##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-QSB
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended MARCH 31, 2007
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the Transition period from 
to
 Commission file number 0-28484
 QualMark Corporation
  Colorado
    
    
    
    84-1232688(State or other jurisdiction of
    
    
    
    (I.R.S. Employerincorporation or organization)
    
    
    
    Identification No.)
 4580 Florence Street, Denver, CO
    
    
    
    80238(Address of principal executive offices)
    
    
    
    (Zip Code)
 (303) 254-8800
 
  o þ
 o þ
 
 o o
    o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1. CONSOLIDATED FINANCIAL STATEMENTSItem 2.Item 3.PART II OTHER INFORMATIONItem 1.Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESINDEX TO EXHIBITSCEO Certification of Section 302CFO Certification of Section 302Certification of Section 906    Table of Contents  
  
  
 For the three
    
    For the threemonths ended
    
    months endedMarch 31,
    
    March 31,2007
    
    2006Net revenue
    
    $
    3,607
    
    
    $
    4,198Cost of sales
    
    
    2,012
    
    
    
    2,429Gross profit
    
    
    1,595
    
    
    
    1,769Selling, general and administrative expenses
    
    
    1,143
    
    
    
    1,205Research and development expenses
    
    
    236
    
    
    
    159Income from operations
    
    
    216
    
    
    
    405Other expense:Interest, net
    
    
    (68
    )
    
    
    (73
    )Income before income taxes
    
    
    148
    
    
    
    332Income tax expense
    
    
    (61
    )
    
    
    (63
    )Net income
    
    $
    87
    
    
    $
    269Net income per share  basic
    
    $
    0.01
    
    
    $
    0.04Net income per share  diluted
    
    $
    0.01
    
    
    $
    0.03Weighted average number of common shares  basic
    
    
    8,788,000
    
    
    
    4,442,000Weighted average number of common shares  diluted
    
    
    8,872,000
    
    
    
    9,298,000
  2




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##### Table of Contents



March 31, 2007
    
    December 31, 2006(UNAUDITED)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    883
    
    
    $
    1,179Trade accounts receivable, net of allowance for
doubtful accounts of $50 for each period
    
    
    3,197
    
    
    
    3,420Inventories, net
    
    
    2,843
    
    
    
    2,524Current deferred tax assets, net
    
    
    943
    
    
    
    943Other current assets
    
    
    263
    
    
    
    143Total current assets
    
    
    8,129
    
    
    
    8,209Property and equipment, net
    
    
    759
    
    
    
    787Restricted cash
    
    
    90
    
    
    
    90Goodwill
    
    
    1,057
    
    
    
    1,057Intangible assets
    
    
    1,037
    
    
    
    1,012Non-current deferred tax assets, net
    
    
    369
    
    
    
    430Other assets
    
    
    477
    
    
    
    464$
    11,918
    
    
    $
    12,049LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    742
    
    
    $
    719Accrued expenses
    
    
    675
    
    
    
    682Deferred revenue
    
    
    38
    
    
    
    18Current portion of long-term debt
    
    
    413
    
    
    
    913Revolving line of credit
    
    
    1,014
    
    
    
    1,100Total current liabilities
    
    
    2,882
    
    
    
    3,432Deferred revenue and other
    
    
    23
    
    
    
    29Long-term debt
    
    
    1,819
    
    
    
    1,627Total liabilities
    
    
    4,724
    
    
    
    5,088Commitments and contingenciesShareholders equity:Common stock; no par value; 15,000,000 shares
authorized; 8,792,256 shares (2007)
and 8,779,362 shares (2006) issued and outstanding
    
    
    10,555
    
    
    
    10,409Accumulated deficit
    
    
    (3,361
    )
    
    
    (3,448
    )Total shareholders equity
    
    
    7,194
    
    
    
    6,961$
    11,918
    
    
    $
    12,049
  3




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##### Table of Contents



Common Stock
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Deficit
    
    
    TotalBalance January 1, 2007
    
    
    8,779,362
    
    
    $
    10,409
    
    
    $
    (3,448
    )
    
