Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - COMARCO INCex31-1.htm
EX-31.2 - EXHIBIT 31.2 - COMARCO INCex31-2.htm
EX-32.2 - EXHIBIT 32.2 - COMARCO INCex32-2.htm
EX-32.1 - EXHIBIT 32.1 - COMARCO INCex32-1.htm


 

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

 

July 31, 2015

 

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.)

 

25541 Commercentre Drive, Suite 250, Lake Forest, California 92630

(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

 

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

 

No

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

   

Accelerated filer

   

Non-accelerated filer

   

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

   

No

 

The registrant had 14,644,165 shares of common stock outstanding as of September 15, 2015.

 



 

 

 

 

COMARCO, INC. AND SUBSIDIARY

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED July 31, 2015

 

 

TABLE OF CONTENTS

 

 

   

Page

PART I — FINANCIAL INFORMATION

 
     
     

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

 
     
 

Condensed Consolidated Balance Sheets as of July 31, 2015 and January 31, 2015

3

     
 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 31, 2015 and 2014

4

     
 

Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended July 31, 2015 and 2014

5

     
 

Notes to Condensed Consolidated Financial Statements

6

     

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

15

     

ITEM 4.

CONTROLS AND PROCEDURES

23

     
     
     

PART II — OTHER INFORMATION

 
     
     

ITEM 1.

LEGAL PROCEEDINGS

24

     

ITEM 1A.

RISK FACTORS

24

     

ITEM 6.

EXHIBITS

25

     

SIGNATURES

26

 

 
2

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

COMARCO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 (In thousands, except share and par value amounts)

 

 

   

(Unaudited)

         
   

July 31,

   

January 31,

 
   

2015

   

2015

 

ASSETS

               

Current Assets

               

Cash and cash equivalents

  $ 1,298     $ 2,140  

Accounts receivable due from suppliers, net of reserves of $0

    122       122  

Other current assets

    71       7  

Total current assets

    1,491       2,269  

Property and equipment, net

    5       8  

Restricted cash

    82       5  

Total assets

  $ 1,578     $ 2,282  
                 

LIABILITIES AND STOCKHOLDERS' DEFICIT

               

Current Liabilities

               

Accounts payable

  $ 734     $ 737  

Accrued liabilities

    747       848  

Income taxes payable

    -       40  

Total current liabilities

    1,481       1,625  

Total liabilities

    1,481       1,625  
                 

Commitments and Contingencies

               
                 

Stockholders' Deficit:

               

Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding

    -       -  

Common stock, $0.10 par value, 50,625,000 shares authorized; 14,644,165 and 14,684,165 shares issued and outstanding at July 31, 2015 January 31, 2014, respectively

    1,464       1,468  

Additional paid-in capital

    18,342       18,322  

Accumulated deficit

    (19,709 )     (19,133 )

Total stockholders' deficit

    97       657  

Total liabilities and stockholders' deficit

  $ 1,578     $ 2,282  

 

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

 

 
3

 

 

COMARCO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

   

Three Months Ended

   

Six Months Ended

 
   

July 31,

   

July 31,

 
   

2015

   

2014

   

2015

   

2014

 
                                 
                                 

Revenue

  $ -     $ -     $ -     $ -  

Cost of revenue

    -       (1,099 )     -       (1,099 )

Gross profit

    -       1,099       -       1,099  
                                 

Selling, general and administrative expenses

    242       263       553       594  

Engineering and support expenses

    48       134       48       194  
      290       397       601       788  

Operating (loss) income

    (290 )     702       (601 )     311  

Interest expense, net

    -       (258 )     -       (380 )

Gain due to change of derivative liabilities

    -       1,231       -       226  

Other income, net

    25       6,462       25       6,662  
                                 

(Loss) Income from operations before income taxes

    (265 )     8,137       (576 )     6,819  

Income tax expense

    -       2       -       2  

Net (loss) income

  $ (265 )   $ 8,135     $ (576 )   $ 6,817  
                                 

Basic (loss) income per share:

  $ (0.02 )   $ 0.55     $ (0.04 )   $ 0.46  

Diluted (loss) income per share:

  $ (0.02 )   $ 0.54     $ (0.04 )   $ 0.45  
                                 

Weighted-average shares outstanding:

                               

Basic

    14,644       14,684       14,659       14,684  

Diluted

    14,644       15,110       14,659       15,132  

 

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)

 

 

   

Six Months Ended

 
   

July 31,

 
   

2015

   

2014

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net (loss) income

  $ (576 )   $ 6,817  

Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:

               

Depreciation and amortization

    3       3  

Amortization of loan discount

    -       333  

Stock-based compensation expense

    16       24  

Provision for doubtful accounts receivable

    -       6  

Change in fair value of derivative liabilities

    -       (226 )

Other assets

    (64 )     (73 )

Accounts payable

    (3 )     (3,455 )

Accrued liabilities

    (101 )     (281 )

Income taxes payable

    (40 )     -  

Net cash used in operating activities

    (765 )     3,148  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Restricted cash

    (77 )     -  

Net cash used in investing activites

    (77 )     -  
                 
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Loan repayment

    -       (1,500 )

Net cash used in financing activities

    -       (1,500 )
                 

Net decrease in cash and cash equivalents

    (842 )     1,648  

Cash and cash equivalents, beginning of period

    2,140       1,096  

Cash and cash equivalents, end of period

  $ 1,298     $ 2,744  
                 

Supplementary disclosures of cash flow information:

               

Cash paid for interest

  $ -     $ 68  

Cash paid for income taxes, net of refunds

  $ 40     $ 2  

 

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

 

 
5

 

 

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 condensed financial statements have been prepared assuming that we will continue to operate as a going concern, which contemplates that we will realize returns on our assets and satisfy our liabilities and commitments in the ordinary course of business. Our consolidated financial statements do not reflect any adjustments related to the outcome of this uncertainty. Our future is highly dependent on our ability to successfully resolve our current litigation, capitalize on our portfolio of patents, generate positive cash flows and/or obtain borrowings or raise capital to meet our liquidity needs.

