                                     |   |                                                                                                           |   |                                                                                                                       |
| Unsecured note payable to Bayberry Capital, Inc., bearing interest at 12% and due October 2012.The note may be

 converted to common shares of the Company, at the option of the holder, based on certain terms related to outstanding shares and per share prices. |   |           50,000                                                  |   |                    -   |
|                                                                                                                                                                                                                                                                     |   |                                                                                                           |   |                                                                                                                       |
|                                                                                                                                                                                                                                                                     |   |      1,091,568                                                                             |   |        1,483,218                                                                             |
| Less unamortized discount                                                                                                                                                                                                                                                |   |           (5,550)                                                 |   |                    -   |
|                                                                                                                                                                                                                                                                     |   |                                                                                                           |   |                                                                                                                       |
|                                                                                                                                                                                                                                                                     |   |      1,086,018                                                                             |   |        1,483,218                                                                             |
| Less current portion                                                                                                                                                                                                                                                     |   |       (865,000)                                                                       |   |         (841,650)                                                                       |
|                                                                                                                                                                                                                                                                     |   |                                                                                                           |   |                                                                                                                       |
|                                                                                                                                                                                                                                                                     | $      |         221,018                                                             |   |           641,568                                                             |

**** 

 

The fair values of the conversion options are recorded as discounts on the face values of the notes and are $5,550 and $0 at June 30, 2011 and December 31, 2010, respectively. These amounts are amortized using the straight-line method over the term of the notes.  During the six months ended June 30, 2011 and 2010, the Company recorded $1,110 and $0, respectively, as interest expense due to amortization of the discounts.

 

 

 

|   |
|--------|

9

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COMCAM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

 

**Note 5 – Supplemental Cash Flow Information**

 

During the six months ended June 30, 2011, the Company:

 

·         Issued 352,000 shares of common stock in satisfaction of $110,475 of accrued expenses and $47,925 of deferred stock compensation.

 

·         Issued 800,000 shares of common stock in exchange for $426,650 of long-term debt, $14,189 of accrued expenses, and recognized debt extinguishment income of $88,839. The debt extinguishment income was recorded as an increase to additional paid-in capital due to the related party nature of the transaction.

 

During the six months ended June 30, 2010, the Company:

 

·         Issued 1,363,930 shares of common stock in exchange for $438,405 of long-term debt, accounts payable, and accrued expenses.

 

·         Issued 1,500,000 shares of common stock for services rendered to the Company in the amount of $375,000.

 

·         Issued 2,698,000 shares of common stock in exchange for $674,500 in cash.

 

·         Recognized debt extinguishment income of $13,725 from the discharge of certain accounts payable.

 

During the six months ended June 30, 2011 and 2010, cash paid for interest was $0 and $11,105 respectively, and cash paid for income taxes was $7,072 and $0, respectively.

 

 

**Note 6 – Common Stock Options and Warrants**

 

Common stock options and warrants consist of:

 

|                              |   |   |                                                     |                                                                                                                 |                                                     | Number of                                                                                                            |            | Price                                                                                                                |
|-----------------------------------|--------|--------|----------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|-----------------|----------------------------------------------------------------------------------------------------------------------|
|                              |   |   |                                                     |                                                                                                                 |                                                     | Options                                                                                                              |            | Warrants                                                                                                             |   | Per Share |
|                              |   |   |                                                     |                                                                                                                 |                                                     |                                                                                                                 |            |                                                                                                                 |   |   |
| Outstanding at January 1, 2011    |   |   |                                                     |                   -   |                                                     |                   -   |  $         |                   -   |
| Granted, vested, and excercisable |   |   |          885,000 |                                                                                                                 |          320,000 |                                                                                                                 |  .50 - .75 |
|                              |   |   |                                                     |                                                                                                                 |                                                     |                                                                                                                 |            |                                                                                                                 |   |   |
| Outstanding at June 30, 2011      |   |   |                                                     |          885,000                                                             |                                                     |          320,000                                                             |  $         |  .50 - .75                                                                                                      |

 

 

 

 

 

10

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COMCAM INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

 

**Note 7 – Distribution Rights Acquisition**

 

In April 2011, the Company entered into a letter of intent to acquire the distribution rights of 1st Choice Security Solutions (“1st Choice”) of Georgia for cash and common stock. The distribution rights will allow the Company to distribute products of Protrac iD in North and South America.

 

As of June 30, 2011, the Company had paid $42,734 to 1st Choice and expects to finalize the purchase of this intangible asset by September 30, 2011. As of the date of these financial statements, the Company expects to spend $70,000 more and issue 200,000 shares of common stock to finalize this intangible asset purchase.

 

        

**Note 8 – Subsequent Events**

 

The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued. Except for the matter discussed below, the Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.

 

In July 2011, the Company issued 242,385 shares of stock in exchange for $126,040.

