COMARCO INC - FORM 10-K - April 29, 2016

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EX-32.2 - EXHIBIT 32.2 - COMARCO INC	ex32-2.htm
EX-10.10 - EXHIBIT 10.10 - COMARCO INC	ex10-10.htm
EX-21.1 - EXHIBIT 21.1 - COMARCO INC	ex21-1.htm
EX-23.1 - EXHIBIT 23.1 - COMARCO INC	ex23-1.htm
EX-31.2 - EXHIBIT 31.2 - COMARCO INC	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - COMARCO INC	ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - COMARCO INC	ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2016

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

		For the transition period from ______________ to ______________

Commission File Number 000-05449

COMARCO, INC.

(Exact name of registrant as specified in its charter)

California	95-2088894
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

28202 Cabot Road, Suite 300, Laguna Niguel, CA	92677
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code:

(949) 599-7400

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.10 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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 (do not check if a smaller reporting company)

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 ☒

As of July 31, 2015, the last business day of our most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $2.3 million, based on the closing sales price of the registrant’s common stock as reported on the OTCQB market on such date. This calculation does not reflect a determination that persons are affiliates for any other purposes.

The number of shares of the registrant’s common stock outstanding as of April 15, 2016 was 14,644,165.

Documents incorporated by reference:

Portions of the registrant’s definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this annual report are incorporated by reference into Part III of this annual report. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement is not deemed to be filed as part of this annual report.

COMARCO, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED JANUARY 31, 2016

TABLE OF CONTENTS

			Page
PART I
	ITEM 1.	BUSINESS	1
	ITEM 1A.	RISK FACTORS	3
	ITEM 1B.	UNRESOLVED STAFF COMMENTS	9
	ITEM 2.	PROPERTIES	9
	ITEM 3.	LEGAL PROCEEDINGS	9
	ITEM 4.	MINE SAFETY DISCLOSURES	10

PART II
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	10
	ITEM 6.	SELECTED FINANCIAL DATA	11
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	11
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	20
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	21
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	40
	ITEM 9A.	CONTROLS AND PROCEDURES	40
	ITEM 9B.	OTHER INFORMATION	41

PART III
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE	41
	ITEM 11.	EXECUTIVE COMPENSATION	41
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	41
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	42
	ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	42

PART IV
	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	42

PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains statements relating to our future plans and developments, financial goals and operating performance that are based on our current beliefs and assumptions. These statements constitute “forward-looking statements” within the meaning of federal securities laws. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “could,” “may,” “should,” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements are only based on facts and factors known by us as of the date of this report. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically 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 (“SEC”). Readers are urged not to place undue reliance on these forward-looking statements.

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, as well as our other SEC filings, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

ITEM 1.

BUSINESS

General

Comarco, Inc. was incorporated in California in 1960 and its common stock has been publicly traded since 1971, when it was spun-off from Genge Industries, Inc. Comarco Inc.’s wholly-owned subsidiary Comarco Wireless Technologies, Inc. (“CWT”) was incorporated in the state of Delaware in September 1993. Comarco and CWT are collectively referred to as “we,” “us,” “our,” “Comarco,” or the “Company”.

We are primarily focused on potentially realizing value from our ongoing IP enforcement actions and other litigation as well as exploring opportunities to further expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of our patent portfolio.

References to “fiscal” years in this report refer to our fiscal years ended January 31; for example, “fiscal 2016” refers to our fiscal year that ended on January 31, 2016.

We file or furnish annual, quarterly, and current reports, proxy statements, and other information with the SEC. Our SEC filings are available free of charge to the public via EDGAR through the SEC’s website at http://www.sec.gov. Our SEC filings are also available on our website at http://www.comarco.com as soon as reasonably practical following the time that they are filed with or furnished to the SEC. In addition, any document we file or furnish with the SEC can be read at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. For further information regarding the operation of the Public Reference Room, please call the SEC at (800) SEC-0330.

Our Business

Going Concern

Our management and our independent registered public accounting firm have expressed substantial doubt about our ability to continue as a going concern as a result of (1) our historical losses from operations, (2) the length of time required to prosecute IP enforcement actions, (3) the uncertainty surrounding the results of IP enforcement actions, (4) our limited existing cash flow and financial resources and (5) 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. (see “Risk Factors”).

Working Capital

As of January 31, 2016, we had negative working capital of approximately $0.7 million, which includes liabilities of $0.4 million related to the remaining balance owed to our former counsel Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”) and $0.6 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 $0.6 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 $0.6 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 will be suffieicnt to 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.

Marketing, Sales, and Distribution

Since we are primarily focused on the monetzation of our patent portfolio, we had no marketing, sales or distribution expenses in fiscal years 2016 and 2015.

Key Customers

For fiscal years 2016 and 2015, we had no customers. For more information regarding our customers, see Note 3 of the Notes to the Consolidated Financial Statements included in Item 8 of this report.

Research and Development

During fiscal years 2016 and 2015, we had no research and development investment. In addition, we currently only have one full-time employee, who is our Chief Executive Officer and President. Since we are primarily focused on the monetzation of our patent portfolio, we anticipate engaging in extremely limited or no research and development activities for the foreseeable future.

Manufacturing and Suppliers

Since we are primarily focused on the monetzation of our patent portfolio, our manufacturing activities and related commercial relations with suppliers are extremely limited and will likely remain so for the foreseeable future.

Patents, Trademarks and Other Intellectual Property

Our future existence and success depend in large part on our proprietary technology, including our patents, trademarks and other intellectual property, on which we have commenced efforts to monetize through enforcement actions and licensing arrangements. We also regularly consider the possibility of selling some or all of our intellectual property portfolio. We generally rely upon patent, copyright, trademark, and trade secret laws in the United States and in certain other countries, and upon confidentiality agreements with our employees, customers, and partners, to establish, maintain and protect our intellectual property rights in our proprietary technology. As of January 31, 2016, we had approximately 49 issued U.S. patents and additional U.S. patent applications pending. We also have 38 foreign patents, however we are discontinuing maintenance of some of our foreign patents in order to focus our resources on monetization of our U.S. patent portfolio. Twenty one of our issued U.S. patents expired in April of 2014. However, these expired patents are still enforceable for any infringement that occurred during the last 6 years of the patent term and we are pursuing certain enforcement actions on that basis. The patents we believe to be the most valuable extend into 2024. Specifically, our patent portfolio addresses sophisticated charging challenges, including charging multiple devices simultaneously and analyzing power requirements of electronic devices, as well as light-weight compact dimensions. In addition, we have registered trademarks in the United States for ChargeSource® and SmartTip®.

Government Regulation

Many of the products we have produced over our history are subject to various federal, state, local and foreign laws governing substances in products and their safe use, including laws regulating the manufacture and distribution of chemical substances and laws restricting the presence of certain substances in electronics products. While we are no longer focused on manufacturing or selling products, if our existing products in the marketplace are found to be non-compliant with these laws, we could be subject to various liabilities and obligations, including sanctions, fines or product recalls.