 

As previously announced in August 2013, Lenovo Information Products Co., Ltd. (“Lenovo”), our only material customer, notified us of their intention to cease offering our Constellation product, the power adapter we designed and developed for Lenovo, and terminate its relationship with us. We completed shipping product to Lenovo during our third quarter ended November 30, 2013. The loss of Lenovo as a customer eliminated our only commercial reveue source and has had a material adverse impact on our results of operations.  We have reduced and/or eliminated certain operating expenses to minimize future losses and cash burn and will continue our efforts in this regard.

 

Two of our recent litigation matters have concluded. In the Chicony Power Technology, Co. Ltd., (“Chicony”) matter, effective as of May 15, 2014, Chicony entered into a settlement agreement with us that dismissed all claims between the two parties arising from the litigation. Pursuant to the terms of the settlement agreement, Chicony agreed to pay us $7.6 million. Settlement amounts of $4.0 million and $3.6 million were paid on May 16, 2014 and May 30, 2014, respectively. Of the $7.6 million, we retained $6.5 million, after distributing $1.1 million in attorneys’ fees and other costs. In connection with the settlement, certain contract manufacturer costs payable to Chicony totaling $1.1 million were discharged and reflected as a reduction of cost of revenues. In our litigation with ACCO Brands USA LLC and its Kensington Computer Products Group division (collectively “Kensington”), on February 4, 2014, we entered into a confidential settlement and licensing agreement with an effective date of February 1, 2014 that establishes a forward royalty program and dismissed all claims between the two parties arising from this matter.

 

On March 10, 2014, we filed a lawsuit in federal court against Targus Group International, Inc. (“Targus”) for patent infringement, breach of contract, intentional interference with contract, violation of business and professional codes, misrepresentation and fraudulent concealment (the “Federal Action”). Targus sought reexamination of the patents at issue. The Federal Action was voluntarily dismissed at our request without prejudice to re-filing the federal claims.  A state court action for breach of contract, fraudulent concealment, unfair competition and accounting was then filed by us in the Orange County Superior Court on June 5, 2014 (the “State Court Action”).  On December 4, 2014, the Superior Court ordered the State Court Action into arbitration and the arbitration hearing was initially set for December 2015 and has been moved to April 2016. We are seeking damages of at least $17 million. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

 
6

 

 

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

On February 13, 2015, we filed a lawsuit against Best Buy Co., Inc. (“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. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

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 patents in third party products. We continue to explore opportunities to expand, 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 possible opportunities or activities will occur or be successful.

 

We had working capital of approximately $0 as of July 31, 2015, which includes liabilities of $0.4 million related to the remaining balance owed to our former counsel Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”) and $0.3 million owed to Zheng Ge Electrical Co., Ltd. (“Zheng Ge”) for contract manufacturing services for our former Bronx product, which was subsequently subject to recall (see Note 6). The $0.4 million balance to Pillsbury will be paid, if at all, in the event we obtain any monetary recovery, whether through settlement, judgment or otherwise, from or as a result of any of our current or future lawsuits related to our intellectual property (see Note 6). Regarding the $0.3 million liability to Zheng Ge, we dispute our obligation to pay this amount based on the recall of the Bronx product. It is possible that an ultimate resolution with Zheng Ge may include a net settlement, although we currently have no legal right to offset the $0.3 million owed by us. Because of the contingent nature of our liability to Pillsbury and that we dispute our obligation to pay Zheng Ge, we believe that our working capital, although $0 for accounting purposes, will allow us to discharge non-contingent and non-disputed liabilities and commitments in the normal course of business over the next twelve months. We are currently generating no revenues and have ceased traditional operations. Our future is highly dependent on our ability to successfully resolve our current litigation, capitalize on our portfolio of patents, generate positive cash flows and obtain borrowings or raise capital to meet our future liquidity needs. The opinioin the Company received from int independent registered public accounting firm on its January 31, 2015 financial statements contains and explanatory paragraph stating that there is substantial doubt regarding the company’s ability to continue as a going concern.

 

We have in the past and will in the future 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 the 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. 

 

3.

Summary of Significant Accounting Policies

 

The summary of our significant accounting policies presented below is designed to assist the reader in understanding our condensed consolidated financial statements.

 

 
7

 

 

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Basis of Presentation

 

The accompanying condensed consolidated balance sheet as of July 31, 2015, which has been derived from our audited financial statements, and our unaudited interim condensed consolidated financial statements as of July 31, 2015 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 10 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, 2015 (the “2015 Form 10-K”), which was filed with the SEC on April 30, 2015. The accounting policies followed by the Company are set forth in Note 2 to the Company’s audited financial statements included in the 2015 Form 10-K. The unaudited interim condensed 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 six months ended July 31, 2015 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2016.

 

Principles of Consolidation

 

The unaudited interim condensed 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.

 

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. The fair value of cash and cash equivalents approximates the amounts shown in the consolidated financial statements. Cash and cash equivalents are generally maintained in uninsured accounts, typically Eurodollar deposits with daily liquidity, which are subject to investment risk including possible loss of principal invested.