    $
    6,961Common stock issued for interest on convertible debt
    
    
    12,394
    
    
    
    19
    
    
    
    
    
    
    
    19Options exercised
    
    
    500
    
    
    
    1
    
    
    
    
    
    
    
    1Beneficial conversion feature on convertible debt and interest
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    101Stock-based compensation expense
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    25Net income
    
    
    
    
    
    
    
    
    
    
    87
    
    
    
    87Balance March 31, 2007
    
    
    8,792,256
    
    
    $
    10,555
    
    
    $
    (3,361
    )
    
    $
    7,194
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##### Table of Contents



Three
    
    Threemonths ended
    
    months endedMarch 31, 2007
    
    March 31, 2006Cash Flows From Operating Activities:Net income
    
    $
    87
    
    
    $
    269Adjustments to reconcile net income to net cash
provided by operating activities:Change in provision for inventory allowance
    
    
    (5
    )
    
    
    5Change in provision for accounts receivable allowance
    
    
    
    
    
    
    (7
    )Depreciation and amortization
    
    
    82
    
    
    
    100Stock-based compensation expense
    
    
    25
    
    
    
    31Loss on sale of assets
    
    
    1
    
    
    
    Amortization of debt discount
    
    
    3
    
    
    
    Deferred tax expense
    
    
    61
    
    
    
    61Paid in kind (common stock) interest expense
    
    
    19
    
    
    
    22Change in operating assets and liabilities:Trade accounts receivable
    
    
    223
    
    
    
    (14
    )Inventories
    
    
    (314
    )
    
    
    (22
    )Other assets
    
    
    (155
    )
    
    
    (109
    )Accounts payable and accrued expenses
    
    
    13
    
    
    
    (148
    )Deferred revenue and other
    
    
    17
    
    
    
    (30
    )Net cash provided by operating activities
    
    
    57
    
    
    
    158Cash Flows From Investing Activities:Purchase of
Derritron Inc. assets
    
    
    (40
    )
    
    
    Acquisition of property and equipment
    
    
    (18
    )
    
    
    (32
    )Net cash used in investing activities
    
    
    (58
    )
    
    
    (32
    )Cash Flows From Financing Activities:Issuance of common stock upon exercise of options
    
    
    1
    
    
    
    Proceeds from borrowings
    
    
    500
    
    
    
    Repayments on borrowings
    
    
    (796
    )
    
    
    (227
    )Net cash used in financing activities
    
    
    (295
    )
    
    
    (227
    )Net decrease in cash and cash equivalents
    
    
    (296
    )
    
    
    (101
    )Cash and cash equivalents at beginning of period
    
    
    1,179
    
    
    
    529Cash and cash equivalents at end of period
    
    $
    883
    
    
    $
    428Supplemental Disclosure:Interest paid
    
    $
    59
    
    
    $
    45Income tax paid
    
    $
    5
    
    
    $
    30Non cash Investing and Financing Activities:Beneficial conversion feature on convertible debt
    
    $
    100
    
    
    $
    Conversion of convertible debt to common stock
    
    $
    
    
    
    $
    40Preferred stock dividends
    
    $
    
    
    
    $
    60Accretion of preferred stock
    
    $
    
    
    
    $
    37
  5




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6




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Three Months EndedMarch 312006Expected life
    
    
    3
    yearsVolatility
    
    
    129
    %Risk-free interest rate
    
    
    3.00
    %Dividend yield
    
    
    0
    %
   WeighedWeighted
    
    
    AverageShares
    
    
    Average
    
    
    Remaining
    
    
    AggregateUnder
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOption
    
    
    Price
    
    
    Life
    
    
    ValueOutstanding at January 1, 2007
    
    
    861,360
    
    
    $
    1.84Granted
    
    
    
    
    
    
    Exercised
    
    
    (500
    )
    
