UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
October 31, 2017
| OR |
| [ ] | 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 0-5449
COMARCO, INC.
(Exact name of registrant as specified in its charter)
| California | 95-2088894 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification No.) |
28202 Cabot Road, Suite 300, Laguna Niguel, California 92677
(Address of principal executive offices and zip code)
(949) 599-7400
(Registrant’s telephone number, including area code)
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 | [X] | No | [ ] |
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| Yes | [X] | No | [ ] |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer, accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [X] | |||
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | [ ] | No | [X] |
The registrant had 14,614,165 shares of common stock outstanding as of December 15, 2017.
COMARCO, INC. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2017
TABLE OF CONTENTS
| 2 |
PART I — FINANCIAL INFORMATION
COMARCO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
| (Unaudited) | ||||||||
| October 31, | January 31, | |||||||
| 2017 | 2017 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 589 | $ | 618 | ||||
| Other current assets | 18 | 14 | ||||||
| Total current assets | 607 | 632 | ||||||
| Total assets | $ | 607 | $ | 632 | ||||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 3 | $ | 6 | ||||
| Accrued liabilities | 265 | 384 | ||||||
| Income taxes payable | - | 5 | ||||||
| Total current liabilities | 268 | 395 | ||||||
| Long Term Liabilities | ||||||||
| Preferred shares subject to mandatory redemption | 700 | - | ||||||
| Total liabilities | 968 | 395 | ||||||
| Commitments and Contingencies (Note 7) | ||||||||
| Stockholders’ Equity: | ||||||||
| Series A Contingent Convertible Preferred stock, no par value, 10,000,000 shares authorized; 7,000,000 shares issued or outstanding | - | - | ||||||
| Common stock, $0.10 par value, 50,625,000 shares authorized; 14,614,165 shares issued and outstanding at July 31, 2017 and January 31, 2017 | 1,461 | 1,461 | ||||||
| Additional paid-in capital | 18,429 | 18,410 | ||||||
| Accumulated deficit | (20,251 | ) | (19,634 | ) | ||||
| Total stockholders’ (deficit) equity | (361 | ) | 237 | |||||
| Total liabilities and stockholders’ (deficit) equity | $ | 607 | $ | 632 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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COMARCO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 31, | October 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Royalty income | $ | - | $ | - | $ | 6 | $ | - | ||||||||
| Cost of revenue | - | - | - | (472 | ) | |||||||||||
| Gross profit | - | - | 6 | 472 | ||||||||||||
| Selling, general and administrative expenses | 199 | 301 | 623 | 1025 | ||||||||||||
| 199 | 301 | 623 | 1025 | |||||||||||||
| Operating loss | (199 | ) | (301 | ) | (617 | ) | (553 | ) | ||||||||
| Other income, net | - | 1 | - | 1,705 | ||||||||||||
| (Loss) income from operations before income taxes | (199 | ) | (300 | ) | (617 | ) | 1,152 | |||||||||
| Income tax expense | - | - | - | - | ||||||||||||
| Net (loss) income | $ | (199 | ) | $ | (300 | ) | $ | (617 | ) | $ | 1,152 | |||||
| (Loss) income per share basic and diluted | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | 0.08 | |||||
| Weighted-average shares outstanding basic and diluted: | 14,615 | 14,644 | 14,615 | 14,644 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
COMARCO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine Months Ended | ||||||||
| October 31, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | (617 | ) | $ | 1,152 | |||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | - | 2 | ||||||
| Stock-based compensation expense | 19 | 18 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable due from suppliers | - | 122 | ||||||
| Other current assets | (4 | ) | 12 | |||||
| Accounts payable | (3 | ) | (756 | ) | ||||
| Accrued liabilities | (119 | ) | (369 | ) | ||||
| Income taxes payable | (5 | ) | - | |||||
| Net cash (used in) provided by operating activities | (729 | ) | 181 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Restricted cash | - | 77 | ||||||
| Net cash provided by investing activities | - | 77 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of preferred shares | 700 | - | ||||||
| Net cash provided by financing activities | 700 | - | ||||||
| Net (decrease) increase in cash and cash equivalents | (29 | ) | 258 | |||||
| Cash and cash equivalents, beginning of period | 618 | 680 | ||||||
| Cash and cash equivalents, end of period | $ | 589 | $ | 938 | ||||
| Supplementary disclosures of cash flow information: | ||||||||
| Cash paid for income taxes, net of refunds | $ | 6 | $ | - | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | Organization |
Comarco, Inc. was incorporated in California in 1960 and its common stock has been publicly traded since 1971, when it was spun-off from Genge Industries, Inc. Comarco, Inc.’s wholly-owned subsidiary, Comarco Wireless Technologies, Inc. (“CWT”), was incorporated in the state of Delaware in September 1993. Comarco and CWT are collectively referred to as “we,” “us,” “our,” “Comarco,” or the “Company”.
| 2. | Current Developments, Future Operations, Liquidity and Capital Resources |
The unaudited consolidated financial statements have been prepared assuming that we will continue to operate as a going concern. As of October 31, 2017, we had working capital of $339,000. We have ceased traditional operations and are currently generating no product related revenues. As discussed in Note 8, on September 11, 2017, we sold 7,000,000 shares of our Series A Participating Preferred Stock for gross proceeds to us in the amount of $700,000 (“Series A Financing”). We believe the proceeds from our Series A Financing will provide us sufficient capital to allow us to discharge our liabilities and commitments in the normal course of business over the next twelve months. However, our ability to continue to operate as a going concern beyond that period is highly dependent on our ability to successfully resolve our current litigation, monetize our portfolio of patents, generate positive cash flow and/or obtain borrowings or raise additional capital.
Our business is currently focused on potentially realizing value from our ongoing or future IP enforcement actions and other litigation, and if successful, further exploring opportunities to expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of some or all our patent portfolio.
On February 3, 2015, we filed a lawsuit against Apple, Inc. (“Apple”) for patent infringement. The complaint alleges that Apple products sold in the United States utilizing the Apple Lightning® power supply adapter system, including most iPad®, iPhone®, and iPod® products, infringe the Company’s patented intellectual property. This lawsuit represents our most significant enforcement effort to date, and, together with the Targus and Best Buy lawsuits described elsewhere in this document, demonstrates our ongoing and accelerated efforts to methodically pursue those companies that we believe have infringed on the intellectual property estate that we have developed over the last 20 years. In September of 2015, Apple filed a petition with the Patent Trial and Appeal Board (the “PTAB”) of the United States Patent and Trademark Office requesting inter partes review of our U.S. Patent No. 8,492,933 B2 (the “933 Patent”). On February 22, 2017, the PTAB issued its finding, ruling in Apple’s favor. We believe the PTAB erred in its ruling, and we have appealed the ruling to the Court of Appeals for the Federal Circuit. We estimate that the appeals process will require approximately 12 months to run its course. While we believe that the proceeds from our Series A Financing (see Note 8) should provide us sufficient capital to pursue the appeal through a decision from the Court of Appeals for the Federal Circuit., it is possible that we may require incremental financing to pursue the appeal to conclusion, particularly if the appeals process runs longer than anticipated. If we require additional financing, there can be no assurance that we will be able to obtain requisite financing on acceptable terms, if at all.
On February 13, 2015, we filed a lawsuit against Best Buy for patent infringement under the patent laws of the United States. The complaint alleges that certain Best Buy power charging products sold in the United States under the Rocketfish brand infringe the Company’s patented intellectual property. Best Buy’s supplier Battery Biz filed a petition with the PTAB requesting an inter partes review. Their request was granted. The parties subsequently settled resulting in a dismissal of the action against Best Buy and termination of the inter partes review.
We have and will continue to analyze alternatives to build and/or preserve value for our stakeholders, including, but not limited to, exploring additional investment and incremental financing from current and/or new investors, the engagement of advisors to assist in exploring strategic options for us as well as identifying potential partnerships for the purpose of monetizing some or all of our patent portfolio and past, present, and future infringement claims. However, there can be no assurances that we will be successful in identifying and/or implementing any of these alternatives, or if implemented, that any of these alternatives will successfully preserve or increase shareholder value.