Employees

As of April 1, 2016, we employed one full-time employee, who is our Chief Executive Officer and President. We also engage certain consultants on a part-time basis, including our Chief Accounting Officer. This significantly reduced headcount is the result of reductions in force targeted at reducing our cash burn.

ITEM 1A.

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information contained in this report, before deciding whether to invest in shares of our common stock. If any of the following risks continue or newly occur, our business, financial condition, operating results and prospects would further suffer. In that case, the trading price of our common stock would likely further decline and you might lose all or part of your investment in our common stock. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our operations and business results.

We effectively suspended our traditional operations as of the end of the third quarter of fiscal 2014. We are now primarily focused on potentially realizing value from our ongoing or future IP enforcement actions and other litigation as well as further exploring opportunities to expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of some or all of our patent portfolio. Our ability to generate positive cash flow, if any, from these activities is speculative and subject to a number of uncertainties. If we do not improve our cash position in the near term, we may be forced to cease operations, in which event you may lose your entire investment in us.

We are now primarily focused on potentially realizing value from our ongoing or future IP enforcement actions and other litigation as well as further exploring opportunities to expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of some of all of our patent portfolio. While we have little experience or track record in generating revenues from these non-traditional methods, we have executed two settlement agreements through fiscal 2016 and one additional settlement agreement in the first quarter of fiscal 2017. 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 received $6.5 million, net of $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 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 established a forward royalty arrangement on sales of certain ACCO Brands products and dismissed all claims between the two parties arising from this matter. On March 26, 2016, we entered into a confidential settlement and license agreement with FT 1, Inc. (formerly known as Targus Group International, Inc.) and Targus International LLC (collectively, “Targus”) that resolves all claims arising from our litigation with Targus in exchange for a confidential lump sum settlement payment from Targus to us plus future per-unit royalty payments to us if Targus exceeds the limit on licensed products that Targus may sell to OEMs under the settlement agreement. However, there can be no guarantees that we will execute additional agreements in the future.

Our ability to generate revenue from ongoing or future litigation is subject to a number of significant uncertainties, including, but not limited to, our ability to retain counsel on an alternative fee structure basis or otherwise fund the cost of litigation and litigation counsel, the validity of our claims, our ability to succeed on the merits of our claims, interpretation of applicable contracts and laws (which in many cases are complex and potentially subject to competing interpretations), our ability to sustain operations through the final adjudication of our various litigation proceedings, and other uncertainties inherent in the litigation process. In addition, it is likely that we will become subject to counterclaims in any litigation to which we are a party, which may result in us being subject to damages or other obligations.

Similarly, our ability to monetize our technology through licensing or sale is speculative and subject to a number of factors, including the outcome of litigation concerning our patent portfolio and the actual and perceived value of our intellectual property in the marketplace. To date, we have entered into three agreements to license our intellectual property to third parties, which have resulted in nominal revenues to date.

Any failure to realize value from our ongoing or future litigation or efforts to monetize our patent portfolio is expected to have a material adverse impact on our already limited financial resources, which could cause us to cease operations or otherwise cause you to lose your entire investment in us. There can be no assurance that we will be successful in generating revenue from any of these non-traditional sources.

Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation, settlement or licensing costs and expenses.

Third parties have claimed, and may in the future claim, that we are infringing on their intellectual property rights. These intellectual property infringement claims, whether we ultimately are found to be infringing on any third party’s intellectual property rights or not, are time-consuming, costly to defend, and divert resources and management attention away from our other priorities. We have previously been subject to litigation alleging that our products infringed on a third party’s intellectual property.

Infringement claims by third parties also could subject us to significant damage awards or fines or require us to pay large amounts to settle such claims.

Third parties may infringe our intellectual property rights, and we may be required to spend significant resources enforcing these rights or otherwise suffer competitive injury.

Our success is highly dependent on our ability to monetize our proprietary technology. We generally rely upon patent, copyright, trademark, and trade secret laws in the United States and in certain other countries, and upon confidentiality agreements with our employees, customers, and partners to establish and maintain our intellectual property rights in our proprietary technology. Our future and pending patent applications may not be issued with the scope we seek, if at all. In addition, we may not have sufficient capital to continue to prosecute and maintain our existing patents or new or existing patent applications. Others may independently develop similar proprietary technology or otherwise gain access to and disclose our proprietary information and technology, and our intellectual property rights could be challenged, invalidated, or circumvented by competitors or others, whether in the United States or in foreign countries. Our employees, customers, or partners also could breach our confidentiality agreements, for which we may not have an adequate remedy available. We also may not be able to timely detect the infringement of our intellectual property rights. Moreover, the laws of foreign countries may not afford the same protection to intellectual property rights as do the laws of the United States. The occurrence of any of the foregoing could harm our competitive position.

During fiscal 2012, we notified 11 companies, including Kensington, Targus, Best Buy Co. Inc. (“Best Buy”) and Apple, Inc. (“Apple”), that we believe they are manufacturing and distributing products that infringe on one or more of our patents. One of the companies entered into a license agreement with us shortly after being notified of the infringement. Subsequently, in February 2014, Kensington entered into license agreement with us in settlement of time consuming and costly infringement litigation. Also, on March 26, 2016, we entered into a confidential settlement and license agreement with Targus that resolves all claims arising from our litigation with Targus in exchange for a confidential lump sum settlement payment from Targus to us plus per-unit royalty payments to us if Targus exceeds the limit on licensed products that Targus may sell to OEMs under the settlement agreement. In February 2015, we initiated litigation against Best Buy and Apple. To date, we have not taken any formal action against the remaining prior noticed alleged infringers, and at present we have not determined if or when we will do so. Whether or not we are successful in enforcing and protecting our intellectual property rights, litigation is time-consuming and costly, and may result in our intellectual property rights being held invalid or unenforceable.

We cannot be certain of the ultimate costs required to conclude our current litigation and may not be able to continue these proceedings.

In February 2015, we filed a lawsuit against Best Buy and Apple for patent infringement under the patent laws of the United States. We are unable to determine the future expenditures related to these matters. The costs incurred for the current litigation may continue to significantly adversely impact our operating results and we may determine that due to the unpredictable nature of the costs and timing of the outcomes, we will no longer be able to persue these actions.

Our strategy to license and/or monetize the value of our patents, trademarks, and other intellectual property through enforcement actions may not be successful.

As noted above, during fiscal 2012 we notified 11 companies, including Kensington, Targus, Best Buy and Apple, that we believe they are manufacturing and/or distributing products that infringe on one or more of our patents. One of the companies entered into a license agreement with us shortly after being notified of the infringement. Subsequently, on February 4, 2014, Kensington entered into a settlement agreement and licensing agreement with us with an effective date of February 1, 2014 that dismissed all claims arising from litigation between us and Kensington. Also, on March 26, 2016, we entered into a confidential settlement and license agreement with Targus that resolves all claims arising from our litigation with Targus in exchange for a confidential lump sum settlement payment from Targus to us plus per-unit royalty payments to us if Targus exceeds the limit on licensed products that Targus may sell to OEMs under the settlement agreement.