    
    0.60Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2007
    
    
    860,860
    
    
    $
    1.84
    
    
    3.95 years
    
    $
    333,000Exercisable at March 31, 2007
    
    
    609,290
    
    
    $
    1.87
    
    
    3.65 years
    
    $
    255,000
  7




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Nonvested
    
    
    WeightedShares
    
    
    AverageUnder
    
    
    Grant DateOption
    
    
    Fair ValueNonvested at January 1, 2007
    
    
    251,570
    
    
    $
    1.76Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested at March 31, 2007
    
    
    251,570
    
    
    $
    1.76
    March 31,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    2,181
    
    
    $
    2,098Work in process
    
    
    226
    
    
    
    250Finished goods
    
    
    625
    
    
    
    370Less: Allowance for obsolescence
    
    
    (189
    )
    
    
    (194
    )$
    2,843
    
    
    $
    2,524
    March 31, 2007
    
    December 31, 2006Ling Electronics trade name/symbol (indefinite life)
    
    $
    849
    
    
    $
    849ACG Dynamics customer list (5 year life)
    
    
    152
    
    
    
    152ACG Dynamics non compete (2 year life)
    
    
    74
    
    
    
    74Derritron
Inc. technical drawings (10 year life)
    
    
    20
    
    
    
    Copyright, patents, and trademarks (2 to 20 year life)
    
    
    402
    
    
    
    402CE Certification (4 year life)
    
    
    64
    
    
    
    64Other intangibles (3 to 5 year life)
    
    
    83
    
    
    
    611,644
    
    
    
    1,602Less: Accumulated amortization
    
    
    (607
    )
    
    
    (590
    )$
    1,037
    
    
    $
    1,012
  8




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Credit Agreement
    Convertible Debt
      9




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Three Months EndedMarch 31, 2007
    
    March 31, 2006BASIC:Net income
    
    $
    87
    
    
    $
    269Accretion of redeemable preferred stock
    
    
    
    
    
    
    (60
    )Preferred stock dividends
    
    
    
    
    
    
    (37
    )Net income available to common
shareholders  basic
    
    $
    87
    
    
    $
    172Weighted average shares outstanding 
basic
    
    
    8,788
    
    
    
    4,442Net income per share  basic
    
    $
    0.01
    
    
    $
    0.04DILUTED:Net income
    
    $
    87
    
    
    $
    269Interest expense from convertible debt
    
    
    
    
    
    
    15Net income available to common
shareholders  diluted
    
    $
    87
    
    
    $
    284Weighted average shares outstanding 
basic
    
    
    8,788
    
    
    
    4,442Dilutive securities
    
    
    84
    
    
    
    4,856Weighted average shares outstanding 
diluted
    
    
    8,872
    (a)
    
    
    9,298Net income per share diluted
    
    $
    0.01
    
    
    $
    0.03
 
 (a)
    
    Does not include common shares obtainable upon conversion of
convertible debt, as the effect would be anti-dilutive.
     10




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HALT/HASS
    
    ED
    
    TOTALTHREE MONTHS ENDED MARCH 31, 2007Net revenue
    
    $
    2,804
    
    
    $
    803
    
    
    $
    3,607Gross profit
    
    
    1,380
    
    
    
    215
    
    
    
    1,595THREE MONTHS ENDED MARCH 31, 2006Net revenue
    
    $
    3,408
    
    
    $
    790
    
    
    $
    4,198Gross profit
    
    
    1,504
    
    
    
    265
    
    
    
    1,769
  AUSTRALIA/UNITED
    
    
    
    
    
    ASIA
    
    NEWSTATES
    
    EUROPE
    
    PACIFIC
    
    ZEALAND
    
    TOTALTHREE MONTHS ENDED MARCH 31, 2007Sales
    
    $
    2,241
    
    
    $
    524
    
    
    $
    842
    
    
    
    
    
    
    $
    3,607Long lived assets, net
    
    
    3,275
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    3,330THREE MONTHS ENDED MARCH 31, 2006Sales
    