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 2. | Current Developments, Future Operations, Liquidity and Capital Resources (continued) |
We believe that our patent portfolio covering key technical aspects of our products could potentially generate a future revenue stream based upon royalties paid to us by others for the use of some or all of our patented technology in third-party products. We continue to explore opportunities to protect, and monetize our patent portfolio, including through the sale or licensing of our patent portfolio. We may or may not resume our traditional activities of producing innovative charging solutions for battery powered devices. There are no assurances that any of these potential opportunities or activities will occur or be successful.
| 3. | Summary of Significant Accounting Policies |
The summary of our significant accounting policies presented below is designed to assist the reader in understanding our consolidated financial statements. Such financial statements and related notes are the representations of our management, who are responsible for their integrity and objectivity.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of January 31, 2017, which has been derived from our audited financial statements, and our unaudited interim consolidated financial statements as of, and for the three and nine months ended October 31, 2017 included herein have been prepared without audit in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and with the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for its fiscal year ended January 31, 2017 (the “2017 Form 10-K”), which was filed with the Securities and Exchange Commission, (“SEC”) on May 1, 2017. The unaudited interim consolidated financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the consolidated results for the interim periods presented. The consolidated results for the three and nine months ended October 31, 2017 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2018.
Reclassification
Certain prior year and prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
Principles of Consolidation
The unaudited interim consolidated financial statements of the Company include the accounts of Comarco, Inc. and CWT, its wholly owned subsidiary. All material intercompany balances, transactions, and profits and losses have been eliminated.
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 3. | Summary of Significant Accounting Policies (continued) |
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the periods reported. Actual results could materially differ from those estimates.
Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the valuation allowances for deferred tax assets and determination of stock-based compensation.
Cash and Cash Equivalents
All highly liquid investments with original maturity dates of three months or less when acquired are classified as cash and cash equivalents.
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, accounts payable and accrued liabilities. The carrying amount of cash and cash equivalents, accounts payable, and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments.
Legal expense classification
All legal expenses, including expenses related to our intellectual property litigation, maintenance of our patent portfolio, public company legal expense, and all other litigation expense, are included in selling, general, and administrative expenses in the accompanying condensed consolidated statement of operations.
Income tax expense
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any required valuation allowance. We continue to maintain a full valuation allowance on the entire deferred tax asset balance. This valuation allowance was established based on management’s overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating loss carry forwards and temporary differences. Due to the current and prior years’ operating losses, the adjusted net deferred tax assets remained fully reserved as of July 31, 2017.
Net (Loss) Income Per Common Share
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period excluding the dilutive effect of potential common stock, which for us consists solely of stock awards. Diluted earnings per share reflects the dilution that would result from the exercise of all dilutive stock awards outstanding during the period. The effect of such potential common stock is computed using the treasury stock method (see Note 5).
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 3. | Summary of Significant Accounting Policies (continued) |
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board “FASB” issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which is intended to improve financial reporting about leasing transactions. The new guidance will require lessees to recognize on their balance sheets the assets and liabilities for the rights and obligations created by leases and to disclose key information about the leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 is effective for us in the first quarter of fiscal 2020. As we do not have any long-term leases, we do not expect the adoption of this updated authoritative guidance to have a significant impact on our consolidated financial statements.
We do not believe that any other recently issued, but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements.
| 4. | Stock-Based Compensation |
We grant stock awards for a fixed number of shares to employees, consultants’, and directors pursuant to our shareholder-approved equity incentive plans.
The total compensation cost for vested awards not yet recognized is approximately $6,750 as of October 31, 2017. The vested awards are expected to fully recognized as compensation expense by the end of fiscal year 2018.
During the three and nine months ended October 31, 2017 and 2016, no stock options and no restricted stock units were granted.
We account for stock-based compensation using the modified prospective method, which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model for options with ratable term vesting. The valuation model requires the input of subjective assumptions. These assumptions include estimating the length of time optionees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of our common stock price over the expected term, and the number of awards that will ultimately not complete their vesting requirements (“forfeitures”). Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related amount recognized as an expense on the consolidated statements of operations. As required under applicable accounting rules, we review our value stock-based awards granted in future periods. The values derived from using either the Lattice Binomial or the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may differ from our current estimates.
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COMARCO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 4. | Stock-Based Compensation (continued) |
The compensation expense recognized is summarized in the table below (in thousands except per share amounts):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 31, | October 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Stock-based compensation expense | $ | 7 | $ | - | $ | 19 | $ | 18 | ||||||||
| Impact on basic and diluted earnings per share | $ | - | $ | - | $ | - | $ | - | ||||||||
Transactions and other information related to stock options outstanding under these plans for the three and nine months ended October 31, 2017 are summarized below:
| Outstanding Options | ||||||||
| Weighted-Ave. | ||||||||
| Number of | Exercise | |||||||
| Shares | Price | |||||||
| Balance, January 31, 2017 | 1,100,000 | $ | 0.37 | |||||
| Options granted | - | - | ||||||
| Options canceled or expired | - | - | ||||||
| Options exercised | - | - | ||||||
| Balance, October 31, 2017 | 1,100,000 | $ | 0.37 | |||||
| Stock Options Exercisable at October 31, 2017 | 760,000 | $ | 0.44 | |||||
As of October 31, 2017, the stock awards outstanding have an aggregate intrinsic value of $0, based on a closing market price of $0.03 per share on October 31, 2017. The following table summarizes information about the Company’s stock awards outstanding at October 31, 2017:
| Awards Outstanding | Options Exercisable | ||||||||||||||||||||||||||
| Range of | Number of options | Weighted-Ave. Remaining Contractural | Weighted-Ave. Exercise/Grant | Number of options | Weighted-Ave. Exercise | ||||||||||||||||||||||
| Exercise / Grant Prices | Outstanding | Life | Price | Exercisable | Price | ||||||||||||||||||||||
| $ | 0.09 | 300,000 | 8.99 | $ | 0.09 | - | $ | 0.09 | |||||||||||||||||||
| $ | 0.14 | - | $ | 0.16 | 300,000 | 7.63 | $ | 0.15 | 300,000 | $ | 0.15 | ||||||||||||||||
| $ | 0.40 | 385,000 | 4.75 | $ | 0.40 | 385,000 | $ | 0.40 | |||||||||||||||||||
| $ | 1.09 | 100,000 | 1.03 | $ | 1.00 | 60,000 | $ | 1.09 | |||||||||||||||||||
| $ | 4.53 | 15,000 | 0.33 | $ | 4.53 | 15,000 | $ | 4.53 | |||||||||||||||||||
| 1,100,000 | 760,000 | ||||||||||||||||||||||||||
Shares available under the plans for future grants at October 31, 2017 totaled 323,535.
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| 5. | Net (Loss) Income Per Share |
We calculate basic (loss) income per share by dividing net (loss) income by the weighted-average number of common shares outstanding during the reporting period. Diluted (loss) income per share reflects the effects of dilutive potential common shares. Because we incurred a net loss for the three and nine months ended October 31, 2017, basic and diluted loss per share for this period were the same because the inclusion of potential common shares would have been dilutive. For the three and nine months ended October 31, 2016, basic and diluted income per share was the same as all potential common shares were antidilutive.
Potential common shares of 35,427,100 and 35,310,836 relating to outstanding warrants and to stock awards to directors and our employee have been excluded from diluted weighted average common shares for the three and nine months ended October 31, 2017 and 2016, respectively, as the effect would have been antidilutive.
| 6. | Accrued Liabilities |
Accrued liabilities consist of the following as of October 31, 2017 and January 31, 2017 (in thousands):
| October 31, | January 31, | |||||||
| 2017 | 2017 | |||||||
| Accrued legal and professional fees | $ | 148 | $ | 94 | ||||
| Accrued payroll and related expenses | 10 | 21 | ||||||
| Accrued consulting | - | 80 | ||||||
| Other | 107 | 189 | ||||||
| $ | 265 | $ | 384 | |||||
| 7. | Commitments and Contingencies |
Executive Severance Commitments
We have a severance compensation agreement with our Chief Executive Officer, Thomas Lanni. This agreement requires us to pay Mr. Lanni, in the event of a termination of employment following a change of control of the Company or certain other circumstances, the amount of his then current annual base salary and the amount of any bonus amount he would have achieved for the year in which the termination occurs plus the acceleration of unvested options. We have not recorded any liability in the accompanying condensed consolidated financial statements for this agreement.
Executive and Board of Directors Compensation
On November 2, 2013, the Company approved a deferred compensation plan for its Chief Executive Officer and Board of Directors. As of October 31, 2017, no compensation expense has been accrued under this deferred compensation plan as its goal has not yet been attained.