 

 

**Note 9 – Recent Accounting Pronouncements**

 

In June 2011, the Financial Accounting Standards Board (the“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”).  ASU 2011-05 requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements.  Under the continuous statement approach, the statement would include the components and total of net income, the components and total of other comprehensive income and the total of comprehensive income.  Under the two statement approach, the first statement would include the components and total of net income and the second statement would include the components and total of other comprehensive income and the total of comprehensive income.  ASU 2011-05 does not change the items that must be reported in other comprehensive income.  ASU 2011-05 is effective retrospectively for interim and annual periods beginning after December 15, 2011, with early adoption permitted.  The Company is currently evaluating the impact of the adoption of ASU 2011-05 on its financial statements.

 

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs” (“ASU 2011-04”).  ASU 2011-04 does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it already is required and permitted under IFRS or U.S. GAAP.  For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS 13.   ASU 2011-04 is effective on a prospective basis for interim and annual periods beginning after December 15, 2011, with early adoption not permitted.  In the period of adoption, a reporting entity will be required to disclose a change, if any, in valuation technique and related inputs that result from applying ASU 2011-04 and to quantify the total effect, if practicable.  The Company is currently evaluating the impact of the adoption of ASU 2011-04 on its financial position, results of operations and disclosures.

 

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the financial statements of the Company.

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**Item 2.         ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This *Management’s Discussion and Analysis of Financial Condition and**Results of Operations* and other parts of this quarterly report contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include but are not limited to those discussed in the subsection entitled *Forward-Looking Statements and Factors That May Affect Future Results and Financial Condition* below. The following discussion should be read in conjunction with our financial statements and notes thereto included in this report. Our fiscal year end is December 31. All information presented herein is based on the six month period ended June 30, 2011. 

 

**Discussion and Analysis**

 

Our financial condition and results of operations depend primarily on revenue generated from the sale of our products and specialized services in addition to our ability to realize additional debt or equity financing. We can provide no assurance that revenue going forward will provide sufficient cash flows to sustain our operations though revenue approximating that required to sustain operations is anticipated in fiscal year 2011. Further, although we have no commitments for financing we remain in the process of procuring additional equity financing as we seek to redress any shortfall in cash flows to sustain operations while seeking to expand our business.

 

***Business***

 

We have two operating divisions. One focuses on product development, manufacturing and sales world-wide while the other focuses on the integration of command and control systems for correctional facilities across the United States.

 

Our product division has developed a video fusion platform that adds next generation, real-time interactive command-and-control capabilities to legacy security systems for greater performance at lower cost. The platform seamlessly integrates a suite of analytics, including third-party security solutions – access control, biometrics, radio frequency identification (RFID), chemical detection and seismic detection – to improve real-time decision-making for critical events over any wireless network. Our products have been deployed with the Department of Defense, Immigration & Customs Enforcement, and many other law enforcement and intelligence agencies in addition to businesses across a wide range of industries. On our own, or working with prime government contractors like DRS, Motorola, and Siemens, our products are deployed in such diverse locales as the John F. Kennedy International Airport, isolated sections of the Texas-Mexico border, and remote mountain passes in Afghanistan.

 

Our systems division acts as the general contractor or plays a key support role to leading government integrators. Our focus to date has been on installing and integrating security systems in juvenile to super-maximum security correctional facilities. We enable our clients to reach further operational excellence by providing a complete range of security integration services. In the past three years we have completed more than 15 security integration projects, with the largest topping $4.2M. We have the skill set and the resources to successfully complete projects in the $10M-$15M range.

 

 

 

 

 

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***Business Development Strategy**** *

 

We are pursuing numerous new domestic and international sales opportunities intended to increase revenue by leveraging our product and systems divisions to provide turn-key solutions across a spectrum of applications within the security industry. While expanding marketing efforts to reach new customers we continue to focus on offering our services as an original equipment manufacturer (OEM) for strategic resellers, in order to serve as a research and development partner, and to develop a network of dealers, resellers and system integrators with differing targeted market expertise. Meanwhile we continue to service existing customers with our products and services. 

 

Product Division

 

We intend to leverage pilot installations on the US/Mexico border, the Port of Philadelphia, and with Immigration and Customs Enforcement to focus on closing new proposals and contracts with the Department of Homeland Security. The key to this line of business is a value added reseller (VAR) agreement signed with DRS in 2010 offering an off-the-shelf advanced thermal tracking solution to be bundled with our microserver and software algorithms which addresses a major US initiative to fight border drug trafficking.  

 

We are also focused on transforming non-recurring engineering contracts that utilize our hardware and software designs into opportunities to develop a recurring royalty model. Our near term intention is to take advantage of certain installations that utilize our cloud computing platform which allows franchise operators and large retail chains to improve remote operations management. 

 

We also intend to develop a program to monetize our patents related to the integration of live video and analytics through a web portal used to make real time command and control decisions. 

 

Systems Division

 

We are focused on pursuing new contracts related to the incremental integration of security measures utilized by correctional facilities. Our business has been limited in the past by an inability to secure performance bonds at a reasonable cost. We have recently overcome this limitation and going forward we are confident in our ability to procure new contracts. In addition, we have expanded our highly profitable long-term maintenance agreement program to existing and future integration customers with a goal of establishing a recurring revenue stream from this business unit.