    $
    2,366
    
    
    $
    56
    
    
    $
    1,604
    
    
    $
    172
    
    
    $
    4,198
     11




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Three Months Ended March 31, 2007 Compared With Three Months Ended March 31, 2006
   HALT/HASS Revenue (HALT/HASS)
  12
    Table of Contents    Electrodynamic Revenue (ED)
               13




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Credit Agreement
    Convertible Debt
       14




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Business Environment
  Suppliers
  International Operations
  Intellectual Property
  Acquisition
  Legal Proceedings
  Government Regulation
  Critical Accounting Policies and Estimates
  Contractual Obligations
  Recently Issued Accounting Pronouncements
  15




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(a)
    
    Exhibits  See Index to Exhibits(b)
    
    Reports on Form 8-K during the quarter ended March 31, 2007:On February 23, 2007, the Company issued a press release announcing an entry into a new loan
and security agreement with Partners for Growth L.P.On February 28, 2007, the Company issued a press release announcing its earnings for the year
ended December 31, 2006.On March 14, 2007, the Company issued a press release announcing an entry into a Default
Waiver and Fifth Amendment to a loan and security agreement with Silicon Valley Bank.
 16




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QualMark CorporationDate: May 10, 2007
    
    By:
    
    /s/ CHARLES D. JOHNSTONCharles D. Johnston President, Chief Executive OfficerDate: May 10, 2007
    
    By:
    
    /s/ ANTHONY A. SCALESEAnthony A. ScaleseChief Financial Officer& Principal Accounting Officer
 17




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EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Amended and Restated Articles of Incorporation of the Company.(1)3.2
    
    Amended and Restated Bylaws of the Company.(1)3.3
    
    Certificate of Designation for Series A Preferred Stock.(5)3.4
    
    Amended Certificate of Designation for Series A Preferred Stock.(5)3.5
    
    Statement of Change of Registered Agent.(5)4.1
    
    Form of Certificate for Shares of Common Stock.(1)4.6
    
    Form of Warrant issued to holders of 10% secured promissory notes.(1)10.1
    
    Qualmark Corporation 1993 Incentive Stock Option Plan.(1)10.2
    
    Qualmark Corporation 1996 Stock Option Plan.(3)10.3
    
    Employment Agreement dated March 1, 1993 by and between the Company and W. Preston Wilson.(1)10.4
    
    Employment Agreement dated August 15, 1994 by and between the Company and J. Wayne Farlow.(1)10.5
    
    Agreement dated September 30, 1995 by and between the Company and Gregg K. Hobbs.(1)10.8
    
    Addendum to Agreement dated as of December 21, 1995 by and between the Company and Gregg K.
Hobbs.(1)10.11
    
    Loan and Security Agreement dated April 30, 1996, by and between Qualmark Corporation and Silicon
Valley Bank, as amended by Amendment to Loan and Security Agreement dated August 18, 1997.(2)10.12
    
    Loan and Security Agreement dated December 22, 1998, by and between Qualmark Corporation and U.S.
Bank National Association.(4)10.13
    
    Waiver and Amendment to Loan Agreement dated March 15, 1999 by and between Qualmark and U.S. Bank
National Association.(4)10.14
    
    Second Amendment to Loan Agreement dated August 23, 1999 by and between Qualmark and U.S. Bank
National Association.(5)10.15
    
    Settlement Agreement dated August 30, 1999 by and among Qualmark Corporation and Screening Systems,
Inc.(5)10.16
    
    Preferred Stock Purchase Agreement dated September 1, 1999, including Warrant to Purchase 139,535
Shares of Common Stock.(5)10.17
    
    Third Amendment to Loan Agreement dated March 31, 2000 by and between Qualmark and U.S. Bank
National Association.(6)10.18
    
    Employment Agreement dated July 17, 2000 by and between the Company and Charles D. Johnston.(7)10.19
    