Effective April 1, 2017, $1,250 per month of the retainer paid to the non-employee directors other than the Chairman of the Board was indefinitely deferred and the annual cash retainer was reduced to zero to enable the Company to spend incremental resources on it IP enforcement activities. Upon the achievement of certain, specific, targeted balance sheet targets, the deferred amounts will be paid out.
Effective December 31, 2015, $2,500 per month of the retainer to be paid to the Chairman of the Board was indefinitely deferred to enable the Company to spend incremental resources on its intellectual property enforcement activities. Upon the achievement of certain, specific, targeted balance sheet targets, the deferred amounts will be paid out.
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7. Commitments and Contingencies (continued)
Legal Contingencies
On February 3, 2015, we filed a lawsuit against Apple, Inc. for patent infringement. The complaint alleges that Apple products sold in the United States utilizing the Apple Lightning® power supply adapter system, including most iPad®, iPhone®, and iPod® products, infringe the Company’s patented intellectual property. This lawsuit represents our most significant enforcement effort to date, and, together with the Targus and Best Buy lawsuits described elsewhere in this document, demonstrates our ongoing and accelerated efforts to methodically pursue those companies that we believe have infringed on the intellectual property estate that we have developed over the last 20 years. In September of 2015, Apple filed a petition with the PTAB requesting inter partes review of our 933 Patent. On February 22, 2017, the PTAB issued its finding, ruling in Apple’s favor. We believe the PTAB erred in its ruling, and we have appealed the ruling to the Court of Appeals for the Federal Circuit. We estimate that the appeals process will require approximately 12 months to run its course. While we believe that the proceeds from our Series A Financing (see Note 8) should provide us sufficient capital to pursue the appeal through a decision from the Court of Appeals for the Federal Circuit, it is possible that we may require incremental financing to pursue the appeal to conclusion, particularly if the appeals process runs longer than anticipated. If we require additional financing, there can be no assurance that we will be able to obtain requisite financing on acceptable terms, if at all.
In addition to the pending matters described above, we are, from time to time, involved in various legal proceedings incidental to the conduct of our business. We are unable to predict the ultimate outcome of these matters.
8. Preferred Shares Subject to Mandatory Redemption
On September 11, 2017, we entered into subscription agreements (the “Subscription Agreements”) with our two largest existing shareholders, Broadwood Partners, L.P. (“Broadwood”) and Elkhorn Partners Limited Partnership (“Elkhorn”), pursuant to which Broadwood and Elkhorn subscribed for and purchased 5,000,000 shares and 2,000,000 shares, respectively, of the Company’s Series A Preferred Stock (as such term is defined in Item 5.03 of Form 8-K dated June 30, 2017 and filed with the SEC on Sept 13, 2017 ) at a purchase price of $0.10 per share, resulting in gross proceeds to the Company of $700,000. The Subscription Agreements also provide that upon the earlier of a Triggering Event (as described in Item 5.03 as referred to above) or immediately prior to the liquidation, dissolution or winding up of the Company (subject to the provisions of the Series A Preferred Stock) The “Preferred shares subject to mandatory redemption” are required to be redeemed three years from the date of issuance and as a result are recorded as a liability in the accompanying Condensed Consolidated Balance Sheets. The warrants will be issued to Broadwood and Elkhorn, as referred to above upon a Triggering Event for no additional consideration, warrants (the “Warrants”) to purchase 18,026,500 shares and 7,210,600 shares, respectively, of the Company’s common stock (“Common Stock”). If issued, the Warrants will have a term of eight years from the date of issuance and an exercise price of $0.05 per share of Common Stock. The Subscription Agreements and Warrants also contain other representations, warranties, and covenants customary for an investment of this type.
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9. Subsequent Events
The Company follows the guidance in FASB ASC Topic 855, Subsequent Events (“ASC 855”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before the consolidated financial statements are issued or are available to be issued. ASC 855 sets forth (i) the period after the balance sheet date during which management of a reporting entity evaluates events or transactions that may occur for potential recognition or disclosure in the consolidated financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its consolidated financial statements, and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.
Subsequent to October 31, 2017, and through the date of this filing, the Company has had no material subsequent events.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our unaudited interim consolidated financial statements and the related notes and other financial information appearing elsewhere in this quarterly report on Form 10-Q.
Forward-Looking Statements
This report on Form 10-Q contains statements relating to our future plans and developments, financial goals and operating performance that are based on our current beliefs and assumptions. These statements constitute “forward-looking statements” within the meaning of federal securities laws. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “could,” “may,” “should,” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements are only based on facts and factors known by us as of the date of this report. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically referenced under the section below entitled “Risk Factors,” as well as those discussed elsewhere in this report and in our other filings” with the Securities and Exchange Commission (“SEC”). Readers are urged not to place undue reliance on these forward-looking statements, which reflect information as of the date of this report.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, whether as a result of new information, future events or otherwise, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.
In addition to the risks, uncertainties, and other factors discussed above or elsewhere in this report, additional risks, uncertainties, and other factors that could cause or contribute to actual results differing materially from those expressed or implied in any forward-looking statements include, without limitation, those set forth under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2017 (the “2017 Form 10-K”) filed with the SEC and those contained in the Company’s other filings with the SEC. Readers of this report are urged to review the descriptions of the risks, uncertainties and other factors contained in those other reports.
Going Concern
As of October 31, 2017, we had working capital of $339,000. We have ceased traditional operations and our currently generating no revenue. We believe the proceeds from our September 11, 2017 Series A Financing will provide us sufficient capital to allow us to discharge our liabilities and commitments in the normal course of business over the next twelve months. However, our ability to continue to operate as a going concern beyond that period is highly dependent on our ability to successfully resolve our current litigation, monetize our portfolio of patents, generate positive cash flow and/or obtain borrowings or raise additional capital.
Our business is currently focused on potentially realizing value from our ongoing or future IP enforcement actions and other litigation as well as further exploring opportunities to expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of some of all of our patent portfolio.
| 14 |
On February 3, 2015, we filed a lawsuit against Apple, Inc. (“Apple”) for patent infringement. The complaint alleges that Apple products sold in the United States utilizing the Apple Lightning® power supply adapter system, including most iPad®, iPhone®, and iPod® products, infringe the Company’s patented intellectual property. This lawsuit represents our most significant enforcement effort to date, and, together with the Targus and Best Buy lawsuits described elsewhere in this document, demonstrates our ongoing and accelerated efforts to methodically pursue those companies that we believe have infringed on the intellectual property estate that we have developed over the last 20 years. In September of 2015, Apple filed a petition with the Patent Trial and Appeal Board (the “PTAB”) of the United States Patent and Trademark Office requesting inter partes review of our U.S. Patent No. 8,492,933 B2 (the “933 Patent”). On February 22, 2017, the PTAB issued its finding, ruling in Apple’s favor. We believe the PTAB erred in its ruling, and we have appealed the ruling to the Court of Appeals for the Federal Circuit. We estimate that the appeals process will require approximately 12 months to run its course. While we believe that the proceeds from our Series A Financing should provide us sufficient capital to pursue the appeal through a decision from the Court of Appeals for the Federal Circuit, it is possible that we may require incremental financing to pursue the appeal to conclusion, particularly if the appeals process runs longer than anticipated. If we require additional financing, there can be no assurance that we will be able to obtain requisite financing on acceptable terms, if at all.
On February 13, 2015, we filed a lawsuit against Best Buy for patent infringement under the patent laws of the United States. The complaint alleges that certain Best Buy power charging products sold in the United States under the Rocketfish brand infringe the Company’s patented intellectual property. Best Buy’s supplier Battery Biz filed a petition with the PTAB requesting an inter partes review. Their request was granted. The parties subsequently settled resulting in a dismissal of the action against Best Buy and termination of the inter partes review.
We have and will continue to analyze alternatives to build and/or preserve value for our stakeholders, including, but not limited to, exploring additional investment and incremental financing from current and/or new investors, the engagement of advisors to assist in exploring strategic options for us as well as identifying potential partnerships to monetizing some or all of our patent portfolio and past, present, and future infringement claims. However, there can be no assurances that we will be successful in identifying and/or implementing any of these alternatives, or if implemented, that any of these alternatives will successfully preserve or increase shareholder value.