 

Accounts Receivable Due from Suppliers

 

Previously, when we were engaged in our traditional operations of producing charging solutions for battery powered devices, we oftentimes we were able to source components locally that we later sold to our contract manufacturers, who built the finished goods, and other suppliers. This was especially the case when new products were initially introduced into production. Sales to our contract manufacturers (or “CMs”) and other suppliers were excluded from revenue and were recorded as a reduction to cost of revenue. As of July 31, 2015, the entire accounts receivable due from suppliers was from Zheng Ge, a tip supplier for our Bronx product, which was subject to a recall. We ceased paying Zheng Ge during the course of the product recall while we investigated the manufacturing defect which ultimately caused the recall and, likewise, Zheng Ge ceased paying us.   As of July 31, 2015, we owe Zheng Ge $0.3 million for contract manufacturing services. Although we currently have no legal right to offset the $0.3 million owed to us, it is possible that an ultimate resolution with Zheng Ge may include a net settlement. Accordingly, we did not provide an allowance for doubtful accounts against the Zheng Ge receivable.

 

Restricted Cash

 

Our restricted cash balances are secured by separate bank accounts and represent 1) $5,000 which serves as collateral for credit card chargebacks associated with our internet website and 2) a $77,000 letter of credit that serves as the security deposit for our corporate office lease.

 

 
8

 

 

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 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 assessment of the impairment of long-lived assets, valuation allowances for deferred tax assets, valuation of derivative liabilities and determination of stock-based compensation.

 

Fair Value of Financial Instruments

 

Our financial instruments include cash and cash equivalents, accounts receivable due from customers and suppliers, accounts payable, accrued liabilities, a short-term loan and derivative liabilities. The carrying amount of cash and cash equivalents, accounts receivable, 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

 

Our legal expenses are classified in either selling, general, and administrative expenses or engineering and support expenses depending on the nature of the legal expense. All legal expenses incurred related to our intellectual property, including associated litigation expense and maintenance of our patent portfolio, are included in engineering and support expenses in our consolidated statement of operations. All other legal expenses, including all other litigation expense and public company legal expense are included in selling, general, and administrative expenses in our consolidated statement of operations.

 

4.

Stock-Based Compensation

 

We grant stock awards for a fixed number of shares to employees, consultants, and directors pursuant to the Company’s shareholder-approved equity incentive plans.

 

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 a Lattice Binomial model for options with performance-based vesting tied to the Company’s stock price and the Black-Scholes valuation model for options with ratable term vesting. Both the Lattice Binomial and Black-Scholes valuation models require 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 valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to 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.

 

 
9

 

 

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The compensation expense recognized is summarized in the table below (in thousands except per share amounts):

 

   

Three Months Ended

   

Six Months Ended

 
   

July 31,

   

July 31,

 
   

2015

   

2014

   

2015

   

2014

 

Stock-based compensation expense

  $ 9     $ 12     $ 16     $ 24  

Impact on basic and diluted earnings per share

  $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 )

 

The total compensation cost related to nonvested awards not yet recognized is approximately $43,000.

 

During the three and six months ended July 31, 2015, 350,000 stock options were granted and no restricted stock units were granted. The fair value of the 350,000 options granted under our stock option plans during the six ended July 31, 2015 was estimated on the date of grant using the following weighted average assumptions: 

 

         
     

Six Months Ended

July 31, 2015

 

Weighted average risk-free interest rate

    2 %

Expected life (in years)

    10  

Expected stock volatility

    152 %

Dividend yield

    -  

Expected forfeitures

    -  

 

During the three and six months ended July 31, 2014, no stock awards were granted.  

 

Transactions and other information related to stock options granted under these plans for the six months ended July 31, 2015 are summarized below:

 

   

Outstanding Options

 
           

Weighted-Ave.

 
   

Number of

   

Exercise

 
   

Shares

   

Price

 

Balance, January 31, 2015

    600,000     $ 0.96  

Options granted

    350,000       0.15  

Options canceled or expired

    -       -  

Options exercise

    -       -  

Balance, July 31, 2015

    950,000     $ 0.66  

Stock Options Exercisable at July 31, 2015

    560,000     $ 0.94  

 

Transactions and other information related to restricted stock granted under these plans for the six months ended July 31, 2015 are summarized below:

 

   

Outstanding Restricted

 
   

Stock Units

 
           

Weighted-Ave.

 
   

Number of

   

Exercise

 
   

Shares

   

Price

 

Balance, January 31, 2015

    390,000     $ 0.18  

Restricted stock granted

    -       -  

Restricted stock forfeited

    (40,000 )     0.18  

Resticted stock vested

    (350,000 )     0.18  

Balance, July 31, 2015

    -     $ -  

 

 
10

 

 

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

As of July 31, 2015, the stock awards outstanding have an aggregate intrinsic value of $700, based on a closing market price of $0.16 per share on July 31, 2015. The following table summarizes information about the Company’s stock awards outstanding at July 31, 2015:

 

   

Awards Outstanding

   

Options Exercisable

 
           

Weighted-Ave.

                         

Range of

 

Number

   

Remaining

   

Weighted-Ave.

   

Number

   

Weighted-Ave.

 

Exercise/Grant Prices

 

Outstanding

   

Contractual Life

   

Exercise/Grant Price

   

Exercisable

   

Exercise Price

 

$0.14

    250,000       9.89     $ 0.14       0     $ 0.14  

$0.16

    100,000       9.84     $ 0.16       0     $ 0.16  

$0.40

    465,000       7.20     $ 0.40       465,000     $ 0.40  

$1.09

    100,000       3.28       1.09       60,000       1.09  

$4.53

    15,000       2.59       4.53       15,000       4.53  

$10.43

    20,000       0.89       10.43       20,000       10.43  
      950,000               0.66       560,000       0.95  

 

Shares available under the plans for future grants at July 31, 2015 were 129,724. 