In February 2015, we initiated separate litigation against both Best Buy and Apple based on our belief that they have manufactured and/or distributed and/or sold products that infringe on one or more of our patents. We cannot predict the ultimate timing, course or outcome of actions taken against the remaining prior noticed infringers and we may not be successful in our efforts to monetize our intellectual property through these enforcement actions.

A majority of our common stock is held by just a few shareholders, which will make it possible for them to have significant influence over the outcome of all matters submitted to our shareholders for approval and which influence may be alleged to conflict with our interests and the interests of other shareholders.

As of April 1, 2016, our two largest shareholders owned an aggregate of approximately 60% of the outstanding shares of our common stock. Elkhorn Partners Limited Partnership (“Elkhorn”) owned approximately 49% and Broadwood Partners, L.P. (“Broadwood”) owned approximately 11%, respectively, of the outstanding shares of our common stock at April 1, 2016. These shareholders, and Elkhorn in particular, will have significant influence over all matters submitted to our shareholders for approval including the election of our directors and other corporate actions. In addition, such influence by one or more of these shareholders could have the effect of discouraging others from attempting to purchase us, take us over, and/or reducing the market price offered for our common stock in such an event.

We are highly dependent on our CEO and President, who is our only full-time employee.

Currently, we only have one employee, Tom Lanni, who is our Chief Executive Officer and President. Mr. Lanni has extensive knowledge concerning the technology underlying our patent portfolio as a result of his 20-year tenure with us. The loss of Mr. Lanni’s services could adversely impact our ability to maximize the value of our patent portfolio or otherwise negatively affect our operations.

Our quarterly operating results are subject to fluctuations and, if our operating results decline or are worse than expected, or if our litigation prospects decline materially, our stock price could fall.

We do not expect significant quarterly fluctuations in revenue as we have effectively suspended traditional operations. However, as we are now primarily focused on potentially realizing value from our ongoing IP enforcement actions and other litigation as well as exploring further opportunities to expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of some or all of our patent portfolio, our expenses may vary considerably from month to month, which would directly impact our operating results. Our quarterly operating results may fluctuate for many additional reasons, including:

	●	Our suspension of historic, traditional business operations, which leaves us with no material, regular revenue sources, and leaves us vulnerable to any short or longer term increases in legal or other expense levels;

	●	Our investment in or proceeds from our ongoing and any future litigation;

	●	Our ability to obtain settlement proceeds or awards of damages in our patent infringement litigation; and

	●	Our ability to sell or license some or all of our patent portfolio.

Due to these and other factors, our past results are not reliable indicators of our future performance. In addition, a certain portion of our operating expenses are relatively fixed including operations in support of our administrative expense. If our operating results decline or are below expectations of investors, the market price of our stock may decline significantly.

We have concluded that our internal controls over financial reporting were not effective as of January 31, 2016 which could cause deficiencies in our financial reporting and investors to lose confidence in the reliability of our consolidated financial statements and result in a decrease in the value of our securities.

Our management has concluded that our internal controls over financial reporting were not effective as discussed in “Management’s Report on Internal Control Over Financial Reporting” in Item 9A of this report. Specifically, our management has concluded that due to a lack of accounting and information technology staff there is a lack of segregation of duties necessary for an appropriate system of internal controls.

While we will continue to implement our internal controls over financial reporting, because of inherent limitations, our internal controls over financial reporting may not prevent or detect all material misstatements, errors or omissions. Also, projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with our policies or procedures may deteriorate. We cannot be certain in future periods that other control deficiencies that may constitute one or more “significant deficiencies” (as defined by the relevant auditing standards) or material weaknesses in our internal control over financial reporting will not be identified. If we fail to implement adequate internal controls, including any failure to implement or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we could fail to be able to provide reasonable assurance as to our financial results or we could fail to meet our reporting obligations and there could be a material adverse effect on the price of our securities. Moreover, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our Restated Articles of Incorporation and our Amended and Restated Bylaws contain provisions which may discourage attempts by others to acquire or merge with us, which could reduce the market value of our common stock.

Provisions of our Restated Articles of Incorporation and our Amended and Restated Bylaws may discourage attempts by other companies to acquire or merge with us, which could reduce the market value of our common stock. These provisions include:

	●	the authorization of our Board of Directors to issue preferred stock with such rights and preferences as may be determined by the Board of Directors, without the approval of our shareholders;

	●	the prohibition of action by the written consent of the shareholders;

	●	the establishment of advance notice requirements for director nominations and other proposals by shareholders for consideration at shareholder meetings;

	●	the requirement that the holders of at least two-thirds of the outstanding common stock entitled to vote at a meeting are required to approve certain business combinations with interested shareholders; and

	●	the requirement that the holders of at least two-thirds of the outstanding common stock entitled to vote at a meeting are required to approve certain changes to specific provisions of our Amended and Restated Articles of Incorporation (including those provisions described above).

Our stock price has been and will likely remain highly volatile.

The stock market in general, and the stock prices of technology companies in particular, have experienced fluctuations that may be unrelated or disproportionate to the operating performance of these companies. Broad market and industry stock price fluctuations may adversely affect the market price of shares of our common stock. The market price of our stock has exhibited significant price fluctuations, which makes our stock unsuitable for many investors. Our stock price may also be affected by the following factors:

	●	Our quarterly operating results;

	●	Realizing value from our ongoing or future litigation as well as the results of our exploring opportunities to expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of some or all of our patent portfolio.

	●	Other events affecting other companies that investors deem relevant to us.

All of these factors, as well as others not discussed above, may contribute to the volatility of our stock price.

Because our common stock is not listed on a national securities exchange, you may find it difficult to buy or sell or obtain quotations for our common stock

Our common stock trades under the symbol “CMRO” on the over-the-counter market OTCQB. Because our stock trades in small quantities and trades over-the-counter, rather than on a national securities exchange, you may find it difficult to either economically purchase, sell, or obtain quotations on the price of our common stock.

We may be subject to penny stock regulations and restrictions, which could make it difficult for shareholders to sell their shares of our common stock.

SEC regulations generally define “penny stocks” as equity securities that have a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. If we do not fall within any exemptions from the “penny stock” definition, we will be subject to Rule 15g-9 under the Exchange Act, which regulations are commonly referred to as the “Penny Stock Rules.” The Penny Stock Rules impose additional sales practice requirements on broker-dealers prior to selling penny stocks, which may make it burdensome to conduct transactions involving our shares. If our shares are subject to the Penny Stock Rules, it may be difficult to buy or sell shares of our stock, and because it may be difficult to find quotations for shares of our stock, it may be impossible to accurately price an investment in our shares. In addition to the Penny Stock Rules, as an issuer of “penny stock” we are unable to utilize the safe harbor provisions of the Forward Looking Statements sections of the Exchange Act. There can be no assurance that our common stock will qualify for an exemption from the Penny Stock Rules, or that if an exemption currently exists, that we will continue to qualify for such exemption. In any event, we are subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of a penny stock if the SEC determines that such a restriction would be in the public interest.