    Second Amendment to Promissory Notes and Fifth Amendment to Loan Agreement dated February 1, 2001
by and between Qualmark and U.S. Bank National Association.(8)10.20
    
    Third Amendment to Promissory Notes and Sixth Amendment to Loan Agreement dated June 29, 2001 by
and between Qualmark and U.S. Bank National Association.(9)10.21
    
    Fourth Amendment to Promissory Notes and Seventh Amendment to Loan Agreement dated January 31, 2002
by and between Qualmark and U.S. Bank National Association. (10)10.22
    
    Series C Preferred Stock Purchase Agreement dated March 27, 2002 (11)10.23
    
    Series C Preferred Stock Certificate of Designations (11)10.24
    
    Series B Preferred Stock Certificate of Designations (11)10.25
    
    Fifth Amendment to Promissory Notes and Eighth Amendment to Loan Agreement dated January 23, 2003
by and between Qualmark and U.S. Bank National Association.(12)10.25(b)
    
    Sixth Amendment to Promissory Notes and Ninth Amendment to Loan Agreement dated July 25, 2003 by
and between Qualmark and U.S. Bank National Association(13)10.26
    
    Irrevocable Letter of Credit issued to Catellus Development Corporation (12)




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EXHIBITNUMBER
    
    DESCRIPTION10.26(b)
    
    Warrant agreement to purchase 25,000 shares of Common Stock dated July 25, 2003 (13)10.27
    
    Seventh Amendment to Promissory Notes and Tenth Amendment to Loan Agreement dated February 27, 2004
by and between Qualmark and U.S. Bank National Association. (14)10.28
    
    Settlement Agreement and Payment Schedule dated February 13, 2004, by and between Qualmark
Corporation and Gregg K. Hobbs. (14)10.29
    
    Eighth Amendment to Promissory Notes and Eleventh Amendment to Loan Agreement dated April 20, 2004
by and between Qualmark and U.S. Bank National Association.(15)10.30
    
    Loan and Security Agreement dated November 9, 2004 by and between Qualmark and Silicon Valley Bank
(16)10.31
    
    Loan and Security Agreement dated November 11, 2004 by and between Qualmark and Partners for Growth
(17)10.32
    
    Asset Purchase Agreement dated November 12, 2004 by and between Qualmark and ACG Dynamics, Inc. (17)10.33
    
    Loan and Security Agreement dated December 8, 2005 by and between Qualmark and Silicon Valley Bank
(18)10.34
    
    Amendment to Loan and Security Agreement dated December 12, 2005 by and between Qualmark and
Partners for Growth (18)10.35
    
    Asset Purchase Agreement dated December 13, 2005 by and between Qualmark and SatCon Technology.(18)10.36
    
    Loan and Security Agreement dated February 20, 2007 by and between Qualmark and Partners for Growth
(19)10.37
    
    Fifth Amendment to Loan and Security Agreement dated March 13, 2006 by and between Qualmark and
Silicon Valley Bank (19)14
    
    Director and Officer Code of Ethics (14)31.1
    
    CEO Certification of Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    CFO Certification of Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certifications of Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference from the Companys Registration Statement No. 333-1454-D on Form
SB-2.(2)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10- QSB for the quarter
ended September 30, 1997.(3)
    
    Incorporated by reference from the Companys Proxy Statement for the 1996 Annual Meeting of
Shareholders.(4)
    
    Incorporated by reference from the Companys Annual Report of Form 10-KSB for the year ended
December 31, 1998.(5)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10- QSB for the quarter
ended September 30, 1999.(6)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10- QSB for the quarter
ended June 30, 2000.(7)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10- QSB for the quarter
ended September 30, 2000.(8)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2000.(9)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10- QSB for the quarter
ended June 30, 2001.(10)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2001.(11)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2002.(12)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2002.(13)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2003.(14)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2003.(15)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2004.(16)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2004.(17)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2004.(18)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2005.(19)
    
    Incorporated by reference from the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2006.