Basis of Presentation
The consolidated results of our operations presented in this report are not audited and are not necessarily indicative of the results to be expected for the entirety of the fiscal year ending January 31, 2018 or any other interim period during such year. Our fiscal year ends on January 31 and our fiscal quarters end on April 30, July 31, and October 31. Unless otherwise stated, all dates refer to our fiscal year and those fiscal quarters.
Executive Summary
Comarco, Inc. was incorporated in California in 1960 and its common stock has been publicly traded since 1971, when it was spun-off from Genge Industries, Inc. Comarco Inc.’s wholly-owned subsidiary Comarco Wireless Technologies, Inc. (“CWT”) was incorporated in the state of Delaware in September 1993. Comarco and CWT are collectively referred to as “we,” “us,” “our,” “Comarco,” or the “Company”.
We are primarily focused on potentially realizing value from our ongoing IP enforcement actions and other litigation as well as exploring opportunities to further expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of our patent portfolio.
In addition to the risks, uncertainties and factors discussed elsewhere in this quarterly report on Form 10-Q and in the Company’s other filings with the SEC, management currently considers the following additional trends, events, and uncertainties to be important to understanding our results of operations for the three and nine months ended October 31, 2017 and 2016:
| ● | We generated approximately $6,000 royalty income for the nine months ended October 31, 2017. We anticipate that we will generate minimal near term revenues from the development, design, royalties and distribution or sale of any products. |
| 15 |
| ● | On March 26, 2016, we entered into a confidential settlement and license agreement with Targus that resolves all claims arising from our litigation with Targus. Pursuant to the terms of the settlement agreement, we granted Targus a world-wide license to make, use, sell and distribute Licensed Products (as defined by the agreements), as well as a sublicense to have Licensed Products manufactured by third parties solely for the benefit of and sale to Targus. In addition, we granted Targus, for a limited number of units, the right to make, use, sell and distribute Licensed Products for third-party OEMs. In exchange for the license granted under the settlement agreement, Targus paid us a one-time, lump-sum payment on April 1, 2016, plus future per-unit royalty payments if Targus exceeds the limit on Licensed Products that Targus may sell to OEMs under the settlement agreement. We have been granted confidential treatment from the SEC related to the one-time payment, the calculation of royalty payments and the OEM unit limit pursuant to a confidential treatment request filed by the SEC. | |
| ● | On February 13, 2015, we filed a lawsuit against Best Buy for patent infringement under the patent laws of the United States. The complaint alleges that certain Best Buy power charging products sold in the United States under the Rocketfish brand infringe our patented intellectual property. Best Buy’s supplier Battery Biz filed a petition with the PTAB requesting an inter partes review. Their request was granted. The parties subsequently settled resulting in a dismissal of the action against Best Buy and termination of the inter partes review. | |
| ● | On February 3, 2015, we filed a lawsuit against Apple for patent infringement. The complaint alleges that Apple products sold in the United States utilizing the Apple Lightning® power supply adapter system, including most iPad®, iPhone®, and iPod® products, infringe our patented intellectual property. This lawsuit represents our most significant enforcement effort to date, and, together with the Targus and Best Buy lawsuits described elsewhere in this document, demonstrates our ongoing and accelerated efforts to methodically pursue those companies that we believe have infringed on the intellectual property estate that we have developed over the last 20 years. In September of 2015, Apple filed a petition with PTAB requesting inter partes review of our 933 Patent. On February 22, 2017, the PTAB issued its finding, ruling in Apple’s favor. We believe the PTAB erred in its ruling, and we have appealed the ruling to the Court of Appeals for the Federal Circuit. We estimate that the appeals process will require approximately 12 months to run its course. While we believe that the proceeds from our Series A Financing (see Note 8) should provide us sufficient capital to pursue the appeal through a decision from the Court of Appeals for the Federal Circuit, it is possible that we may require incremental financing to pursue the appeal to conclusion, particularly if the appeals process runs longer than anticipated. If we require additional financing, there can be no assurance that we will be able to obtain requisite financing on acceptable terms, if at all. |
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interim consolidated financial statements appearing elsewhere in this report, which have been prepared in accordance with GAAP. The preparation of these unaudited interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from our estimates.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Management believes there have been no significant changes during the three and nine months ended October 31, 2017 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the fiscal year ended January 31, 2017.
| 16 |
Results of Operations
The following tables set forth certain items as a percentage of revenue from our unaudited interim consolidated statements of operations for the three and nine months ended October 31, 2017 and 2016:
| (in thousands) | (in thousands) | |||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| October 31, | October 31, | Year over Year | ||||||||||||||||||||||
| Three | Nine | |||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | Months | Months | |||||||||||||||||||
| Revenues | $ | - | $ | - | $ | 6 | $ | - | - | % | 100 | % | ||||||||||||
| Operating income (loss) | $ | (199 | ) | $ | (300 | ) | $ | (617 | ) | $ | 1,152 | 34 | % | (154 | )% | |||||||||
| Net income (loss) | $ | (199 | ) | $ | (300 | ) | $ | (617 | ) | $ | 1,152 | 34 | % | (154 | )% | |||||||||
Cost of Sales
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
| October 31, | October 31, | Year over Year | ||||||||||||||||||||||||||||||||||||||
| Three | Nine | |||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | Months | Months | |||||||||||||||||||||||||||||||||||
| % of | % of | % of | % of | |||||||||||||||||||||||||||||||||||||
| Total | Total | Total | Total | |||||||||||||||||||||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||||||||||||||||||
| Product costs | $ | - | 0 | % | 0 | % | $ | - | 0 | % | $ | - | 0 | % | 0 | % | 0 | % | ||||||||||||||||||||||
| Supplier settlement | - | 0 | % | - | 0 | % | - | 0 | % | (472 | ) | 0 | % | 0 | % | 100 | % | |||||||||||||||||||||||
| Supplier chain overhead | - | 0 | % | 0 | % | - | 0 | % | - | 0 | % | 0 | % | 0 | % | |||||||||||||||||||||||||
| Inventory reserve and scrap charges | - | 0 | % | - | 0 | % | - | 0 | % | - | 0 | % | 0 | % | 0 | % | ||||||||||||||||||||||||
| $ | - | 0 | % | $ | - | 0 | % | $ | - | 0 | % | $ | (472 | ) | 0 | % | 0 | % | 100 | % | ||||||||||||||||||||
During the nine months ended October 31, 2016, we determined that the statute of limitations on the Zheng Ge contracts has lapsed. As a direct result, we wrote off receivables of $0.1 million and from liabilities of $0.6 million to Zheng Ge. The net write-off in the amount of $472,000 was recorded as a reduction of cost of goods sold.
Operating Costs and Expenses
| (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| October 31, | October 31, | Year over Year | |||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | Three Months | Nine Months | ||||||||||||||||||||||||||||||||||||
| % of Rev | % of Rev | % of Rev | % of Rev | ||||||||||||||||||||||||||||||||||||||
| Operating Expenses: | |||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | (199 | ) | 0 | % | 301 | 0 | % | $ | (623 | ) | 10,550 | % | $ | 1,025 | 0 | % | 34 | % | 39 | % | ||||||||||||||||||||
| $ | (199 | ) | 0 | % | $ | 301 | 0 | % | $ | (623 | ) | 10,550 | % | $ | 1,025 | 0 | % | 34 | % | 39 | % | ||||||||||||||||||||
Selling, general, and administrative (“SG&A”) expenses for the three and nine months ended October 31, 2017 decreased by approximately $102,000 and $402,000, respectively, compared to the corresponding periods ended October 31, 2016 as costs incurred related to our intellectual property and maintenance of our patent portfolio, litigation expenses, and other professional fees decreased. We had no employees in our sales and marketing department during the three and nine months ended October 31, 2017 and 2016. General and administrative related expenses consist of the salary of our only employee, our Chief Executive Officer and President, as well as professional fees, directors’ fees, and other costs and expenses attributable to being a public company.
| 17 |
Other Income, net
During the three and nine months ended October 31, 2017 and 2016, other income, net, was $0 and approximately $(0.4), and $0 and $1.7 million, respectively. Other income net for the nine months ended October 31, 2016 was related to the Company’s settlement with Targus.
Income Tax Expense
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any required valuation allowance. We continue to maintain a full valuation allowance on the entire deferred tax asset balance. This valuation allowance was established based on management’s overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating loss carry forwards and temporary differences. Due to the current and prior years’ operating losses, the adjusted net deferred tax assets remained fully reserved as of October 31, 2017.