 

Mergers and Acquisitions

 

We intend to continue to seek out the acquisition of companies and products that add synergistic distribution partners and broader application integration. Our intention is to target companies with intellectual properties in biometric algorithms, RFID sensors, and prison perimeter offerings.

 

In April 2011, the Company entered into a letter of intent to acquire distribution rights from 1st Choice Security Solutions (“1st Choice”), an OEM supplier of ultra-long range RFID technology. The distribution rights will allow us to distribute Protrac iD products in North and South America. As of June 30, 2011, we had paid $42,734 to 1st Choice. We expect to finalize the distribution rights purchase by September 30, 2011, with an additional $70,000 cash outlay and the issuance 200,000 shares of common stock.

 

 

 

 

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Business Development Risks

 

Our business development strategy is prone to significant risks and uncertainties which can have an immediate impact on efforts to realize net cash flow and deter future prospects of revenue growth. We have a limited history of generating revenue which cannot be viewed as an indication of continued growth and a historical record of incurring losses. Should we be unable to consistently generate revenue and reduce or stabilize expenses on a consolidated basis to the point where we can realize net cash flow, such failure will have an immediate impact on our ability to continue our business operations.

Our financial condition and results of operations going forward will continue to depend primarily on revenue generated from the sale of specialized services and our ability to realize additional debt or equity financing. We can provide no assurance that future revenue will provide sufficient cash flow to sustain operations although the achievement of this milestone is anticipated in the near term. Further, we have no immediate commitments for additional financing though management is committed to procuring the capital required to develop our business.

 

**Results of Operations**

 

During the six month period ended June 30, 2011, we were engaged in (i) developing our *Internet Protocol* remote control platform cameras, micro servers, associated software, and unique end-to-end network solutions, (ii) providing turnkey system design and installation, maintenance contracts, and field support technicians to correctional facilities, (iii) completing debt financing arrangements, (iv) securing a performance bond, (v) performing due diligence and entering into a letter of intent with 1st Choice, and (vi) satisfying continuous public disclosure requirements.

 

***Revenue***

 

Revenue for the three months ended June 30, 2011, increased to $993,570 from $550,984 for the three months ended June 30, 2010, an increase of 80%. Revenue for the six months ended June 30, 2011, increased to $2,375,101 from $1,498,524 for the six months ended June 30, 2010, an increase of 58%. The increase in revenue over the comparable period is due to the procurement of new contracts by our systems division. We expect to continue to increase revenues in future periods through the sale of services to correction facilities and video products.

 

Cost of revenue for the three months ended June 30, 2011, was $681,168 compared to $375,499 for the three months ended June 30, 2010, an increase of 81%. Cost of revenue for the six months ended June 30, 2011, was $1,731,498 compared to $966,728 for the six months ended June 30, 2010, an increase of 79%. The increase in the cost of revenue in the current period can be attributed to the increase in revenue over the comparative period and increasing costs for materials. We expect the cost of revenue to increase in future periods along with increases in revenue.

****** 

Gross profit for the three months ended June 30, 2011, increased to $312,402 from $175,485 for the three months ended June 30, 2010, an increase of 78%. Gross profit for the six months ended June 30, 2011, increased to $643,603 from $531,796 for the six months ended June 30, 2010, an increase of 21%. The increase in gross profit over the comparable periods is primarily attributable to the increase in revenue over the comparative periods, while opposed by increasing materials costs. We expect that gross profit will continue to increase in correlation with anticipated increases in revenue over future periods. 

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***Expenses***

 

Operating expenses for the three months ended June 30, 2011, decreased to $730,365 from $938,813 for the three months ended June 30, 2010, a decrease of 22%. Operating expenses for the six months ended June 30, 2011, increased to $1,570,443 from $1,553,821 for the six months ended June 30, 2010, an increase of 1%. The decrease in operating expenses over the comparative three month periods is primarily attributable to our implementation of cost-cutting activities and operational efficiencies. The increase in operating expenses over the comparative six month periods is primarily attributable to the increase in general and administrative expenses. We expect that operating expenses will remain relatively constant in the near term as management continues to evaluate prospective operating efficiencies.

 

Depreciation and amortization expenses for the six months ended June 30, 2011 and 2010 were $121,571 and $210,925, respectively. The decrease in depreciation and amortization expenses over the respective periods can be attributed to a decrease in the amortization of intangible assets.

 

***Other Income (Expense)***

****** 

Interest income for the three months ended June 30, 2011 was $251 as compared to $151 for the three months ended June 30, 2010. Interest income for the six months ended June 30, 2011 was $606 as compared to $570 for the six months ended June 30, 2010. Interest expense for the three months ended June 30, 2011 was $35,873 as compared to $26,266 for the three months ended June 30, 2010. Interest expense for the six months ended June 30, 2011 was $61,346 as compared to $53,937 for the six months ended June 30, 2010. The increase in interest expense over the comparable three and six month periods can be attributed to outstanding debt obligations. We expect that interest expense will continue to increase as debt obligations mature.