 

5.

Net (Loss) Income Per Share

 

The Company calculates 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 potentially dilutive securities. Since the Company incurred a net loss for the three and six months ended July 31, 2015, basic and diluted loss per share for this period was the same because the inclusion of dilutive potential common shares related to outstanding stock awards in the calculation would have been antidilutive.

 

Potential common shares of 785,870 and 3,044,475 relating to outstanding stock awards to directors and our employee as well as stock purchase warrant to Broadwood, respectively have been excluded from diluted weighted average common shares for the three and six months ended July 31, 2015, respectively, as the effect would have been antidilutive.

 

The following table presents reconciliations of the numerators and denominators of the basic and diluted loss per share computations for net (loss) income. In the tables below, “Net (loss) income” represents the numerator and “Shares” represents the denominator (in thousands, except per share amounts):

 

   

Three Months Ended July 31,

   

Six Months Ended July 31,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Net (loss) income

  $ (265 )   $ 8,135     $ (576 )   $ 6,817  

Basic net income (loss) per share:

                               

Weighted-average shares outstanding-Basic

    14,644       14,684       14,659       14,684  

Basic net (loss) income per share

  $ (0.02 )   $ 0.55     $ (0.04 )   $ 0.46  

Diluted net (loss) income per share:

                               

Weighted average shares outstanding - basic

    14,644       14,684       14,659       14,684  

Effect of potentially dilutive securities

    -       426       -       448  

Weighted average shares outstanding - diluted

    14,644       15,110       14,659       15,132  

Diluted net (loss) income per share

  $ (0.02 )   $ 0.54     $ (0.04 )   $ 0.45  

 

 
11

 

 

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

6.

Supplier Concentrations

 

The suppliers comprising 10 percent or more of the Company’s gross accounts receivable due from suppliers at either July 31, 2015 and January 31, 2015 are listed below (in thousands, except percentages).

 

   

As of July 31,

   

As of January 31,

 
   

2015

   

2015

 

Total gross accounts receivable due from suppliers

  $ 122       100 %   $ 122       100 %

Accounts receivable concentration:

                               

Zheng Ge Electrical Co., Ltd.

  $ 122       100 %   $ 122       100 %
    $ 122       100 %   $ 122       100 %

 

Zheng Ge was a tip supplier for our Bronx product, which was subject to a recall. We previously sourced some of the component parts that Zheng Ge used in the manufacture of the tips. We ceased paying Zheng Ge during the course of the product recall. Likewise, Zheng Ge ceased paying us.

 

The companies comprising 10 percent or more of our gross accounts payable at either July 31, 2015 and January 31, 2015 are listed below (in thousands, except percentages).

 

   

As of July 31,

   

As of January 31,

 
   

2015

   

2015

 
                                 

Total gross accounts payable

  $ 734       100 %   $ 737       100 %

Supplier concentration:

                               

Pillsbury Winthrop Shaw Pittman, LLP

    432       59 %     432       59 %
    $ 432       59 %   $ 432       59 %

 

Pillsbury was our former legal counsel for the Kensington litigation as well as other patent and intellectual property matters (see Note 9). On May 28, 2014, we entered into an agreement with Pillsbury in which we paid Pillsbury a lump sum of $1.5 million and the remaining balance of $0.4 million (“the Balance”) was modified and is to be paid, if at all, in the event we obtain any monetary recovery, whether through settlement, judgment or otherwise, after May 28, 2014 from or as a result of any of our current or future lawsuits related to our intellectual property. The amount payable shall be equal to the Balance plus 20% per annum, compounded annually from May 28, 2014. In connection with this $1.5 million lump-sum partial repayment, no gain was recognized.

 

7.

Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

   

July 31,

   

January 31,

 
   

2015

   

2015

 
                 

Uninvoiced materials and services received

  $ 331     $ 331  

Accrued legal and professional fees

    71       138  

Accrued payroll and related expenses

    36       38  

Other

    309       341  
    $ 747     $ 848  

 

As of July 31, 2015, approximately $0.3 million or 98 percent of total uninvoiced materials and services of $0.3 million, included in accrued liabilities, were due to Zheng Ge. As discussed in Notes 2 and 3 above, we dispute our obligation to pay Zheng Ge due to the recall of the Bronx product.

 

 
12

 

 

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

8.

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 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 consolidated financial statements for this agreement.

 

As a result of the Company’s sale of the 6,250,000 shares of common stock to Elkhorn Partners in 2013, Elkhorn’s beneficial ownership of the Company increased from approximately 9% to approximately 49% of the Company’s outstanding voting stock, making Elkhorn the Company’s largest shareholder and resulting in a change of control for purposes of the severance compensation agreement. Mr. Lanni has waived his right to receive payments under this agreement as a result of the change in Elkhorn’s beneficial ownership of the Company.

 

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 July 31, 2015, no compensation expense has been accrued under this deferred compensation plan as its goal has not yet been attained.

 

 

Legal Contingencies

 

On March 10, 2014, we filed a lawsuit in federal court against Targus for patent infringement, breach of contract, intentional interference with contract, violation of business and professional codes, misrepresentation and fraudulent concealment. Targus sought reexamination of the patents at issue. The federal action was voluntarily dismissed at our request without prejudice to re-filing the federal claims.  A state court action for breach of contract, fraudulent concealment, unfair competition and accounting was then filed by us in the Orange County Superior Court on June 5, 2014.  On December 4, 2014, the Superior Court ordered the state court action into arbitration and the arbitration hearing was original set for December 2015 and has been moved toApril 2016. We are seeking damages of at least $17 million. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

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 the Company’s patented intellectual property. This lawsuit represents our most significant enforcement effort to date, and , together with the Best Buy and Targus lawsuits, demonstrates the 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. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

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. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

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.