Liquidity and Capital Resources
Cash and cash equivalents decreased approximately $29,000 from January 31, 2017 to $589,000 at October 31, 2017.
| (in thousands) | ||||||||
| Nine Months Ended October 31, | ||||||||
| 2017 | 2016 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | (729 | ) | $ | 181 | |||
| Investing activities | $ | - | $ | 77 | ||||
| Financing activities | $ | 700 | $ | - | ||||
Operating Activities
Cash used in operating activities was approximately $729,000 for the nine months ended October 31, 2017 and was primarily used to pay off the Company’s accounts payable.
Cash provided by operating activities was approximately $181,000 for the nine months ended October 31, 2016 and was primarily driven by the Company’s net income of approximately $1.2 million.
Investing Activities
Cash provided by investing activities was $700,00 form the issuance of 7,000,000 shares of “Preferred Shares subject to mandatory redemption” in the third quarter of 2017
Financing Activities
Cash provided by financing activities during the nine months ended October 31, 2017 and 2016 was $0 and $77,000, respectively. The cash provided by financing activities during the nine months ended October 31, 2016 was from the return of our security deposit as our corporate lease expired.
| 18 |
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (Principal Executive Officer) and Interim Chief Accounting Officer (Principal Financial Officer), to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer of the effectiveness, as of October 31, 2017, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). “Internal control over financial reporting” includes those policies and procedures that:
| (1) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; |
| (2) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and |
| (3) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements. |
Based on that evaluation, our Chief Executive Officer and Interim Chief Accounting Officer concluded that our disclosure controls and procedures were not effective based on our material weakness in the form of lack of segregation of duties, which stems from our limited capital resources. In order to remedy our lack of segregation of duties, we would need to raise additional capital or improve our capital position to hire additional financial and administrative staff
Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended October 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 19 |
| ITEM 1. | LEGAL PROCEEDINGS |
Comarco, Inc. vs. Apple Inc., Case No. 8:15-cv-00145, United States District Court for the Central District of California.
On February 3, 2015, we filed a lawsuit against Apple for patent infringement. The complaint alleges that Apple products sold in the United States utilizing the Apple Lightning® power supply adapter system, including most iPad®, iPhone®, and iPod® products, infringe our patented intellectual property. In September of 2015, Apple filed a petition with PTAB requesting inter partes review of our 933 Patent. On February 22, 2017, the PTAB issued its finding, ruling in Apple’s favor. We believe the PTAB erred in its ruling, and we have appealed the ruling to the Court of Appeals for the Federal Circuit. While we believe that the proceeds from our Series A Financing should provide us sufficient capital to pursue the appeal for the next 12 months, it is possible that we may require incremental financing to pursue the appeal to conclusion, particularly if the appeals process runs longer than anticipated. If we require additional financing, there can be no assurance that we will be able to obtain requisite financing on acceptable terms, if at all.
Comarco, Inc. vs. Best Buy Co. Inc., Case No. 8:15-cv-00256, United States District Court for the Central District of California.
On February 13, 2015, we filed a lawsuit against Best Buy for patent infringement under the patent laws of the United States. The complaint alleges that certain Best Buy power charging products sold in the United States under the Rocketfish brand infringe our patented intellectual property. Best Buy’s supplier Battery Biz filed a petition with the PTAB requesting an inter partes review. Their request was granted. The parties subsequently settled resulting in a dismissal of the action against Best Buy and termination of the inter partes review.
In addition to the matters described above, we are from time to time involved in various legal proceedings incidental to the conduct of our business. The legal proceedings potentially cover a variety of allegations spanning our entire business. We are unable to predict the ultimate outcome of all such matters.
| ITEM 1A. | RISK FACTORS |
Our business, financial condition and operations are subject to several factors, risks and uncertainties, including those previously disclosed under Part I. Item 1A “Risk Factors” of our annual report on 2017 Form 10-K as well as any amendments thereto or additions and changes thereto contained in any subsequent filings of quarterly reports on Form 10-Q or current reports on Form 8-K. The disclosures in our annual report on Form 10-K and our subsequent reports and filings are not necessarily a definitive list of all factors that may affect our business, financial condition and future results of operations. There have been no material changes to the risk factors as disclosed in 2017 Form 10-K.
| 20 |
| ITEM 6. | EXHIBITS |
| 101.INS* | XBRL Instance Document |
| 101.SCH* | XBRL Taxonomy Extension Schema Document |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkable Document |
| 101.DEF* | XBRL Taxonomy Definition Linkbase Document |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
| * | Filed herewith. |
| 21 |
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.
| COMARCO, INC. | |
| Date: December 15, 2017 | /s/ THOMAS W. LANNI |
Thomas W. Lanni President, Chief Executive Officer and Interim Chief Accounting Officer (Principal Executive Officer and Principal Financial Officer) |
| 22 |
EXHIBIT INDEX
| 101.INS* | XBRL Instance Document |
| 101.SCH* | XBRL Taxonomy Extension Schema Document |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | XBRL Taxonomy Definition Linkbase Document |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
| * | Filed herewith. |
| 23 |
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302
I, Thomas W. Lanni, certify that:
1. I have reviewed this Form 10-Q for the period ended October 31, 2017 of Comarco, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and | |
| d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
| a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: December 15, 2017 | By: | /s/ THOMAS W. LANNI |
| Thomas W. Lanni | ||
President, Chief Financial Officer and Interim Chief Accounting Officer | ||
| (Principal Executive and Accounting Officer and Principal Financial Officer) |
Exhibit 31.2
Certification of Principal Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Thomas Lanni, Chief Accounting Officer of Comarco, Inc., certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Comarco, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: December 15, 2017 | /s/ THOMAS W. LANNI |
Thomas W. Lanni Chief Accounting Officer (Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO SECTION 906
Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, the undersigned officer of Comarco Inc. (the “Company”), hereby certify to my knowledge that:
The Report on Form 10-Q for the period ended October 30, 2017 of the Company fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
| Dated: December 15, 2017 | By: | /s/ THOMAS W. LANNI |
| Thomas W. Lanni | ||
| President, Chief Financial Officer | ||
| (Principal Executive and Accounting Officer) |
Document and Entity Information - shares |
9 Months Ended | |
|---|---|---|
Oct. 31, 2017 |
Dec. 15, 2017 |
|
| Document And Entity Information | ||
| Entity Registrant Name | COMARCO INC | |
| Entity Central Index Key | 0000022252 | |
| Document Type | 10-Q | |
| Document Period End Date | Oct. 31, 2017 | |
| Amendment Flag | false | |
| Current Fiscal Year End Date | --01-31 | |
| Entity Filer Category | Smaller Reporting Company | |
| Entity Common Stock, Shares Outstanding | 14,614,165 | |
| Document Fiscal Period Focus | Q3 | |
| Document Fiscal Year Focus | 2018 |
Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands |
Oct. 31, 2017 |
Jan. 31, 2017 |
|---|---|---|
| Current Assets | ||
| Cash and cash equivalents | $ 589 | $ 618 |
| Other current assets | 18 | 14 |
| Total current assets | 607 | 632 |
| Total assets | 607 | 632 |
| Current Liabilities | ||
| Accounts payable | 3 | 6 |
| Accrued liabilities | 265 | 384 |
| Income taxes payable | 5 | |
| Total current liabilities | 268 | 395 |
| Long Term Liabilities | ||
| Preferred shares subject to mandatory redemption | 700 | |
| Total liabilities | 968 | 395 |
| Stockholders’ Equity: | ||
| Series A Contingent Convertible Preferred stock, no par value, 10,000,000 shares authorized; 7,000,000 shares issued or outstanding | ||
| Common stock, $0.10 par value, 50,625,000 shares authorized; 14,614,165 shares issued and outstanding at July 31, 2017 and January 31, 2017 | 1,461 | 1,461 |
| Additional paid-in capital | 18,429 | 18,410 |
| Accumulated deficit | (20,251) | (19,634) |
| Total stockholders’ (deficit) equity | (361) | 237 |
| Total liabilities and stockholders’ (deficit) equity | $ 607 | $ 632 |
Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parenthetical) - $ / shares |
Oct. 31, 2017 |
Jan. 31, 2017 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Series A Contingent Convertible Preferred stock, no par value | ||
| Series A Contingent Convertible Preferred stock, shares authorized | 10,000,000 | 10,000,000 |
| Series A Contingent Convertible Preferred stock, shares issued | 7,000,000 | 7,000,000 |
| Series A Contingent Convertible Preferred stock, shares outstanding | 7,000,000 | 7,000,000 |
| Common stock, par value | $ 0.10 | $ 0.10 |
| Common stock, shares authorized | 50,625,000 | 50,625,000 |
| Common stock, shares issued | 14,614,165 | 14,614,165 |
| Common stock, shares outstanding | 14,614,165 | 14,614,165 |
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Oct. 31, 2017 |
Oct. 31, 2016 |
Oct. 31, 2017 |
Oct. 31, 2016 |
|
| Income Statement [Abstract] | ||||
| Royalty income | $ 6 | |||
| Cost of revenue | (472) | |||
| Gross profit | 6 | 472 | ||
| Selling, general and administrative expenses | 199 | 301 | 623 | 1,025 |