 

***Net Loss***

****** 

Net loss for the three months ended June 30, 2011, was $445,585 as compared to a net loss of $775,718 for the three months ended June 30, 2010, a decrease of 43%. Net loss for the six months ended June 30, 2011, was $999,580 as compared to a net loss of $1,061,667 for the six months ended June 30, 2010, a decrease of 6%. The decrease in net loss over the comparable periods can be primarily attributed to decreases in losses from operations during the current three and six month periods. We expect to transition to net income in the near term with anticipated increases in revenue and consistency in operating expenses.

****** 

***Income Tax Expense (Benefit)***

 

We have an income tax benefit resulting from net operating losses to offset any future operating profit. The net operating loss carry forwards at December 31, 2010, was approximately $6,195,000. These losses will begin to expire in the year 2019. The amount of net operating loss carry forwards that can be used in any one year can be limited by significant changes in the ownership of the Company and by the applicable tax laws which are in effect at the time such carry forwards are utilized. Some states do not allow us to file consolidated income tax returns and offset our net operating loss carryforwards against Pinnacle’s taxable income. When applicable, we record income taxes payable and income tax expense for these states.

 

***Impact of Inflation***

 

We believe that inflation has had a negligible effect on operations over the past three years and that we can offset any inflationary pressures by improving operating efficiencies. 

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***Capital Expenditures***

 

We made no significant capital expenditures on property or equipment for the six months ended June 30, 2011 or 2010.

 

***Liquidity and Capital Resources***

 

At June 30, 2011 we had a working capital deficit of $232,925. 

 

At June 30, 2011 we had current assets of $1,491,475 that consisted of cash totaling $558,616, accounts receivable of $767,395, estimated earnings in excess of billings on uncompleted contracts of $155,668 and prepaid expenses of $9,796. Our total assets of $2,191,805 included current assets as well as intangible assets of $393,467, property and equipment of $132,677 and other assets of $174,186.

 

At June 30, 2011 we had current liabilities of $1,724,400 that consisted of accounts payable of $571,459, accrued expenses of $101,492, excess billings on uncompleted contracts of $136,449, a line of credit of $50,000 and the current portion of long-term debt of $865,000. Total liabilities of $2,105,018 include current liabilities as well as long-term debt of $221,018 and accrued expenses of $159,600.

 

Total stockholders’ equity was $86,787 as of June 30, 2011. 

 

Cash flows used in operations were $335,064 for the six months ended June 30, 2011 as compared to $382,246 for the six months ended June 30, 2010. The difference in cash flows used in operations over the comparative periods can be primarily attributed to a decrease in net losses, an adjustment to net losses from stock, option, and warrant compensation expenses, and an increase in accounts payable. We expect to realize cash flows provided by operating activities with an anticipated transition to net income in the near term. 

 

Cash flows used in investing activities were $43,063 for the six months ended June 30, 2011 as compared to $12,695 for the six months ended June 30, 2010. Cash flows used in investing activities in the current period are related to amounts paid to acquire the distribution rights of Protrac iD in addition to the purchase of property and equipment. We expect to continue to use cash flows in investing activities in future periods.

 

Cash flows provided by financing activities were $419,250 for the six months ended June 30, 2011 as compared to $499,103 for the six months ended June 30, 2010. Cash flows provided by financing activities for the current period are attributable to the issuance of common stock for cash and debt instruments offset by payments on long-term debt. We expect to continue to have cash flow provided by financing activities.

 

We had certain long-term debt obligations as of June 30, 2011:

 

·         Unsecured note payable to Global Convertible Megatrend, Ltd. (“Global Megatrend”) in the amount of $176,568 bearing interest at 7.5% and due in December 2012. The note may be converted to our common shares, at the option of the holder, based on certain terms related to outstanding shares and per share prices. Accrued interest at June 30, 2011 was $10,123.

 

·         Secured note payable to Paul Higbee in the amount of $465,000 bearing interest at 8%, due on March 31, 2012. Accrued interest at June 30, 2011 was $47,217. 

 

 

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·         Secured promissory note payable to Doug Bartek in the amount of $400,000 bearing interest at 18%, with a final payment of $472,000 on February 25, 2012. The obligation is secured by the stock of our wholly owned subsidiary, Pinnacle. Accrued interest at June 30, 2011 was $24,658, and an unamortized discount of $5,550 at June 30, 2011.

 

·         Unsecured note payable to Bayberry Capital, Inc., in the amount of $50,000 bearing interest at 12% and due in October 2012. The note may be converted to our common shares, at the option of the holder, based on certain terms related to outstanding shares and per share prices. Accrued interest at June 30, 2011 was $1,491.

 

We have a 2010 Benefit Plan registered under Form S-8 pursuant to which we can issue or option shares of our common stock to employees, directors, officers, consultants or advisors on the terms and conditions set forth therein. As of June 30, 2011 we had granted 885,000 stock options for a two year term at an exercise price of $0.50 a share under the Benefit Plan.