 

 
13

 

 

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

9.

Legal Settlement

 

On April 26, 2011, Chicony, the contract manufacturer of the Bronx product that was the subject of a product recall, filed a complaint against us for breach of contract, seeking payment of $1.2 million for the alleged non-payment by us of amounts alleged by Chicony to be due it for products purchased from it by the Company. We denied liability and filed a cross-complaint on May 13, 2011 seeking the recovery of damages of $4.9 million caused by Chicony's failure to adhere to our technical specifications when manufacturing the Bronx product, which we believe resulted in the recall of the product. On April 16, 2013, the court approved our first-amended cross-complaint, which added intentional interference to our complaint and increased the damages we were seeking to at least $15.0 million. On February 4, 2014, a jury returned a verdict in our favor and awarded us damages of approximately $10.8 million, offset by previously accrued liabilities of $1.1 million for a net award of approximately $9.7 million. Effective as of May 15, 2014, Chicony entered into a settlement agreement with us that dismissed all claims between the parties arising from the litigation referenced above. Pursuant to the terms of the settlement agreement, Chicony agreed to pay us $7.6 million in lieu of the jury’s net award of $9.7 million or any other related costs or fees. $4.0 million of the settlement amount was paid to us on May 16, 2014, with the balance of $3.6 million paid to us on May 30, 2014. We recorded a gain of $7.6 million associated with this settlement in the quarter ended July 31, 2014. As a result of the settlement agreement, the $1.1 million payable to Chicony for contract manufacturing costs has been legally dismissed and discharged and recorded as an offset to Cost of Revenues in the quarter ended July 31, 2014.

 

Further pursuant to the settlement agreement, each party released the other and its affiliates from any and all claims related to the subject matter of the litigation and we covenanted not to sue Chicony on the next 500,000 power adapters sold by Chicony after May 15, 2014 that we allege infringe on our intellectual property rights. The settlement agreement also contains other representations, warranties and covenants of both parties that are customary for an agreement of this type.

 

On September 1, 2011, subsequent to receiving an infringement notification from us, Kensington filed a lawsuit against us alleging that five of our patents relating to power technology are invalid and/or not infringed by products made and/or sold by Kensington. On February 29, 2012, we denied these claims and filed a cross-complaint alleging infringement by Kensington of each of these five patents. On February 4, 2014, Kensington entered into a settlement and licensing agreement with the Company with an effective date of February 1, 2014 that dismissed all claims between the two parties arising from the litigation referenced above.

 

 
14

 

 

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 condensed 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-Qcontains 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 addressed 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, or the SEC. Readers are urged not to place undue reliance on these forward-looking statements, which speak only 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, 2015 (the “2015 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 Qualification

 

The condensed financial statements have been prepared assuming that we will continue to operate as a going concern, which contemplates that we will realize value from our assets and satisfy our liabilities and commitments in the ordinary course of business. Our consolidated financial statements do not reflect any adjustments related to the outcome of this uncertainty. Our future is highly dependent on our ability to successfully resolve our current litigation, capitalize on our portfolio of patents, generate positive cash flows and obtain borrowings or raise capital to meet our liquidity needs.

 

As previously announced in August 2013, Lenovo Information Products Co., Ltd. (“Lenovo”), our only material customer, notified us of their intention to cease offering our Constellation product, the power adapter we designed and developed for Lenovo, and terminated its relationship with us. We completed shipping product to Lenovo during our third quarter ended November 30, 2013. The loss of Lenovo as a customer eliminated our only source of revenue and has had a material adverse impact on our results of operations. We have reduced and/or eliminated certain operating expenses to minimize future losses and cash burn and will continue our efforts in this regard.

 

 
15

 

 

Two of our recent litigation matters have concluded. In the Chicony Power Technology, Co. Ltd., (“Chicony”) matter, effective as of May 15, 2014, Chicony entered into a settlement agreement with us that dismissed all claims between the two parties arising from the litigation. Pursuant to the terms of the settlement agreement, Chicony agreed to pay us $7.6 million. Settlement amounts of $4.0 million and $3.6 million were paid on May 16, 2014 and May 30, 2014, respectively. Of the $7.6 million, we retained $6.5 million, after distributing $1.1 million in attorneys’ fees and other costs. In connection with the settlement, certain contract manufacturer costs payable to Chicony totaling $1.1 million were discharged and reflected as a reduction of cost of revenues. In our litigation with ACCO Brands USA LLC and its Kensington Computer Products Group division (collectively “Kensington”), on February 4, 2014, we entered into a confidential settlement and licensing agreement with an effective date of February 1, 2014 that establishes a forward royalty program and dismissed all claims between the two parties arising from this matter.

 

On March 10, 2014, we filed a lawsuit in federal court against Targus Group International, Inc. (“Targus”) for patent infringement, breach of contract, intentional interference with contract, violation of business and professional codes, misrepresentation and fraudulent concealment (the “Federal Action”). Targus sought reexamination of the patents at issue. The Federal Action was voluntarily dismissed without prejudice to re-filing the federal claims.  A state court action for breach of contract, fraudulent concealment, unfair competition and accounting was then filed by us in the Orange County Superior Court on June 5, 2014 (the “State Court Action”).  On December 4, 2014, the Superior Court ordered the State Court Action into arbitration and the arbitration hearing is set for December 2015. We are seeking $17 million damages as well as accounting and injunctive relief. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

On February 13, 2015, we filed a lawsuit against Best Buy Co., Inc. (“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. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

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 Comarco’s most significant enforcement effort to date, and, together with the Targus and Best Buy lawsuits described above, demonstrates the Company’s ongoing and accelerated efforts to methodically pursue those companies that the Company believes have infringed on the intellectual property estate that the Company has developed over the last 20 years. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

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 patents in third party products. We continue to explore opportunities to expand, protect, and monetize our patent portfolio, including through the sale or licensing of our patent portfolio. In the future, we may resume our traditional activities, if and when possible. However, there are no assurances that any of the foregoing possible opportunities or activities will occur or be successful.