| Operating expenses | 199 | 301 | 623 | 1,025 |
| Operating loss | (199) | (301) | (617) | (553) |
| Other income, net | 1 | 1,705 | ||
| (Loss) income from operations before income taxes | (199) | (300) | (617) | 1,152 |
| Income tax expense | ||||
| Net (loss) income | $ (199) | $ (300) | $ (617) | $ 1,152 |
| (Loss) income per share basic and diluted | $ (0.01) | $ (0.02) | $ (0.04) | $ 0.08 |
| Weighted-average shares outstanding basic and diluted: | 14,615,000 | 14,644,000 | 14,615,000 | 14,644,000 |
Organization |
9 Months Ended | ||
|---|---|---|---|
Oct. 31, 2017 | |||
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||
| Organization |
Comarco, Inc. was incorporated in California in 1960 and its common stock has been publicly traded since 1971, when it was spun-off from Genge Industries, Inc. Comarco, Inc.’s wholly-owned subsidiary, Comarco Wireless Technologies, Inc. (“CWT”), was incorporated in the state of Delaware in September 1993. Comarco and CWT are collectively referred to as “we,” “us,” “our,” “Comarco,” or the “Company”. |
Current Developments, Future Operations, Liquidity and Capital Resources |
9 Months Ended | ||
|---|---|---|---|
Oct. 31, 2017 | |||
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||
| Current Developments, Future Operations, Liquidity and Capital Resources |
The unaudited consolidated financial statements have been prepared assuming that we will continue to operate as a going concern. As of October 31, 2017, we had working capital of $339,000. We have ceased traditional operations and are currently generating no product related revenues. As discussed in Note 8, on September 11, 2017, we sold 7,000,000 shares of our Series A Participating Preferred Stock for gross proceeds to us in the amount of $700,000 (“Series A Financing”). We believe the proceeds from our Series A Financing will provide us sufficient capital to allow us to discharge our liabilities and commitments in the normal course of business over the next twelve months. However, our ability to continue to operate as a going concern beyond that period is highly dependent on our ability to successfully resolve our current litigation, monetize our portfolio of patents, generate positive cash flow and/or obtain borrowings or raise additional capital.
Our business is currently focused on potentially realizing value from our ongoing or future IP enforcement actions and other litigation, and if successful, further exploring opportunities to expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of some or all our patent portfolio.
On February 3, 2015, we filed a lawsuit against Apple, Inc. (“Apple”) for patent infringement. The complaint alleges that Apple products sold in the United States utilizing the Apple Lightning® power supply adapter system, including most iPad®, iPhone®, and iPod® products, infringe the Company’s patented intellectual property. This lawsuit represents our most significant enforcement effort to date, and, together with the Targus and Best Buy lawsuits described elsewhere in this document, demonstrates our ongoing and accelerated efforts to methodically pursue those companies that we believe have infringed on the intellectual property estate that we have developed over the last 20 years. In September of 2015, Apple filed a petition with the Patent Trial and Appeal Board (the “PTAB”) of the United States Patent and Trademark Office requesting inter partes review of our U.S. Patent No. 8,492,933 B2 (the “933 Patent”). On February 22, 2017, the PTAB issued its finding, ruling in Apple’s favor. We believe the PTAB erred in its ruling, and we have appealed the ruling to the Court of Appeals for the Federal Circuit. We estimate that the appeals process will require approximately 12 months to run its course. While we believe that the proceeds from our Series A Financing (see Note 8) should provide us sufficient capital to pursue the appeal through a decision from the Court of Appeals for the Federal Circuit., it is possible that we may require incremental financing to pursue the appeal to conclusion, particularly if the appeals process runs longer than anticipated. If we require additional financing, there can be no assurance that we will be able to obtain requisite financing on acceptable terms, if at all.
On February 13, 2015, we filed a lawsuit against Best Buy for patent infringement under the patent laws of the United States. The complaint alleges that certain Best Buy power charging products sold in the United States under the Rocketfish brand infringe the Company’s patented intellectual property. Best Buy’s supplier Battery Biz filed a petition with the PTAB requesting an inter partes review. Their request was granted. The parties subsequently settled resulting in a dismissal of the action against Best Buy and termination of the inter partes review.
We have and will continue to analyze alternatives to build and/or preserve value for our stakeholders, including, but not limited to, exploring additional investment and incremental financing from current and/or new investors, the engagement of advisors to assist in exploring strategic options for us as well as identifying potential partnerships for the purpose of monetizing some or all of our patent portfolio and past, present, and future infringement claims. However, there can be no assurances that we will be successful in identifying and/or implementing any of these alternatives, or if implemented, that any of these alternatives will successfully preserve or increase shareholder value.
We believe that our patent portfolio covering key technical aspects of our products could potentially generate a future revenue stream based upon royalties paid to us by others for the use of some or all of our patented technology in third-party products. We continue to explore opportunities to protect, and monetize our patent portfolio, including through the sale or licensing of our patent portfolio. We may or may not resume our traditional activities of producing innovative charging solutions for battery powered devices. There are no assurances that any of these potential opportunities or activities will occur or be successful. |
Summary of Significant Accounting Policies |
9 Months Ended | ||
|---|---|---|---|
Oct. 31, 2017 | |||
| Accounting Policies [Abstract] | |||
| Summary of Significant Accounting Policies |
The summary of our significant accounting policies presented below is designed to assist the reader in understanding our consolidated financial statements. Such financial statements and related notes are the representations of our management, who are responsible for their integrity and objectivity.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of January 31, 2017, which has been derived from our audited financial statements, and our unaudited interim consolidated financial statements as of, and for the three and nine months ended October 31, 2017 included herein have been prepared without audit in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and with the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for its fiscal year ended January 31, 2017 (the “2017 Form 10-K”), which was filed with the Securities and Exchange Commission, (“SEC”) on May 1, 2017. The unaudited interim consolidated financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the consolidated results for the interim periods presented. The consolidated results for the three and nine months ended October 31, 2017 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2018.
Reclassification
Certain prior year and prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
Principles of Consolidation
The unaudited interim consolidated financial statements of the Company include the accounts of Comarco, Inc. and CWT, its wholly owned subsidiary. All material intercompany balances, transactions, and profits and losses have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the periods reported. Actual results could materially differ from those estimates.
Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the valuation allowances for deferred tax assets and determination of stock-based compensation.
Cash and Cash Equivalents
All highly liquid investments with original maturity dates of three months or less when acquired are classified as cash and cash equivalents.
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, accounts payable and accrued liabilities. The carrying amount of cash and cash equivalents, accounts payable, and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments.
Legal expense classification
All legal expenses, including expenses related to our intellectual property litigation, maintenance of our patent portfolio, public company legal expense, and all other litigation expense, are included in selling, general, and administrative expenses in the accompanying condensed consolidated statement of operations.
Income tax expense
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any required valuation allowance. We continue to maintain a full valuation allowance on the entire deferred tax asset balance. This valuation allowance was established based on management’s overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating loss carry forwards and temporary differences. Due to the current and prior years’ operating losses, the adjusted net deferred tax assets remained fully reserved as of July 31, 2017.
Net (Loss) Income Per Common Share
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period excluding the dilutive effect of potential common stock, which for us consists solely of stock awards. Diluted earnings per share reflects the dilution that would result from the exercise of all dilutive stock awards outstanding during the period. The effect of such potential common stock is computed using the treasury stock method (see Note 5).
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board “FASB” issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which is intended to improve financial reporting about leasing transactions. The new guidance will require lessees to recognize on their balance sheets the assets and liabilities for the rights and obligations created by leases and to disclose key information about the leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 is effective for us in the first quarter of fiscal 2020. As we do not have any long-term leases, we do not expect the adoption of this updated authoritative guidance to have a significant impact on our consolidated financial statements.