 

Our current assets are sufficient to maintain operations but insufficient to return to product research, development or manufacture over the next twelve (12) months. We need a minimum of $3,000,000 in debt or equity financing to fund these product related activities, expand our marketing efforts or raise our performance bond capacity, all of which are integral to our business success.  Unfortunately, we have no commitments or arrangements for this financing, though management is actively pursuing acceptable arrangements for prospective debt or equity placements. Our inability to obtain financing would have a material adverse affect on our business operations. 

 

We have a $100,000 line of credit with a bank which had a balance due of $50,000 at June 30, 2011. Accrued interest at June 30, 2011 was $13.

 

We have no commitments for future capital expenditures that were material at June 30, 2011. 

 

We have no defined benefit plan or contractual commitment with any of our officers or directors. 

 

We have no current plans for the purchase or sale of any plant or equipment. 

 

We hired several former employees of 1st Choice during July 2011. 

 

We do not expect to pay cash dividends in the foreseeable future.

 

***Off-Balance Sheet Arrangements***

 

As of June 30, 2011 we have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to stockholders.

 

 

 

 

 

 

 

 

 

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***Going Concern***

 

Our auditors have expressed an opinion as to our ability to continue as a going concern as a result of an accumulated deficit of $7,638,342 as of December 31, 2010 and a working capital deficit. Our ability to continue as a going concern remains dependent on an ability to realize net income and/or obtaining financing from outside sources. Management’s plan to address our ability to continue as a going concern includes (i) increases in revenue; (ii) decreases in general and administrative costs; (iii) financing from private placement sources; and (iv) converting outstanding debt to equity. Although we believe that we will be able to remain a going concern, through the methods discussed above, there can be no assurances that such methods will prove successful.

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***Critical Accounting Policies***

 

In Note 1 to the audited financial statements for the years ended December 31, 2010 and 2009, included in our Form 10-K, we discussed those accounting policies that are considered to be significant in determining the results of operations and our financial position. We believe that the accounting principles utilized by us conform to accounting principles generally accepted in the United States. The preparation of financial statements requires our management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate estimates. Our estimates are based on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions. 

 

***Revenue Recognition***

 

We generate revenues from product sales, consulting, installation of security systems, and support and maintenance contracts. Our revenue recognition policy is as follows:

 

·         Development and Delivery of Security Systems - Profits on long-term contracts are recorded primarily using the percentage of completion method for individual contracts. Estimated percentage of completion is determined on the basis of total costs expended as a percentage of total estimated costs. As our long-term contracts extend over one or more years, revisions in cost and profit estimates are reflected in the accounting period that the revisions become known. Due to the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term.

 

o   Contract costs include all direct materials, labor, and other costs. General and administrative costs are charged to expense as incurred. At the time a loss on a contract is expected, the entire amount of the estimated loss is recognized.

o   The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues earned in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues earned.

 
      - Support and Maintenance Revenue – Revenue from support and maintenance agreements is recognized ratably over the term of the agreement, which in most instances is one year. 

 
      - Service Revenue – Revenue from system upgrades is recognized as the services are performed. Revenue from training and development services is recognized as the services are performed. 

 
      - Product Sales Revenue – Revenue from product sales is recognized at the time the product is shipped and invoiced and collectibility is reasonably assured. We believe that revenue should be recognized at the time of shipment as title passes to the customer at the time of shipment. 

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      - Consulting Revenue – Revenues from consulting services are recognized when a consulting agreement is executed that establishes the amount and scope of service to be provided, the consulting services have been performed, and we have no additional rescission, refund, or customer satisfaction requirements, and collectibility of the amount billed is reasonably assured. 

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***Forward-Looking Statements and Factors That May Affect Future Results and Financial Condition***

 

The statements contained in the section titled *Management’s Discussion and Analysis of Financial Condition and**Results of Operations* and elsewhere in this current report, with the exception of historical facts, are forward-looking statements. Forward-looking statements reflect our current expectations and beliefs regarding our future results of operations, performance, and achievements. These statements are subject to risks and uncertainties and are based upon assumptions and beliefs that may or may not materialize. These statements include, but are not limited to, statements concerning: 

 

·         our anticipated financial performance;

·         the sufficiency of existing capital resources;

·         our ability to raise additional capital to fund cash requirements;

·         uncertainties related to our business;

·         increases in revenues;

·         the volatility of the stock market and;

·         general economic conditions.

 

We wish to caution readers that our operating results are subject to various risks and uncertainties that could cause our actual results to differ materially from those discussed or anticipated including the factors set forth in the section entitled *Risk Factors* included elsewhere in this report. We also wish to advise readers not to place any undue reliance on the forward-looking statements contained in this report, which reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update or revise these forward-looking statements to reflect new events or circumstances or any changes in our beliefs or expectations, other than as required by law.

 

###### ***Stock-Based Compensation***

######  

## We have adopted Accounting Standards Codification Topic (“ASC”) 718, Share-Based-Payment, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.

##  

## We account for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 505. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services.