The Financial Industry Regulatory Authority, or FINRA, sales practice requirements may also limit a shareholder's ability to buy or sell our common stock.

In addition to the Penny Stock Rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our headquarters are located in Laguna Niguel, California. We entered into lease agreement with the landlord during fiscal 2017. The lease for this facility expires August 2016.

We are subletting the office space that was our previous headquarters. The lease for the former headquarter facility and the sublease expire on August 31, 2016.

ITEM 3.

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 and the arbitration hearing was set for April 2016.

On March 26, 2016, we entered into a confidential settlement and license agreement with Targus that resolves all claims arising from our litigation with Targus in exchange for a confidential lump sum settlement payment from Targus to us plus per-unit royalty payments to us if Targus exceeds the limit on licensed products that Targus may sell to OEMs under the settlement agreement.

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 Kennsington, 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. 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, none of which we currently consider may be material. There can be no certainty, however, that we may not ultimately incur liability from such incidental legal proceedings or that such liability will not be material and adverse.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock trades under the symbol “CMRO” on the OTCQB. The following table sets forth, for the quarters indicated, the high and low last sale price information for our common stock as reported by OTC Markets Inc., a research service that compiles quote information reported on the National Association of Securities Dealers composite feed or other qualified inter-dealer quotation medium. These quotations reflect inter-dealer prices, without retail markup, markdown or commissions, and may not necessarily represent actual transactions.

	High		Low

Year ended January 31, 2016:
First Quarter	$	0.19	$	0.14
Second Quarter		0.21		0.14
Third Quarter		0.21		0.14
Fourth Quarter		0.21		0.11
Year ended January 31, 2015:
First Quarter	$	0.30	$	0.17
Second Quarter		0.29		0.16
Third Quarter		0.20		0.15
Fourth Quarter		0.19		0.14

Holders

As of April 1, 2016, there were 284 holders of record of our common stock.

Dividends

We did not declare any dividends during fiscal 2016 or fiscal 2015. We do not expect to pay cash dividends in the near future, as we intend to retain any future earnings to fund working capital and operations. Any determinations to pay dividends in the future will be at the discretion of our Board of Directors.

Repurchases

We did not repurchase any securities during fiscal years 2016 or 2015.

ITEM 6.

SELECTED FINANCIAL DATA

	Years Ended January 31,
	2016			2015
	(In thousands, except per share data)

Revenue	$	-		$	-
Cost of revenue		-			(1,099	)
Gross profit		-			1,099

Selling, general and administrative expenses		1,116			1,232
Engineering and support expenses		260			309
		1,376			1,541
Operating loss		(1,376	)		(442	)
Other (loss) income , litigation settlement		30			6,524
(Loss) Income before income taxes		(1,346	)		6,082
Income tax expense		-			42
Net (loss) income	$	(1,346	)	$	6,040

Basic net (loss) income per share:	$	(0.09	)	$	0.41
Diluted net (loss) income per share:	$	(0.09	)	$	0.41

Working (deficit) capital	$	(727	)	$	644
Total assets	$	922		$	2,282
Borrowings under loan agreement	$	-		$	-
Stockholders' (deficit) equity	$	(648	)	$	657

ITEM 7.

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

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included in Item 8 of this report as well as our risk factors included in Item 1A of this report. The following discussion contains forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” included in Item 1 of this report.

Overview

Going Concern Qualification

The 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/or obtain borrowings or raise capital to meet our liquidity needs.

Three of our recent litigation matters have concluded. 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 (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 was set for April 2016. On March 26, 2016, we entered into a confidential settlement and license agreement with Targus that resolves all claims arising from our litigation with Targus in exchange for a confidential lump sum settlement payment from Targus to us plus future per-unit royalty payments to us if Targus exceeds the limit on licensed products that Targus may sell to OEMs under the settlement agreement.

In the 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 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 February 13, 2015, we filed a lawsuit against Best Buy Co, Inc. 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, 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 our patented intellectual property. This lawsuit represents our most significant enforcement effort to date, and, together with the Kennsington, 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.

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.

We had negative working capital of approximately $0.7 million as of January 31, 2016, which includes liabilities of $0.4 million related to the remaining balance owed to our former counsel Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”) and $0.6 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 $0.6 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 $0.6 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 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 expressed substantial doubt about our ability to continue as a going concern as a result of (1) our historical losses from oerations, (2) the length of time to procecute IP enforcement actions, (3) the uncertainty surrounding the results of IP enforcement actions, (4) our limited existing cash flow and financial resources and (5) 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 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.

Business Strategy and Future Plans

We anticipate that we will generate no revenue in future periods from the development, design, distribution or sale of any products. Since the third quarter of fiscal quarter 2014, we have been primarily focused on potentially realizing value from our ongoing IP enforcement actions and other litigation as well as further exploring opportunities to expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of some or all of our patent portfolio. In the future, we may resume our traditional operations, if and when possible.

Company Trends and Uncertainties

Management currently considers the following additional trends, events, and uncertainties to be important to an understanding of our business:

	●	We generated no revenue for fiscal years ended January 31, 2016 and 2015. We anticipate that we will generate no future revenue from the development, design, distribution or sale of any products.

	●	On March 26, 2016, we entered into a confidential settlement and license agreement with Targus that resolves all claims arising from our litigation with Targus in exchange for a confidential lump sum settlement payment from Targus to us plus per-unit royalty payments to us if Targus exceeds the limit on licensed products that Targus may sell to OEMs under the settlement agreement.

	●	On February 13, 2015, we filed a lawsuit against Best Buy Co., Inc. 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, 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 our patented intellectual property. This lawsuit represents our most significant enforcement effort to date, and, together with the Kensington, 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 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 Elkhorn Loan and certain related agreements.

	●	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

The preparation of our consolidated financial statements requires us to apply accounting policies and make certain estimates and judgments. Our significant accounting policies are presented in Note 2 of the notes to the consolidated financial statements in Item 8 of this report. Of our significant accounting policies, we believe the following are the most significant and involve a higher degree of uncertainty, subjectivity, and judgments. These policies involve estimates and judgments that are inherently uncertain. Changes in these estimates and judgments may significantly impact our annual and quarterly operating results.

Stock-based Compensation

We recognize compensation costs for all stock-based awards made to employees, consultants, and directors. The fair value of stock based awards is estimated on the date of grant, and is recognized as expense ratably over the requisite service period. We currently use either a Lattice Binomial or the Black-Scholes option-pricing model to estimate the fair value of our share-based payments. Both the Lattice Binomial and the Black-Scholes option-pricing model are based on a number of assumptions, including expected volatility, expected forfeiture rates, expected life, risk-free interest rate and expected dividends. The prevailing difference between the two models is the Lattice Binomial model’s ability to enhance the simple assumptions that underlie the Black-Sholes model. The Lattice Binomial model allows for assumptions such as risk-free rate of interest, volatility and exercise rate to vary over time reflecting a more realistic pattern of economic and behavioral occurrences. If the assumptions change under either model, stock-based compensation may differ significantly from what we have recorded in the past.