 

 
16

 

 

We had working capital of approximately $0 as of July 31, 2015, which includes liabilities of $0.4 million related to the remaining balance owed to our former counsel Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”) and $0.3 million owed to Zheng Ge Electrical Co., Ltd. (“Zheng Ge”) for contract manufacturing services performed for our former Bronx product, which was subsequently subject to recall. The $0.4 million balance to Pillsbury will be paid, if at all, in the event we obtain any monetary recovery, whether through settlement, judgment or otherwise, from or as a result of any of our current or future lawsuits related to our intellectual property. Regarding the $0.3 million liability to Zheng Ge, we dispute our obligation to pay this amount based on the recall of the Bronx product. It is possible that an ultimate resolution with Zheng Ge may include a net settlement, although we currently have no legal right to offset the $0.3 million owed by us. Because of the contingent nature of our liability to Pillsbury and that we dispute our obligation to pay Zheng Ge, we believe that our working capital, although $0 for accounting purposes, will allow us to discharge non-contingent and non-disputed liabilities and commitments in the normal course of business over the next twelve months. We are currently generating no revenues and have ceased traditional operations. Our future is highly dependent on our ability to successfully resolve our current litigation, capitalize on our portfolio of patents, generate positive cash flows and obtain borrowings or raise capital to meet our future liquidity needs.

 

Our management and our independent registered public accounting firm have questioned our ability to continue as a going concern as a result of our historical losses from operations and uncertainties surrounding our ability to raise additional funds. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our consolidated financial statements, and shareholders may lose all or part of their investment in our common stock.

 

We have in the past and will in the future analyze of 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 the 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 condensed 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, 2016 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”.

 

Through the third quarter of fiscal year 2014, we developed and designed innovative technologies and intellectual property that was used in power adapters to power and charge battery powered devices such as laptop computers, tablets, smart phones and readers. In August 19, 2013, Lenovo, our only material customer, informed us that it intended to cease offering our Constellation product, the power adapter we designed and developed for Lenovo, and terminated its relationship with us. Sales of the Constellation product to Lenovo accounted for materially all of our revenue for the fiscal year 2014. We anticipate that we will generate no revenue in future periods from the development, design, distribution or sale of any products. We have effectively suspended traditional operations and are now primarily focused on realizing the potential value from our ongoing litigation as well as exploring opportunities to expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of our patent portfolio.

 

 
17

 

 

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 six months ended July 31, 2015:

 

 

We generated no revenue for three and six months ended July 31, 2015 and 2014. We anticipate that we will generate no future revenue from the development, design, distribution or sale of any products.

 

 

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. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

 

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 above, 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. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

 

Effective as of May 15, 2014, Chicony entered into a settlement agreement with us that dismissed all claims between the parties arising from the litigation referenced above. Pursuant to the terms of the settlement agreement, Chicony agreed to pay us $7.6 million. Settlement amounts of $4.0 million and $3.6 million were paid on May 16, 2014 and May 30, 2014, respectively. Of the $7.6 million, we retained $6.5 million, after distributing $1.1 million in attorneys’ fees and other costs. In connection with the settlement, certain contract manufacturer costs payable to Chicony totaling $1.1 million were discharged and reflected as a reduction of cost of revenues. We are currently analyzing and will continue to analyze a range of alternatives to preserve and/or build 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. There can be no assurances that we will be successful in implementing any of these alternatives, or if implemented, that any of these alternatives will successfully preserve or increase shareholder value.

 

 

On March 10, 2014, we filed a lawsuit in federal court against Targus for patent infringement, breach of contract, intentional interference with contract, violation of business and professional codes, misrepresentation and fraudulent concealment . Targus sought reexamination of the patents at issue. The Federal Action was voluntarily dismissed without prejudice to re-filing the federal claims.  A state court action for breach of contract, fraudulent concealment, unfair competition and accounting was then filed by us in the Orange County Superior Court on June 5, 2014.  On December 4, 2014, the Superior Court ordered the State Court Action into arbitration and the arbitration hearing is set for April 2016. We are seeking $17 million damages as well as accounting and injunctive relief. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

 

We were previously party to litigation with Kensington. On February 4, 2014, Kensington entered into a settlement and licensing agreement with us with an effective date of February 1, 2014 that dismisses all claims between the two parties arising from this matter.

 

 

On August 6, 2013, we changed our legal representation with respect to our ongoing intellectual infringement and enforcement litigation and entered an alternative fee arrangement in order to reduce our legal expenses.

 

 

On February 11, 2013, we entered into a Secured Loan Agreement (the “Loan Agreement”) with Elkhorn Partners Limited Partnership (“Elkhorn”). Pursuant to the Loan Agreement, on February 11, 2013, Elkhorn made a $1,500,000 senior secured term loan (the “Elkhorn Loan”) to us.  The Elkhorn Loan bore interest at 7% per annum for the first year; increasing to 8.5% per annum thereafter, ranked senior in right of payment to all of our other indebtedness, was secured by a first priority security interest in all of the assets of Comarco and CWT, and was due and payable in full on November 30, 2014. On June 3, 2014, the Company repaid the Elkhorn Loan in full. See Note 8 to the Company’s audited financial statements included in the 2015 Form 10-K for additional information regarding the Loan Agreement, the Loan and certain related agreements.