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# ***Recent Accounting Pronouncements***

 

Please see Note 9 to our consolidated financial statements for recent accounting pronouncements.

**** 

**ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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Not required.

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**ITEM 4.          CONTROLS AND PROCEDURES**

***Evaluation of Disclosure Controls and Procedures***

In connection with the preparation of this report on Form 10-Q, an evaluation was carried out by our management, with the participation of the chief executive officer and the chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)). Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

Based on that evaluation, our management concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were effective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Commission’s rules and forms, and that such information was accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

***Changes in Internal Control over Financial Reporting***

There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the period ended June 30, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

**PART II – OTHER INFORMATION**

 

**ITEM 1.          LEGAL PROCEEDINGS**

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None.

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**ITEM 1A.       RISK FACTORS**

**** 

Our operations and securities are subject to a number of risks. Below we have identified and discussed the material risks that we are likely to face. Should any of the following risks occur, they will adversely affect our business, financial condition, and/or results of operations as well as the future trading price and/or the value of our securities.

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**Risks Related to our Business**

 

*OUR ABILITY TO CONTINUE AS A GOING CONCERN IS IN QUESTION*

 

Our auditors included an explanatory statement in their report on our consolidated financial statements for the years ended December 31, 2010 and 2009, stating that there are certain factors which raise substantial doubt about our ability to continue as a going concern. These factors include an accumulated deficit and working capital deficit.

 

*WE HAVE A HISTORY OF LOSSES AND MAY INCUR LOSSES FOR THE FORESEEABLE FUTURE*

 

We had an accumulated deficit of $8,637,922 as of June 30, 2011 and a net operating loss. We do expect net income in the next twelve months but can provide no assurance to this end. Should we realize net income in the near term we can provide no assurance that we will be able to sustain net income over time. 

 

*WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS*

 

We have historically had difficulty producing our products because of cash flow shortages. Though we have recently resumed limited production of our products, our future success depends in a significant part on our ability to evolve our hardware and software and to develop and introduce new products and technologies in response to market demands. If adequate funds are not available, our ability to develop or enhance products and services or otherwise respond to competitive pressures would be significantly limited. 

 

*THE VIDEO MONITORING SURVEILLANCE INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND OUR PRODUCTS COULD BECOME OBSOLETE AT ANY TIME*

** 

Evolving technology, updated industry standards, and frequent new product and service introductions characterize the video surveillance systems and security integration services markets; our products could become obsolete at any time. Competitors could develop products similar to or better than our own, finish development of new technologies in advance of our research and development, or be more successful at marketing new products, any of which factors may hurt our prospects for success. 

** 

*THE MARKET ACCEPTANCE OF OUR PRODUCTS IS CRITICAL TO OUR GROWTH*

 

We generate revenue from the design and sale of video surveillance systems and security integration services; therefore, market acceptance of our products is critical. If our customers do not accept or purchase our products, then our revenue, cash flow and/or operating results will be negatively impacted. 

** 

*WE COMPETE WITH LARGER AND BETTER-FINANCED CORPORATIONS*

 

Competition within the international market for video surveillance systems and security integration services is intense. While our products are distinguished by next-generation innovations that are more sophisticated, flexible and cost effective than many competitive products currently in the marketplace, a number of entities offer video surveillance systems, and new competitors may enter the market in the future. Some of our existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do, including well known multi-national corporations. 

 

 

 

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*WE ARE LARGELY DEPENDENT UPON FEW CUSTOMERS*We have in the past, and may in the future lose our customers or a substantial portion of our business with one or more major customers. If we do not sell products to our existing customers in the quantities anticipated, or if our customers reduce or terminate their relationships with us, market perception of our products and technology, growth prospects, and financial condition and results of operations could be harmed. Any termination of our relationship with our largest customers or any other customers could materially reduce our revenue.

 

*WE DEPEND ON ONE MANUFACTURER AND LIMITED SOURCE SUPPLIERS*

 

Pennsylvania-based Strategic Manufacturing Technologies, Inc. currently procures our components and manufactures our video surveillance systems. Our components are purchased for us from such source suppliers as Motorola, Inc., and Analog Devices, Inc. We anticipate that we will continue to depend upon one or few manufacturers, as well as a limited number of source suppliers, which dependence reduces the level of control we have and exposes us to significant risks such as inadequate capacity, late delivery, substandard quality and higher prices, all of which could adversely affect our business. We currently have no agreement with Strategic Manufacturing Technologies, Inc. for the manufacture of our video surveillance systems.

 

If our suppliers were unable to provide parts in the volumes needed or at an acceptable price, our manufacturer and we would have to identify and qualify acceptable replacements from alternative sources of supply. If we were unable to obtain these components in a timely fashion, we would likely not be able to meet demand. Any disruption of either component procurement or manufacturing delays could adversely affect our results of operations.

