NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
C
OMARCO,
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.
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).
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.
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.
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.
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.
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.
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.