 

 
18

 

 

 

Concurrent with the execution of the Loan Agreement, Elkhorn entered into a Stock Purchase Agreement with us (the “Stock Purchase Agreement”). Pursuant to that Stock Purchase Agreement, we sold 6,250,000 shares of our common stock to Elkhorn at a price of $0.16 per share, resulting in an aggregate purchase price of $1.0 million. The purchase price of $0.16 per share paid by Elkhorn for those shares was determined by arms-length negotiations between Elkhorn and the members of a special committee of our Board of Directors, comprised of three of the directors who have no affiliation with Elkhorn and no financial interest, other than their interests solely as our shareholders, in either the loan or share transactions with Elkhorn. See Note 8 to the Company’s audited financial statements included in the 2015 Form 10-K for additional information regarding the Stock Purchase Agreement and certain related agreements.

 

 

As a result of our sale of the 6,250,000 shares of common stock to Elkhorn pursuant to the Elkhorn Stock Purchase Agreement, Elkhorn’s beneficial ownership increased from approximately 9% to approximately 49% of our outstanding voting stock, making Elkhorn our largest shareholder.

 

 

On August 13, 2014, the Company and Broadwood Partners, L.P. (“Broadwood”) entered into an Amendment and Release Agreement that resolved the disputes between the Company and Broadwood concerning our July 2012 financing transaction with Broadwood (the “Broadwood Financing”). Pursuant to the Amendment and Release Agreement, the Company issued Broadwood a new stock purchase warrant (“New Warrant”) entitling Broadwood to purchase up to a total of 2,350,000 shares of the Company’s common stock, at a price of $0.16 per share, in exchange for cancellation of the warrants issued and potentially issuable under the Broadwood Financing. The New Warrant expires on July 27, 2020. In addition, the Company and Broadwood released each other from any and all claims concerning the Broadwood Financing.

 

Critical Accounting Policies

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interim condensed 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 six months ended July 31, 2015 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, 2015.

 

 
19

 

 

Results of Operations

 

The following tables set forth certain items as a percentage of revenue from our unaudited interim condensed consolidated statements of operations for the three and six months ended July 31, 2015 and 2014:

 

   

(in thousands)

   

(in thousands)

                 
   

Three Months Ended July 31,

   

Six Months Ended July 31,

   

Year over Year

 
   

2015

   

2014

   

2015

   

2014

   

Three Months

   

Six Months

 
                                                 

Revenue

  $ -     $ -     $ -     $ -       0 %     0 %

Operating (loss) income

  $ (290 )   $ 622     $ (601 )   $ 311       -147 %     -293 %

Net (loss) income

  $ (265 )   $ 7,128     $ (576 )   $ 6,817       -104 %     -108 %

 

Operating Costs and Expenses

 

   

(in thousands)

   

(in thousands)

                 
   

Three Months Ended July 31,

   

Six Months Ended July 31,

                 
   

2015

   

2014

   

2015

   

2014

   

Year over Year

 
           

%

of Rev

           

%

of Rev

           

%

of Rev

           

%

of Rev

   

Three Months

   

Six

Months

 

Operating expenses:

                                                                               

Selling, general and administrative expenses, excluding corporate overhead

  $ 3       0 %   $ 173       0 %   $ 3       0 %   $ 400       0 %     -98 %     -99 %

Corporate overhead

    273       0 %     90       0 %     550       0 %     194       0 %     203 %     184 %

Engineering and support expenses

    14       0 %     134       0 %     48       0 %     194       0 %     -90 %     -75 %
    $ 290       0 %   $ 397       0 %   $ 601       0 %   $ 788       0 %     -27 %     -24 %

 

Selling, general, and administrative (“SG&A”) expenses for the three and six months ended July 31, 2015 decreased $0.1 million and $0.2 million, respectively compared to the corresponding periods of fiscal 2015. We had no employees in our sales and marketing department during the three or six months ended July 31, 2015 and 2014.

 

Corporate overhead consists 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.

 

For the three and six months ended July 31, 2015 and 2014, engineering and support expenses consisted of legal expenses incurred related to our intellectual property, including associated litigation expense and maintenance of our patent portfolio.

 

 

Interest Expense

 

The interest expense for the three and six months ended July 31, 2014 relates to interest expense as well as amortization expense of the debt discount on the Elkhorn Loan. On June 3, 2014, the Company repaid the Elkhorn Loan in full.

 

There was no corresponding interest expense for the three and six months ended July 31, 2015.

 

 

Loss Due to Change of Derivative Liabilities

 

For the three and six months ended July 31, 2014, we reported a gain due to the change in the fair value of our derivative liabilities of approximately $1.2 million and $0.2 million, respectively.

 

There was no corresponding loss for the three and six months ended July 31, 2015.

 

 

Other Income, net

 

During the three and six months ended July 31, 2015, other income, net, we received $23,000 related to financial assets that were sold.

 

During the three and six months ended July 31, 2014, other income, net, consisted of $6.5 million and $6.7 million, respectively. During the three months ended July 31, 2014, we settled and were paid $7.6 million from Chicony in lieu of the jury’s net award of $9.7 million. As a result of this settlement agreement, the previously accrued obligation of $1.1 million to Chicony was legally dismissed and was reversed during the three months ended July 31, 2014. In addition, we received $0.2 million from a settlement and licensing agreement during the six months ended July 31, 2014.