** 

*OUR SUCCESS DEPENDS ON THE ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL*

 

Our future success will depend substantially on the continued service and performance of Don Gilbreath, Robert Betty and other key personnel. We have relatively few senior personnel, and so the loss of Don Gilbreath, Robert Betty or any other key employees could have a material adverse effect on our business prospects, financial condition and results of operations. Our future success also depends on our ability to identify, attract, hire, train, retain and motivate technical, managerial and sales personnel. Competition for such personnel is intense, and we cannot assure that we will succeed in attracting and retaining such personnel. Our failure to attract and retain the necessary technical, managerial and sales personnel could have a material adverse effect on our business prospects, financial condition and results of operations. 

** 

*MISAPPROPRIATION OF PROPRIETARY RIGHTS OR CLAIMS OF INFRINGEMENT OR LEGAL ACTIONS RELATED TO INTELLECTUAL PROPERTY COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION*

 

Our success also depends significantly on protecting proprietary technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology or products. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. In addition, from time to time, third parties may assert patent, copyright, trademark and other intellectual property rights claims against us with respect to existing or future products or technology. If there is a successful claim of infringement and we fail or are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, our business and results of operations could be seriously harmed. 

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*OUR BUSINESS IS SUBJECT TO GOVERNMENTAL REGULATIONS*

 

International, national and local standards set by governmental regulatory authorities set the regulations by which communications are transmitted within and across respective territories. Our fixed and mobile digital video cameras and communication systems are subject to such regulation in addition to national, state and local taxation. Our products may be required to meet Federal Communications Commission approval, specifically for Classes A & B of Part 15 for the telephone related applications of our hardware products. Further, climate change legislation and greenhouse gas regulation is becoming increasingly ubiquitous. Although we successfully operate within current governmental regulations it is possible that regulatory changes could negatively impact our operations and cause us to diminish or cease operations.

 

*OUR PRODUCTS ARE SUBJECT TO ENVIRONMENTAL LAWS*

 

New hazardous materials restrictions have been and are being sought in numerous jurisdictions worldwide. As these restrictions take effect, we may need to change the components we use in certain key products. These components may be difficult to procure or more expensive than the components we currently use. As such, current and future environmental regulations could negatively impact our operations.

**** 

**Risks Related to our Stock**

 

*WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FUND AN EXPANSION OF OPERATIONS WHICH COULD ADVERSELY AFFECT OUR SHAREHOLDERS*

 

We will need to raise additional capital to fund an expansion of operations up to $3,000,000. Capital realized would be used for research and development expenses, product manufacture, marketing costs and performance bonds. We have no commitment from any sources of financing to provide us with any needed capital requirements. Any equity financing will obligate us to issue additional shares of our common stock which would result in dilution to existing shareholders. 

 

*We incur significant expenses as a result of being REGISTERED WITH THE COMMISSION, which EXPENSES negatively impact our financial performance.*

 

We incur significant legal, accounting and other expenses as a result of the Sarbanes-Oxley Act of 2002, as well as related rules implemented by the Commission, which control the corporate governance practices of public companies. Compliance with these laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, as discussed in the following risk factor, has substantially increased our expenses, including legal and accounting costs, and made some activities more time-consuming and costly. 

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*Our common stock is currently deemed to be “penny stock”, which makes it more difficult for investors to sell their shares.*

 

Our common stock is and will be subject to the “penny stock” rules adopted under section 15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of their securities.

** 

*OUR STOCK PRICE IS VOLATILE*

 

The market price for our common stock is subject to significant volatility and trading volumes are low. Factors affecting our stock price could include: 

 

·         our perceived prospects; 

·         negative variances in our operating results, and achievement of key business targets; 

·         limited trading volume in shares of our common stock in the public market; 

·         sales or purchases of large blocks of our stock; 

·         changes in, or failure to meet, earnings estimates; 

·         changes in securities analysts’ buy/sell recommendations; 

·         differences between our reported results and those expected by investors and securities analysts; 

·         announcements of new contracts or our competitors; 

·         announcements of legal claims against us; 

·         market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors; 

·         developments in the financial markets; 

·         general economic, political or stock market conditions. 

 

In addition, our stock price may fluctuate in ways unrelated or disproportionate to our operating performance. The general economic, political and stock market conditions that may affect the market price of our common stock are beyond our control. The market price of our common stock at any particular time may not remain the market price in the future. In the past, securities class action litigation has been instituted against companies following periods of volatility in the market price of their securities. Any such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources. 

 

**ITEM 2.          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

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**Purchases of Equity Securities made by the Issuer and Affiliated Purchasers**

 

None.

 

### 

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### **Recent Sales of Unregistered Securities**

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On July 5, 2011 we issued 242,385 shares of common stock in exchange for $126,040 in cash or $0.52 per share, in reliance on Section 4(2) of the Securities Act, to the following individuals:

 

| ***Investor***     | ***Shares***  | ***Consideration*** |
|--------------------|---------------|---------------------|
| Louise Woods       | 177,000       | $92,040             |
| SeaFin Capital LLC | 65,385        | $34,000             |
| ***Totals***       | ***242,385*** | ***$126,040***      |

 

 

We made this offering pursuant to Section 4(2) of the Securities Act based on the following factors: (1) the issuances were isolated private transactions which did not involve a public offering; (2) the offerees have access to the kind of information which registration would disclose; and (3) the offerees are financially sophisticated.