Income Taxes

We are required to estimate our provision for income taxes in each of the tax jurisdictions in which we conduct business. This process involves estimating our actual current tax expense in conjunction with the evaluation and measurement of temporary differences resulting from differing treatment of certain items for tax and accounting purposes. These temporary timing differences result in the establishment of deferred tax assets and liabilities, which are recorded on a net basis and included in our consolidated balance sheets. We then assess on a periodic basis the probability that our net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided with a corresponding charge to tax expense to reserve the portion of the deferred tax assets which are estimated to be more likely than not to be realized.

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 January 31, 2016. We have a net operating loss carryforward of $35.8 million for federal and $28.7 million for state, which expire in increments through 2032. Based on a review performed in fiscal 2015, we concluded that a Section 382 ownership change did not occurred as a result of the Elkhorn transaction in fiscal 2014.

Results of Operations

The following tables set forth certain items as a percentage of revenue from our audited consolidated statements of operations for fiscal 2016 and fiscal 2015:

Revenue

We generated no revenue for fiscal years ended January 31, 2016 and 2015. We anticipate that we will generate no revenue from the development, design, distribution or sale of any products.

	(in thousands) Years Ended January 31,
	2016			2015			% Change

Revenue	$	-		$	-			0	%
Operating loss	$	(1,376	)	$	(442	)		-211	%
Net (loss) income	$	(1,346	)	$	6,040			-122	%

Cost of revenue for the fiscal year ended January 31, 2016 decreased by $1.1 compared to the corresponding period of fiscal 2015. The decrease is a result of us having $0 in revenue and product costs during fiscal 2016 and fiscal 2015, and that as a result of the May 14, 2014 is settlement agreement with Chicony, the previously accrued obligation of $1.1 million to Chicony was legally dismissed and was reversed during the year ended January 31, 2015.

	(in thousands) Years Ended January 31,
	2016					2015						% Change
			% of Total						% of Total
Cost of Revenue:
Product costs	$	-		0	%	$	-			0	%		0	%
Supplier settlement		-		0	%		(1,099	)		100	%		0	%
	$	-		0	%	$	(1,099	)		100	%		-100	%

Operating Costs and Expenses

Fiscal 2016 operating expenses were $1.4 million compared to $1.5 million in fiscal 2015. The fiscal 2016 decrease in operating expenses of $0.2 million compared to fiscal 2015 relates primarily to decreased legal expenses and personnel and related costs.

Corporate overhead consists of salaries and other personnel-related expenses of our accounting and finance, human resources and benefits, and other administrative personnel, as well as professional fees, directors’ fees, and other costs and expenses attributable to being a public company.

Engineering and support expenses generally consist of legal expenses incurred related to our intellectual property, including associated litigation expense and maintenance of our patent portfolio.

	(in thousands) Years Ended January 31,
	2016					2015					% Change
			% of Rev					% of Rev
Operating expenses:
Selling, general and administrative expenses, excluding corporate overhead	$	6		0	%	$	8		0	%		-25	%
Corporate overhead		1,110		0	%		1,224		0	%		-9	%
Engineering and support expenses		260		0	%		309		0	%		-16	%
	$	1,376		0	%	$	1,541		0	%		-11	%

Interest Expense, Net

We had no interest expense in fiscal year 2016.

Fiscal year 2015 interest expense, net, 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.

Change in Fair Value of Derivative Liabilities

We had no change in fair value of derivative liabilities in fiscal 2016.

For fiscal 2015, the change in fair value of derivative liabilities is due to the Company repaying the Elkhorn Loan in full and as a result, the discount to the loan payable and related derivative liability were extinguished and charged to earnings for the year ended January 31, 2015.

Other Income, net

During the fiscal year ended January 31, 2016, other income, net, was $30,000 related to financial assets that were sold.

During the fiscal year ended January 31, 2015, other income, net, was $6.7 million. Pursuant to our May 2014 settlement agreement we were paid $7.6 million from Chicony. Of the $7.6 million, we received $6.5 million, net of attorneys’ fees and other costs. 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 year ended January 31, 2015. In addition, we received $0.2 million from a separate settlement and licensing agreement during the year ended January 31, 2015.

Income Taxes

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 history of operating losses, the adjusted net deferred tax assets remained fully reserved as of January 31, 2016.

During fiscal 2016, we recorded a net loss of $1.3 million and recorded income tax expense of $1,600, which represents the minimum tax due in the state of California. The net deferred tax asset as of January 31, 2016 was $16.7 million, all of which is fully reserved.

During fiscal 2015, we recorded a net income of $6.1 million and recorded income tax expense of $42,000, which represents the minimum tax due in the state of California. The net deferred tax asset as of January 31, 2015 was $16.1 million, all of which is fully reserved.

Liquidity and Capital Resources

The following table is a summary of our Consolidated Statements of Cash Flows:

	(in thousands) Years Ended January 31,
	2016			2015

Cash provided by (used in):
Operating activities	$	(1,388	)	$	2,467
Investing activites	$	(72	)	$	77
Financing activities	$	-		$	(1,500	)

Cash Flows from Operating Activities

The cash used in operating activities during fiscal 2016 of $1.4 million is primarily a result of net loss of $1.3 million.

The cash provided in operating activities during fiscal 2015 of $2.5 million is a result of net income of $6.1 million from our May 2014 litigation settlement with Chicony; offset by net non-cash amortization, stock option expense and change in fair value of derivative liabilities of $0.9 million offset by operating expenses paid of $2.7 million.

In fiscals 2016 and 2015, we continued our cost cutting measures in order to incrementally reduce our cash burn. We may require further cost cutting measures and/or additional capital from debt or equity financing to fund our operations. We cannot be certain that such cost cutting measures will be possible or that financing will be available to us on acceptable terms, or at all.

Cash Flows from Investing Activities

During fiscal 2016, our security deposit of $77,000 for our corporate lease became collateralized by cash in a separate bank account.

During the fiscal 2015, our security deposit of $77,000 for our corporate lease expired.

Cash Flows from Financing Activities; Loan Agreement & Credit Facility

On February 11, 2013, we entered into a Secured Loan Agreement (the “Elkhorn Loan Agreement”) and a Stock Purchase Agreement (the “Elkhorn SPA”), and certain related agreements (collectively, the “Elkhorn Agreements”). Pursuant to those agreements, Elkhorn made a $1.5 million senior secured loan to us with a maturity date of November 30, 2014 (the “Elkhorn Loan”) and purchased a total of 6,250,000 shares of our common stock at a cash purchase price of $0.16 per share, generating an additional $1.0 million of cash for the Company. On February 11, 2013, we used approximately $2.1 million of the proceeds of $2.5 million from the Elkhorn Loan and the sale of the shares to Elkhorn to pay the entire principal amount of and all accrued interest on our July 2012 loan from Broadwood. On June 3, 2014, the Company repaid the Elkhorn Loan Agreement in full.