 

 
20

 

 

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, 2015.

  

Liquidity and Capital Resources

 

Cash and cash equivalents at July 31, 2015 decreased $0.8 million to $1.3 million as compared to $2.7 million at July 31, 2014. The following table is a summary of our Condensed Consolidated Statements of Cash Flows.

 

   

(in thousands)

 
   

Six Months Ended July 31,

 
   

2015

   

2014

 
                 

Cash provided by (used in):

               

Operating activities

  $ (765 )   $ (52 )

Investing activites

  $ (77 )   $ -  

Financing activities

  $ -     $ (1,500 )

 

Operating Activities

 

Cash used in operating activities was $0.8 million for the six months ended July 31, 2015 and was primarily driven by our net loss of $0.6 million.

 

Cash provided by operating activities was $3.1 million for the six months ended July 31, 2014 and was primarily driven by our net income of $6.8 million offset by cash used to pay accounts payable of $3.5 million.

 

 

Investing Activities

 

Druing the six months ended July 31, 2015, our security deposit of $77,000 for our corporate lease became collateralized by cash in a separate bank account.

 

We had no investing activities during the six months ended July 31, 2014.

 

Financing Activities

 

We had no financing activities during the six months ended July 31, 2015.

 

On June 3, 2014, the Company repaid the amounts outstanding under the Elkhorn Loan Agreement in full of $1.5 million.

 

 
21

 

 

Uncertainties Regarding Future Operations and Liquidity Requirements for the Next 12 Months

 

We had working capital of approximately $0 as of July 31, 2015, which includes liabilities of $0.4 million related to the remaining balance owed to our former counsel Pillsbury and $0.3 million owed to Zheng Ge for contract manufacturing services performed for our former Bronx product, which was subsequently subject to recall. The $0.4 million balance to Pillsbury will be paid, if at all, in the event we obtain any monetary recovery, whether through settlement, judgment or otherwise, from or as a result of any of our current or future lawsuits related to our intellectualy property. Regarding the $0.3 million liability to Zheng Ge, we dispute our obligation to pay this amount based on the recall of the Bronx product. It is possible that an ultimate resolution with Zheng Ge may include a net settlement, although we currently have no legal right to offset the $0.3 million owed by us. Because of the contingent nature of our liability to Pillsbury and that we dispute our obligation to pay Zheng Ge, we believe that our working capital, although $0 for accounting purposes, will allow us to discharge non-contingent and non-disputed liabilities and commitments in the normal course of business over the next twelve months.

 

As discussed elsewhere in this report, we are currently generating no revenues and have ceased traditional operations. Our future is highly dependent on our ability to successfully resolve our current litigation, capitalize on our portfolio of patents, generate positive cash flows and obtain borrowings or raise capital to meet our future liquidity needs.

 

 
22

 

 

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 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 July 31, 2015, 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.  

 

In connection with its evaluation, our management has concluded that, as of July 31, 2015, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP due to lack of segregation of duties. Our management’s finding of ineffective internal control over financial reporting results primarily from a lack of sufficient accounting and information technology staff which results in a lack of segregation of duties necessary for an appropriate system of internal controls. While management believes that the lack of effective internal control over financial reporting during the fiscal quarter ended July 31, 2015 did not result in any particular deficiency in our financial reporting for the fiscal quarter then ended, management believes that the lack of effectiveness of our internal control over financial reporting could result in a failure to provide reliable financial reporting in the future. In order to remedy our existing internal control deficiency, we will need to raise additional capital or improve our working capital position to allow us to hire additional staff. 

 

 Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the quarter ended July 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 
23

 

 

PART II — OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

Comarco, Inc. vs. Targus Group International, Inc., Case No. 8:14-cv-00361, Superior Court of California County of Orange – Central Justice Center. 

 

On March 10, 2014, we filed a lawsuit in federal court against Targus for patent infringement, breach of contract, intentional interference with contract, violation of business and professional codes, misrepresentation and fraudulent concealment. Targus sought reexamination of the patents at issue. The Federal Action was voluntarily dismissed without prejudice to re-filing the federal claims. A state court action for breach of contract, fraudulent concealment, unfair competition and accounting was then filed by us in the Orange County Superior Court on June 5, 2014.  On December 4, 2014, the Superior Court ordered the State Court Action into arbitration. The arbitration hearing was original set for December 2015 and was moved to April 2016. We are seeking $17 million damages as well as accounting and injunctive relief. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

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. This lawsuit represents our most significant enforcement effort to date, and, together with the Targus and Best Buy lawsuits described above, 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. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

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. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

       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 a number of factors, risks and uncertainties, including those previously disclosed under Part I. Item 1A “Risk Factors” of our annual report on 2015 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 2015 Form 10-K.

 

 
24

 

 

ITEM 6.

EXHIBITS

 

31.1 *

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2 *

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1 *

Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2 *

Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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.

 

**

XBRL (Extension Business Reporting Language) information is furnished and filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

 
25

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

COMARCO, INC.

 

     
     

Date: September 15, 2015

/s/ THOMAS W. LANNI

 

 

Thomas W. Lanni

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

     
     
     
     

Date: September 15, 2015

/s/ JANET N. GUTKIN

 

 

Janet N. Gutkin

 

 

Chief Accounting Officer

 

 

(Principal Financial and Accounting Officer)

 

 

 
26

 

 

EXHIBIT INDEX

 

 

Exhibit

Description

 

31.1 *

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2 *

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1 *

Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2 *

Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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.

 

**

XBRL (Extension Business Reporting Language) information is furnished and filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

 

27