We do not believe that any other recently issued, but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements. |
Stock-Based Compensation |
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| Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-Based Compensation |
We grant stock awards for a fixed number of shares to employees, consultants’, and directors pursuant to our shareholder-approved equity incentive plans.
The total compensation cost for vested awards not yet recognized is approximately $6,750 as of October 31, 2017. The vested awards are expected to fully recognized as compensation expense by the end of fiscal year 2018.
During the three and nine months ended October 31, 2017 and 2016, no stock options and no restricted stock units were granted.
We account for stock-based compensation using the modified prospective method, which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model for options with ratable term vesting. The valuation model requires the input of subjective assumptions. These assumptions include estimating the length of time optionees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of our common stock price over the expected term, and the number of awards that will ultimately not complete their vesting requirements (“forfeitures”). Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related amount recognized as an expense on the consolidated statements of operations. As required under applicable accounting rules, we review our value stock-based awards granted in future periods. The values derived from using either the Lattice Binomial or the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may differ from our current estimates.
The compensation expense recognized is summarized in the table below (in thousands except per share amounts):
Transactions and other information related to stock options outstanding under these plans for the three and nine months ended October 31, 2017 are summarized below:
As of October 31, 2017, the stock awards outstanding have an aggregate intrinsic value of $0, based on a closing market price of $0.03 per share on October 31, 2017. The following table summarizes information about the Company’s stock awards outstanding at October 31, 2017:
Shares available under the plans for future grants at October 31, 2017 totaled 323,535. |
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Net (Loss) Income Per Share |
9 Months Ended | ||
|---|---|---|---|
Oct. 31, 2017 | |||
| Earnings Per Share [Abstract] | |||
| Net (Loss) Income Per Share |
We calculate basic (loss) income per share by dividing net (loss) income by the weighted-average number of common shares outstanding during the reporting period. Diluted (loss) income per share reflects the effects of dilutive potential common shares. Because we incurred a net loss for the three and nine months ended October 31, 2017, basic and diluted loss per share for this period were the same because the inclusion of potential common shares would have been dilutive. For the three and nine months ended October 31, 2016, basic and diluted income per share was the same as all potential common shares were antidilutive.
Potential common shares of 35,427,100 and 35,310,836 relating to outstanding warrants and to stock awards to directors and our employee have been excluded from diluted weighted average common shares for the three and nine months ended October 31, 2017 and 2016, respectively, as the effect would have been antidilutive. |
Accrued Liabilities |
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| Payables and Accruals [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Liabilities |
Accrued liabilities consist of the following as of October 31, 2017 and January 31, 2017 (in thousands):
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Commitments and Contingencies |
9 Months Ended | ||
|---|---|---|---|
Oct. 31, 2017 | |||
| Commitments and Contingencies Disclosure [Abstract] | |||
| Commitments and Contingencies |
Executive Severance Commitments
We have a severance compensation agreement with our Chief Executive Officer, Thomas Lanni. This agreement requires us to pay Mr. Lanni, in the event of a termination of employment following a change of control of the Company or certain other circumstances, the amount of his then current annual base salary and the amount of any bonus amount he would have achieved for the year in which the termination occurs plus the acceleration of unvested options. We have not recorded any liability in the accompanying condensed consolidated financial statements for this agreement.
Executive and Board of Directors Compensation
On November 2, 2013, the Company approved a deferred compensation plan for its Chief Executive Officer and Board of Directors. As of October 31, 2017, no compensation expense has been accrued under this deferred compensation plan as its goal has not yet been attained.
Effective April 1, 2017, $1,250 per month of the retainer paid to the non-employee directors other than the Chairman of the Board was indefinitely deferred and the annual cash retainer was reduced to zero to enable the Company to spend incremental resources on it IP enforcement activities. Upon the achievement of certain, specific, targeted balance sheet targets, the deferred amounts will be paid out.
Effective December 31, 2015, $2,500 per month of the retainer to be paid to the Chairman of the Board was indefinitely deferred to enable the Company to spend incremental resources on its intellectual property enforcement activities. Upon the achievement of certain, specific, targeted balance sheet targets, the deferred amounts will be paid out.
Legal Contingencies
On February 3, 2015, we filed a lawsuit against Apple, Inc. for patent infringement. The complaint alleges that Apple products sold in the United States utilizing the Apple Lightning® power supply adapter system, including most iPad®, iPhone®, and iPod® products, infringe the Company’s patented intellectual property. This lawsuit represents our most significant enforcement effort to date, and, together with the Targus and Best Buy lawsuits described elsewhere in this document, demonstrates our ongoing and accelerated efforts to methodically pursue those companies that we believe have infringed on the intellectual property estate that we have developed over the last 20 years. In September of 2015, Apple filed a petition with the PTAB requesting inter partes review of our 933 Patent. On February 22, 2017, the PTAB issued its finding, ruling in Apple’s favor. We believe the PTAB erred in its ruling, and we have appealed the ruling to the Court of Appeals for the Federal Circuit. We estimate that the appeals process will require approximately 12 months to run its course. While we believe that the proceeds from our Series A Financing (see Note 8) should provide us sufficient capital to pursue the appeal through a decision from the Court of Appeals for the Federal Circuit, it is possible that we may require incremental financing to pursue the appeal to conclusion, particularly if the appeals process runs longer than anticipated. If we require additional financing, there can be no assurance that we will be able to obtain requisite financing on acceptable terms, if at all.
In addition to the pending matters described above, we are, from time to time, involved in various legal proceedings incidental to the conduct of our business. We are unable to predict the ultimate outcome of these matters. |
Preferred Shares Subject to Mandatory Redemption |
9 Months Ended |
|---|---|
Oct. 31, 2017 | |
| Preferred Shares Subject To Mandatory Redemption | |
| Preferred Shares Subject to Mandatory Redemption |
8. Preferred Shares Subject to Mandatory Redemption
On September 11, 2017, we entered into subscription agreements (the “Subscription Agreements”) with our two largest existing shareholders, Broadwood Partners, L.P. (“Broadwood”) and Elkhorn Partners Limited Partnership (“Elkhorn”), pursuant to which Broadwood and Elkhorn subscribed for and purchased 5,000,000 shares and 2,000,000 shares, respectively, of the Company’s Series A Preferred Stock (as such term is defined in Item 5.03 of Form 8-K dated June 30, 2017 and filed with the SEC on Sep 13, 2017 ) at a purchase price of $0.10 per share, resulting in gross proceeds to the Company of $700,000. The Subscription Agreements also provide that upon the earlier of a Triggering Event (as described in Item 5.03 as referred to above) or immediately prior to the liquidation, dissolution or winding up of the Company (subject to the provisions of the Series A Preferred Stock) The “Preferred shares subject to mandatory redemption” are required to be redeemed three years from the date of issuance and as a result are recorded as a liability in the accompanying Condensed Consolidated Balance Sheets. The warrants will be issued to Broadwood and Elkhorn, as referred to above upon a Triggering Event for no additional consideration, warrants (the “Warrants”) to purchase 18,026,500 shares and 7,210,600 shares, respectively, of the Company’s common stock (“Common Stock”). If issued, the Warrants will have a term of eight years from the date of issuance and an exercise price of $0.05 per share of Common Stock. The Subscription Agreements and Warrants also contain other representations, warranties, and covenants customary for an investment of this type. |
Subsequent Events |
9 Months Ended |
|---|---|
Oct. 31, 2017 | |
| Subsequent Events [Abstract] | |
| Subsequent Events |
9. Subsequent Events
The Company follows the guidance in FASB ASC Topic 855, Subsequent Events (“ASC 855”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before the consolidated financial statements are issued or are available to be issued. ASC 855 sets forth (i) the period after the balance sheet date during which management of a reporting entity evaluates events or transactions that may occur for potential recognition or disclosure in the consolidated financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its consolidated financial statements, and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.