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

We had negative working capital of approximately $0.7 million as of January 31, 2016, which includes liabilities of $0.4 million related to the remaining balance owed to our former counsel Pillsbury and $0.6 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 intellectual property. Regarding the $0.6 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 $0.6 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 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.

Contractual Obligations

In the course of our business operations, we incur certain commitments to make future payments under contracts such as operating leases and purchase orders. Payments under these contracts are summarized as follows as of January 31, 2016 (in thousands):

Payments due by Period

Long Term Debt Obligations

Less than

1 year

1 to 3

years

3 to 5

years

Total

Operating lease obligations

152

In addition to the amounts shown in the table above, we have unrecognized tax benefits in the amount of $0.8 million, which we are uncertain as to if or when such amounts may be settled.

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 the executive 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.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. The Company will be required to adopt this ASU beginning with the quarter ending March 31, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements. The Company does not anticipate that adopting this update will have a material impact on its consolidated financial statements.

The FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, (ASU 2014-12). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. ASU 2014-12 becomes effective for annual and interim periods beginning after December 15, 2015 with early adoption permitted. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements. The Company does not anticipate that adopting this update will have a material impact on its consolidated financial statements.

The FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and provide related disclosures. The ASU is effective for annual and interim reporting periods beginning January 1, 2017. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements. The Company does not anticipate that adopting this update will have a material impact on our consolidated financial statements as such matters are currently disclosed.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

COMARCO, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	22
Financial Statements:
Consolidated Balance Sheets, January 31, 2016 and 2015	23
Consolidated Statements of Operations, Years Ended January 31, 2016 and 2015	24
Consolidated Statements of Stockholders’ Equity (Deficit), Years Ended January 31, 2016 and 2015	25
Consolidated Statements of Cash Flows, Years Ended January 31, 2016 and 2015	26
Notes to Consolidated Financial Statements	27
Schedule II -- Valuation and Qualifying Accounts, Years Ended January 31, 2016 and 2015	46

All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or the notes thereto.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Comarco, Inc.

Lake Forest, California

We have audited the accompanying consolidated balance sheets of Comarco, Inc. and subsidiary (the “Company”) as of January 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended. Our audits also included the financial statement schedule of Comarco, Inc. listed in Part IV, Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comarco, Inc. and subsidiary as of January 31, 2016 and 2015- and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses and negative cash flow from operations, has negative working capital and faces uncertainties surrounding the Company’s ability to raise additional funds. These factors, among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ SQUAR MILNER LLP (formerly SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP)

Newport Beach, California

April 29, 2016

COMARCO, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	January 31,			January 31,
	2016			2015
ASSETS
Current Assets
Cash and cash equivalents	$	680		$	2,140
Accounts receivable		122			122
Other current assets		41			7
Total current assets		843			2,269
Property and equipment, net		2			8
Restricted cash		77			5
Total assets	$	922		$	2,282

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable	$	883		$	737
Accrued liabilities		687			848
Income taxes payable		-			40
Total current liabilities		1,570			1,625
Total liabilities		1,570			1,625

Commitments and Contingencies (see Note 10 and 11)

Stockholders' (Deficit) Equity:
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 January 31, 2016 and 2015, respectively		1,464			1,468
Additional paid-in capital		18,367			18,322
Accumulated deficit		(20,479	)		(19,133	)
Total stockholders' equity (deficit)		(648	)		657
Total liabilities and stockholders' equity (deficit)	$	922		$	2,282

The accompanying notes are an integral part of the financial statements.

COMARCO, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Years Ended January 31,
	2016			2015

Revenue	$	-		$	-
Cost of revenue	$	-			(1,099	)
Gross profit		-			1,099

Selling, general and administrative expenses		1,116			1,232
Engineering and support expenses		260			309
		1,376			1,541
Operating loss		(1,376	)		(442	)
Interest expense, net		-			(380	)
Change in fair value of derivative liabilities		-			226
Other income, net - litigation settlement		30			6,678

Income (loss) from operations before income taxes		(1,346	)		6,082
Income tax expense		-			42
Net income (loss)	$	(1,346	)	$	6,040

Basic loss per share:	$	(0.09	)	$	0.41
Diluted loss per share:	$	(0.09	)	$	0.41

Weighted-average shares outstanding:
Basic		14,652			14,684
Diluted		14,652			14,863

The accompanying notes are an integral part of the financial statements.

COMARCO, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)

	Common Stock			Additional Paid-in Capital		Accumulated Deficit			Total
Balance at January 31, 2014 14,684,165 shares	$	1,468		$	15,980	$	(25,173	)	$	(7,725	)

Net income		-			-		6,040			6,040
Issuance of Broadwood replacement warrants		-			2,294		-			2,294
Stock based compensation expense		-			48		-			48
Balance at January 31, 2015 14,684,165 shares	$	1,468		$	18,322	$	(19,133	)	$	657

Net loss		-			-		(1,346	)		(1,346	)
Stock based compensation expense		-			41		-			41
Forfeiture of restricted stock		(4	)		4		-			-
Balance at January 31, 2016 14,644,165 shares	$	1,464		$	18,367	$	(20,479	)	$	(648	)

The accompanying notes are an integral part of the financial statements.

COMARCO, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Years Ended January 31,
	2016			2015

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,346	)	$	6,040
Adjustments to reconcile net income (loss) from continuing operations to net cash used in operating activities:
Depreciation and amortization		6			6
Amortization of loan discount		-			333
Stock-based compensation expense		41			48
Provision for doubtful accounts receivable		-			6
Change in fair value of derivative liabilities		-			(226	)
Supplier settlement		-			(1,099	)
Changes in operating assets and liabilities
Other assets		(34	)		10
Accounts payable		146			(2,527	)
Accrued liabilities		(161	)		(164	)
Income taxes payable		(40	)		40
Net cash provided by operating activities		(1,388	)		2,467

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		-			-
Change in restricted cash		(72	)		77
Net cash provided by investing activites		(72	)		77


CASH FLOWS FROM FINANCING ACTIVITIES:
Loan repayment		-			(1,500	)
Net cash (used in) provided by financing activities		-			(1,500	)

Net increase in cash and cash equivalents		(1,460	)		1,044
Cash and cash equivalents, beginning of period		2,140			1,096
Cash and cash equivalents, end of period	$	680		$	2,140

Noncash investing and financing activities:
Issuance of Broadwood replacement warrants	$	-		$	2,294

Supplementary disclosures of cash flow information:
Cash paid for interest	$	-		$	68
Cash paid for income taxes, net of refunds	$	2		$	2

The accompanying notes are an integral part of the financial statements.

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

1.	Organization

2.	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. In the opinion of management, these accounting policies conform to accounting principles generally accepted in the United States of America in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.

Principles of Consolidation

Our consolidated financial statements include the accounts of Comarco, Inc. and CWT. All material intercompany balances, transactions, and profits have been eliminated.