 

On June 5, 2011 we issued 120,000 shares of common stock in exchange for $30,000 in cash or $0.25 per share, pursuant to exemption provided by Rule 506 of Regulation D of the Securities Act, to the following individuals:

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| ***Investor***   | ***Shares***  | ***Consideration*** |
|------------------|---------------|---------------------|
| Dan Traxler      | 60,000        | $15,000             |
| William R. Bryan | 40,000        | $10,000             |
| Ron E. Barker    | 20,000        | $5,000              |
| ***Totals***     | ***120,000*** | ***$30,000***       |

**** 

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We complied with the requirements of Rule 506 of Regulation D of the Securities Act by: (i) foregoing any general solicitation or advertising to market the securities; (ii) selling only to accredited investors; (iii) having not violated antifraud prohibitions with the information provided to the investors; (iv) being available to answer questions by the investors; and (v) issuing restricted securities to the investors.

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**ITEM 3.          DEFAULTS ON SENIOR SECURITIES**

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None.

 

**ITEM 4.          (REMOVED AND RESERVED)**

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Removed and reserved.

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**ITEM 5.          OTHER INFORMATION**

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None.

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**ITEM 6.          EXHIBITS**

 

Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits on page 27 of this Form 10‐Q, and are incorporated herein by this reference.

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**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.

 

**** 

| ***ComCam International, Inc.****             *                                            | ***Date***                                  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------|
|  

 

/s/ Don Gilbreath

By: Don Gilbreath

Chief Executive Officer, Chief Financial Officer, Principal 

Accounting Officer and Director

  | ****** 

****** 

August 19, 2011 |

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**EXHIBITS**

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***Exhibit             Description***

****** 

3(i)*                        Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to the Form 10-SB/A filed with the Commission on June 26, 2006). 

3(ii)*                       Bylaws of the Company (incorporated by reference to the Form 10-SB/A filed with the Commission on June 26, 2006). 

10(i)*                     Employment Agreement between the Company, ComCam, Inc. and Don Gilbreath dated June 22, 2005 (incorporated by reference to the Form 10-SB/A filed with the Commission on June 26, 2006).

10(ii)*                    Amendment and Assignment of Convertible Debenture between the Company and Global Convertible Megatrend, LTD, dated June 30, 2007 (incorporated by reference to the Form 10-K/A filed with the Commission on January 14, 2011).

10(iii)*                   Joinder, Amendment and Consent Agreement between ComCam, Inc., the Company and HNI, LLC dated September 28, 2007 (incorporated by reference to the Form 10-QSB filed with the Commission on November 14, 2007).

10(iv)*                   Amendment Agreement dated February 14, 2008 (incorporated by reference to the Form 10-K filed with the Commission on April 14, 2008).

10(v)*                    Amended and Restated Debenture between the Company and HNI dated July 10, 2009 (incorporated by reference to the Form 10-Q filed with the Commission on January 27, 2010).

10(vi)*                   Share Purchase Agreement between the Company, Pinnacle Integrated Systems, Inc., Robert Betty and Feng Brown dated December 30, 2009 (incorporated by reference to the Form 8-K filed with the Commission on December 31, 2009).

10(vii)*                  Secured Promissory Note from Paul Higbee dated March 31, 2010 (incorporated by reference to the Form 10-K/A filed with the Commission on January 14, 2011).

10(viii)*                 Debt Settlement Agreement between the Company and Paul Higbee dated March 31, 2010 (incorporated by reference to the Form 10-K/A filed with the Commission on January 14, 2011).

10(ix)*                   Restated Accord and Satisfaction Agreement dated March 24, 2011 (incorporated by reference to the Form 8-K/A filed with the Commission on May 16, 2011.

14*                         Code of Ethics adopted March 24, 2008 (incorporated by reference to the Form 10-K filed with the Commission on April 14, 2008).

21*                         Subsidiaries (incorporated by reference to the Form 10-K filed with the Commission on April 16, 2010).

31                           Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14 of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (attached).

32                           Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (attached).

99*                         Pinnacle Integrated Systems, Inc. audited financial statements for the period ended December 30, 2009 and the years ended December 31, 2008 and 2007 (predecessor to ComCam International, Inc.) (incorporated by reference to the Form 10-KA/2 filed with the Commission on March 9, 2011).

101. INS                XBRL Instance Document†

101. PRE               XBRL Taxonomy Extension Presentation Linkbase†

101. LAB              XBRL Taxonomy Extension Label Linkbase†

101. DEF               XBRL Taxonomy Extension Label Linkbase†

101. CAL              XBRL Taxonomy Extension Label Linkbase†

101. SCH              XBRL Taxonomy Extension Schema†

 

*                              Incorporated by reference to previous filings of ComCam International.

†                                              Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished” and not “filed” or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, or deemed “furnished” and not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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