Subsequent to October 31, 2017, and through the date of this filing, the Company has had no material subsequent events. |
Significant Accounting Policies (Policies) |
9 Months Ended |
|---|---|
Oct. 31, 2017 | |
| Accounting Policies [Abstract] | |
| Basis of Presentation |
Basis of Presentation
The accompanying condensed consolidated balance sheet as of January 31, 2017, which has been derived from our audited financial statements, and our unaudited interim consolidated financial statements as of, and for the three and nine months ended October 31, 2017 included herein have been prepared without audit in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and with the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for its fiscal year ended January 31, 2017 (the “2017 Form 10-K”), which was filed with the Securities and Exchange Commission, (“SEC”) on May 1, 2017. The unaudited interim consolidated financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the consolidated results for the interim periods presented. The consolidated results for the three and nine months ended October 31, 2017 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2018. |
| Reclassification |
Reclassification
Certain prior year and prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. |
| Principles of Consolidation |
Principles of Consolidation
The unaudited interim consolidated financial statements of the Company include the accounts of Comarco, Inc. and CWT, its wholly owned subsidiary. All material intercompany balances, transactions, and profits and losses have been eliminated. |
| Use of Estimates |
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the periods reported. Actual results could materially differ from those estimates.
Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the valuation allowances for deferred tax assets and determination of stock-based compensation. |
| Cash and Cash Equivalents |
Cash and Cash Equivalents
All highly liquid investments with original maturity dates of three months or less when acquired are classified as cash and cash equivalents. |
| Fair Value of Financial Instruments |
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, accounts payable and accrued liabilities. The carrying amount of cash and cash equivalents, accounts payable, and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. |
| Legal Expense Classification |
Legal expense classification
All legal expenses, including expenses related to our intellectual property litigation, maintenance of our patent portfolio, public company legal expense, and all other litigation expense, are included in selling, general, and administrative expenses in the accompanying condensed consolidated statement of operations. |
| Income Tax Expense |
Income tax expense
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any required valuation allowance. We continue to maintain a full valuation allowance on the entire deferred tax asset balance. This valuation allowance was established based on management’s overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating loss carry forwards and temporary differences. Due to the current and prior years’ operating losses, the adjusted net deferred tax assets remained fully reserved as of July 31, 2017. |
| Net (Loss) Income Per Common Share |
Net (Loss) Income Per Common Share
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period excluding the dilutive effect of potential common stock, which for us consists solely of stock awards. Diluted earnings per share reflects the dilution that would result from the exercise of all dilutive stock awards outstanding during the period. The effect of such potential common stock is computed using the treasury stock method (see Note 5). |
| Recent Accounting Pronouncements |
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board “FASB” issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which is intended to improve financial reporting about leasing transactions. The new guidance will require lessees to recognize on their balance sheets the assets and liabilities for the rights and obligations created by leases and to disclose key information about the leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 is effective for us in the first quarter of fiscal 2020. As we do not have any long-term leases, we do not expect the adoption of this updated authoritative guidance to have a significant impact on our consolidated financial statements.
We do not believe that any other recently issued, but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements. |
Stock-Based Compensation (Tables) |
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| Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Employee Service Share-based Compensation |
The compensation expense recognized is summarized in the table below (in thousands except per share amounts):
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| Schedule of Stock Options Granted |
Transactions and other information related to stock options outstanding under these plans for the three and nine months ended October 31, 2017 are summarized below:
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| Schedule of Stock Awards Outstanding |
The following table summarizes information about the Company’s stock awards outstanding at October 31, 2017:
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Accrued Liabilities (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Oct. 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payables and Accruals [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Accrued Liabilities |
Accrued liabilities consist of the following as of October 31, 2017 and January 31, 2017 (in thousands):
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Current Developments, Future Operations, Liquidity and Capital Resources (Details Narrative) - USD ($) $ in Thousands |
9 Months Ended | ||
|---|---|---|---|
Sep. 11, 2017 |
Oct. 31, 2017 |
Oct. 31, 2016 |
|
| Working capital | $ 339 | ||
| Gross proceeds from issuance of preferred stock | $ 700 | ||
| Series A Participating Preferred Stock [Member] | |||
| Number of stock issued during perod, shares | 7,000,000 | ||
| Gross proceeds from issuance of preferred stock | $ 700 | ||
Stock-Based Compensation (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Oct. 31, 2017 |
Oct. 31, 2016 |
Oct. 31, 2017 |
Oct. 31, 2016 |
|
| Compensation cost related to vested awards not yet recognized | $ 6,750 | $ 6,750 | ||
| Stock option granted gross | 0 | 0 | 0 | 0 |
| Stock options outstanding intrinsic value | $ 0 | $ 0 | ||
| Closing market price | $ 0.03 | $ 0.03 | ||
| Shares available for future grants | 323,535 | 323,535 | ||
| Restricted Stock [Member] | ||||
| Stock option granted gross | 0 | 0 | 0 | 0 |
Stock-Based Compensation - Schedule of Compensation Related Expense (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Oct. 31, 2017 |
Oct. 31, 2016 |
Oct. 31, 2017 |
Oct. 31, 2016 |
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| Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ||||
| Stock-based compensation expense | $ 7 | $ 19 | $ 18 | |
| Impact on basic and diluted earnings per share | $ (0.01) | $ (0.02) | $ (0.04) | $ 0.08 |
Stock-Based Compensation - Schedule of Stock Options Granted (Details) - $ / shares |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Oct. 31, 2017 |
Oct. 31, 2016 |
Oct. 31, 2017 |
Oct. 31, 2016 |
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| Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ||||
| Number of Shares, Outstanding Options beginning balance | 1,100,000 | |||
| Number of Shares, Options granted | 0 | 0 | 0 | 0 |
| Number of Shares, Options canceled or expired | ||||
| Number of Shares, Options exercised | ||||
| Number of Shares, Outstanding Options ending balance | 1,100,000 | 1,100,000 | ||
| Number of Shares, Options Exercisable ending balance | 760,000 | 760,000 | ||
| Weighted-Ave Exercise Price, beginning balance | $ 0.37 | |||
| Weighted-Ave Exercise Price, Options granted | ||||
| Weighted-Ave Exercise Price, Options canceled or expired | ||||
| Weighted-Ave Exercise Price, Options exercised | ||||
| Weighted-Ave Exercise Price, ending balance | $ 0.37 | 0.37 | ||
| Weighted-Ave Exercise Price, Options Exercisable ending balance | $ 0.44 | $ 0.44 | ||
Net (Loss) Income Per Share (Details Narrative) - shares |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Oct. 31, 2017 |
Oct. 31, 2016 |
Oct. 31, 2017 |
Oct. 31, 2016 |
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| Earnings Per Share [Abstract] | ||||
| Antidilutive securities excluded from computation of earnings per share, amount | 35,427,100 | 35,310,836 | 35,427,100 | 35,310,836 |
Accrued Liabilities - Schedule of Accrued Liabilities (Details) - USD ($) $ in Thousands |
Oct. 31, 2017 |
Jan. 31, 2017 |
|---|---|---|
| Payables and Accruals [Abstract] | ||
| Accrued legal and professional fees | $ 148 | $ 94 |
| Accrued payroll and related expenses | 10 | 21 |
| Accrued consulting | 80 | |
| Other | 107 | 189 |
| Total | $ 265 | $ 384 |
Commitments and Contingencies (Details Narrative) |
3 Months Ended |
|---|---|
|
Oct. 31, 2017
USD ($)
| |
| Deferred compensation liability | $ 0 |
| Non-employee Directors [Member] | |
| Monthly deferred compensation | 1,250 |
| Board of Directors Chairman [Member] | |
| Monthly deferred compensation | $ 2,500 |
Preferred Shares Subject to Mandatory Redemption (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands |
9 Months Ended | ||
|---|---|---|---|
Sep. 11, 2017 |
Oct. 31, 2017 |
Oct. 31, 2016 |
|
| Share price | $ 0.03 | ||
| Gross proceeds from issuance of preferred stock | $ 700 | ||
| Subscription Agreements [Member] | Broadwood Partners L.P. [Member] | Series A Preferred Stock [Member] | |||
| Number of shares issued during period | 5,000,000 | ||
| Warrant to purchase common stock | 18,026,500 | ||
| Subscription Agreements [Member] | Elkhorn Partners Limited Partnership [Member] | Series A Preferred Stock [Member] | |||
| Number of shares issued during period | 2,000,000 | ||
| Warrant to purchase common stock | 7,210,600 | ||
| Subscription Agreements [Member] | Broadwood Partners, L.P. and Elkhorn Partners Limited Partnership [Member] | Series A Preferred Stock [Member] | |||
| Share price | $ 0.10 | ||
| Gross proceeds from issuance of preferred stock | $ 700 | ||
| Warrant term | 8 years | ||
| Warrant exercise price per share | $ 0.05 | ||