Future Operations, Liquidity and Capital Resources

The consolidated financial statements have been prepared assuming that we will continue to operate as a going concern, which contemplates that we will realize 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. The accompanying financial statements do not include any adjustments relating to this uncertainty.

Three of our recent litigation matters have concluded. 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 was set for April 2016. On March 26, 2016, we entered into a confidential settlement and license agreement with Targus that resolves all claims arising from our litigation with Targus in exchange for a confidential lump sum settlement payment from Targus to us plus per-unit royalty payments to us if Targus exceeds the limit on licensed products that Targus may sell to OEMs under the settlement agreement. 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 established a forward royalty program and dismissed all claims between the two parties arising from this matter.

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 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.

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.

We have and will continue to analyze alternatives to build and/or preserve value for our stakeholders, including, but not limited to, exploring additional investment and incremental financing from current and/or new investors, the engagement of advisors to assist in exploring strategic options for us as well as identifying potential partnerships for the purpose of monetizing some or all of our patent portfolio and past, present, and future infringement claims. However, there can be no assurances that we will be successful in identifying and/or implementing any of these alternatives, or if implemented, that any of these alternatives will successfully preserve or increase shareholder value.

We believe that our patent portfolio covering key technical aspects of our products could potentially generate a future revenue stream based upon royalties paid to us by others for the use of some or all of our 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 potential opportunities or activities will occur or be successful.

We had negative working capital of approximately $0.7 million as of January 31, 2016, which includes liabilities of $0.4 million related to the remaining balance owed to our former counsel Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”) and $0.6 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 5). 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 5). Regarding the $0.6 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 $0.6 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 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/or obtain borrowings or raise capital to meet our future liquidity needs.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 years 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 allowance for doubtful accounts, 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. 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.

Restricted Cash

Our restricted cash balances are secured by separate bank account and represent a $77,000 letter of credit that serves as the security deposit for our corporate office lease.

Accounts Receivable due from Suppliers

Previously, when we were engaged in our traditional operations of producing charging solutions for battery powered devices, we were often able to source components locally that we later sold to our contract manufacturers, who built the finished goods, and other suppliers. This was especially true 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 January 31,2016, 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 January 31, 2016, we owe Zheng Ge $0.6 million for contract manufacturing services. Although we currently have no legal right to offset the $0.6 million owed by 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.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Additions, improvements, and major renewals are capitalized; maintenance, repairs, and minor renewals are expensed as incurred. Depreciation and amortization is calculated on a straight-line basis over the expected useful lives of the property and equipment. The expected useful lives of office furnishings and fixtures are five to seven years, and of equipment and purchased software are two to five years. The expected useful life of leasehold improvements, which is included in office furnishings and fixtures, is the lesser of the term of the lease or five years.

We evaluate property and equipment for impairment when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. Factors considered important which could trigger an impairment review include, but are not limited to, significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for our overall business, and significant negative industry or economic trends. If such assets are identified to be impaired, the impairment to be recognized is the amount by which the carrying value of the asset exceeds the fair value of the asset. We did not experience any changes in our business or circumstances to require an impairment analysis nor did we recognize any impairment charges during the fiscal years ended January 31, 2016 and 2015.

Assets to be disposed of are separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

Income Taxes

The Company accounts for income taxes under the asset and liability method. whereby deferred tax assets and liabilities are recognized for the future lax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences. the period in which they are expected to be recovered, and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is "more likely than not" that some or all of the deferred tax assets will not be realized. Management has determined that a full valuation allowance against the Company's net deferred tax assets is appropriate.

We apply the uncertain tax provisions of the Income Taxes Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification”), which interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The topic also provides guidance on de-recognition, classification, interest, and penalties, accounting in interim periods, disclosure, and transition.

During fiscal 2016, we recorded a net loss of approximately $1.3 million and recorded income tax expense of $4,000, which represents the minimum tax due in the state of California. The net deferred tax asset of $16.7 million at January 31, 2016, $1.1 million of which relates to net operating losses created in fiscal 2016, continues to be fully reserved.

During fiscal 2015, we recorded a net income of $6.1 million and recorded income tax expense of $42,000, which represents the alternative minimum tax due in the state of California. The net deferred tax asset of $16.1 million at January 31, 2015 continues to be fully reserved.

Warranty Costs

We provide limited warranties for products previously sold by us for a period generally not to exceed 24 months. We accrue for the estimated cost of warranties at the time revenue is recognized. The accrual is consistent with our actual claims experience. Should actual warranty claim rates differ from our estimates, revisions to the liability would be required.

Net Income (Loss) Per Common Share

Basic net (loss) per share is computed by dividing net income (loss) 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 8).

Stock-Based Compensation

We grant stock awards, restricted stock and restricted stock units for a fixed number of shares to employees, consultants, and directors with an exercise or grant price equal to the fair value of the shares at the date of grant.

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.

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts receivable due 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. The legal expense included in selling, general and administrative expenses during fiscal 2016 and 2015 was $0.1 million, respectively. The legal expense included in research and development expenses during fiscal 2016 and 2015 was $0.2 million and $0.3 million, respectively. The total legal expense included during fiscal 2016 and 2015 was $0.3 million and $0.4 million, respectively.

Subsequent Events

Management has evaluated events subsequent to January 31, 2016 through the date the accompanying consolidated financial statements were filed with the Securities and Exchange Commission for transactions and other events that may require adjustment of and/or disclosure in such financial statements.

3.	Supplier Concentration

The suppliers comprising 10 percent or more of our gross accounts receivable due from suppliers at either January 31, 2016 or 2015 are listed below (in thousands, except percentages).

	Years Ended January 31,
	2016				2015
Total gross accounts receivable due from suppliers	$	122	100	%	$	122	100	%
Supplier concentration:
Zheng Ge Electrical Co., Ltd.	$	122	100	%	$	122	100	%
	$	122	100	%	$	122	100	%

Zheng Ge Electrical Co., Ltd. (“Zheng Ge”) was a tip supplier for the 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 while we investigated the manufacturing defect which ultimately caused the recall and, likewise, Zheng Ge ceased paying us.

The suppliers and other vendors comprising 10 percent or more of our gross accounts payable at either January 31, 2016 or 2015 are listed below (in thousands, except percentages).

	Years Ended January 31,
	2016				2015

Total gross accounts payable	$	883	100	%	$	737	100	%
Supplier concentration:
Pillsbury Winthrop Shaw Pittman, LLP		432	49	%		432	59	%
	$	432	49	%	$	432	59	%

Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”) was our former legal counsel for the Kensington litigation as well as other patent and intellectual property matters (see Note 10 and 11). 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 Comarco obtains any monetary recovery, whether through settlement, judgment or otherwise, from or as a result of the Targus Lawsuit and/or any of the additional lawsuits. The amount payable shall be equal to the Balance plus 20% per annum, compounded annually from the Effective Date of May 28, 2014. In connection with this partial repayment, no gain was recognized.

4.	Property and Equipment

Property and equipment consist of the following (in thousands):

	January 31,			January 31,
	2016			2015

Office furnishing and fixtures	$	605		$	605
Equipment		973			973
Purchased software		66			66
		1,644			1,644
Less: Accumulated depreciation and amortization		(1,642	)		(1,636	)
	$	2		$	8

Depreciation and amortization expense for fiscal 2016 and fiscal 2015 totaled $6,000, respectively.

5.	Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	January 31,		January 31,
	2016		2015

Uninvoiced materials and services received	$	331	$	331
Accrued legal and professional fees		169		138
Accrued payroll and related expenses		33		38
Accrued warranty		4		4
Other		150		337
	$	687	$	848

As of January 31, 2016, approximately $0.3 million or 98 percent of total uninvoiced materials and services of $0.3 million, respectively, included in accrued liabilities, were due to Zheng Ge Electrical Co. Ltd. (“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.

6.	Income Taxes

Income tax expense on a consolidated basis consists of the following amounts (in thousands):

	Years Ended January 31,
	2016		2015
Federal:
Current	$	—	$	—
Deferred		—		—
State:
Current		4		42
Deferred		—		—
Foreign:
Current		—		—
	$	4	$	42

The effective income tax rate on loss from continuing operations differs from the United States statutory income tax rates for the reasons set forth in the table below (in thousands, except percentages).

	Years Ended January 31,
	2016						2015
	Amount			Percent Pretax Income			Amount			Percent Pretax Income
(Loss)/Income from operations before income taxes	$	(1,346	)		100	%	$	6,082			100	%

Computed “expected” income tax benefit on loss from operations before income taxes	$	(538	)		34	%	$	2,068			34	%
State tax, net of federal benefit		(73	)		6	%		387			6	%
Tax credits		—			0	%		—			0	%
Change in valuation allowance		626			(39	)%		(569	)		(9	)%
Permanent differences		1			2	%		118	)		2	%
Return to provision adjustments		—			0	%		—			0	%
Change in state tax rate		—			0	%		(1,978	)		(32	)%
Other, net		(12	)		(1	)%		16			0	%
Income tax expense	$	4			0	%	$	42			1	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at January 31, 2016 and 2015 are as follows (in thousands):

	January 31,
	2016			2015
Deferred tax assets:
Property and equipment, principally due to differing depreciation methods		153			161
Accruals and reserves		145			206
Net research and manufacturer investment credit carryforwards		2,325			2,325
Net operating losses		13,832			13,151
AMT credit carryforwards		136			136
Stock based compensation		140			127
Other		—			—
Total gross deferred tax assets		16,731			16,106
Less: valuation allowance		(16,731	)		(16,106	)
Net deferred tax assets	$	—		$	—

We have federal and state research and experimentation credit carryforwards of $1.7 million and $2.1 million, respectively, which expire through 2032. We have a net operating loss carryforward of $35.8 million for federal and $28.7 million for state, which expire in increments through 2033.

In assessing the probability that deferred tax assets will benefit future periods, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. There was a full valuation allowance for deferred tax assets as of January 31, 2016, an increase of $0.6 million during the fiscal year, based on management’s overall assessment of risks and uncertainties related to our future ability to realize, and hence utilize, the deferred tax assets.

A reconciliation of the beginning balance of our unrecognized tax benefits and the ending amount of unrecognized tax benefit is as follows (in thousands):

	Unrecognized Tax Benefits
Balance at February 1, 2015	$	777
Additions based on tax positions related to the current year		—
Reductions due to lapses of statute of limitations		10
Tax positions of prior years		—
Balance at January 31, 2016	$	767

The unrecognized tax benefits recorded above, if reversed, would not impact our effective tax rate since we maintain a full valuation allowance against our deferred tax asset. We recognize interest and penalties associated with unrecognized tax benefits in the income tax expense line item of the consolidated statement of operations.

We and our subsidiary, CWT, file income tax returns in the U.S. federal jurisdiction and in certain state jurisdictions. With few exceptions, we are no longer subject to U.S. federal examinations or state income tax examinations by tax authorities for years before 2010 in those jurisdictions where returns have been filed.

7.	Stock Compensation

We have stock-based compensation plans under which outside directors, consultants, and employees are eligible to receive stock options and other equity-based awards. The stock option plans and a director stock option plan provide that officers, key employees, directors and consultants may be granted options to purchase up to 2,675,000 shares of our common stock at not less than 100 percent of the fair market value at the date of grant, unless the grantee is a 10 percent shareholder, in which case the price must not be less than 110 percent of the fair market value.

The Company’s former employee stock option plan (the “Prior Employee Plan”) expired during May 2005. As a result, no new options could be granted under the plan thereafter. This plan provided for the issuance of up to 825,000 shares of common stock. As of January 31, 2013, the Prior Employee Plan had 25,000 stock options outstanding. During December 2005, the Board of Directors approved and adopted the Company’s 2005 Equity Incentive Plan (the “2005 Plan”) covering 450,000 shares of common stock. The 2005 Plan was approved by the Company’s shareholders at its annual shareholders’ meeting in June 2006, and subsequently amended at its annual shareholders’ meeting in June 2008 to increase the number of shares issuable under the plan from 450,000 to 1,100,000 shares. In July 2011, the Company’s shareholders approved the 2011 Equity Incentive Plan (the “2011” Plan) covering 750,000 shares of common stock, as well as the shares that remained available for issuance under the 2005 Plan plus shares that were the subject of outstanding awards under the 2005 Plan, which again become available for grant under that plan. Thus, the 2011 Plan combines the 2011 Plan and the 2005 Plan. Under the 2011 Plan, we may grant stock options, stock appreciation rights, restricted stock, restricted stock units, and performance based awards to employees, consultants and directors. In addition, under the 2011 Plan, awards vest or become exercisable in installments determined by the compensation committee of our Board of Directors. The options granted under Prior Employee Plan expire as determined by the committee, but no later than ten years and one week after the date of grant (five years for 10 percent shareholders). The options granted under the 2011 and 2005 Plan expire as determined by the committee, but no later than ten years after the date of grant (five years for 10 percent shareholders).

During fiscal 2016, 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 year ended January 31, 2016 was estimated on the date of grant using the following weighted average assumptions:

	Year Ended January 31, 2016
Weighted average risk-free interest rate		2	%
Expected life (in years)		10
Expected stock volatility		152	%
Dividend yield		-
Expected forfeitures		-

Estimated expected forfeitures is 0 as remaining stock options were granted to our CEO and board of directors and we do not expect future forfeitures.

During fiscal 2015, no restricted stock shares or stock options were granted.

The fair value of stock options is determined using a Lattice Binomial model for options with performance-based vesting tied to our stock price and the Black-Scholes valuation model for options with ratable term vesting. Both the Lattice Binomial and Black-Scholes valuation model require the input of subjective assumptions including estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the common stock price over the expected term, and the number of options 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. We review our valuation assumptions at each grant date and, as a result, 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 Black-Scholes model are recognized as 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 materially differ from our current estimates.

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

	Years Ended January 31,
	2016			2015
Stock-based compensation expense	$	41		$	48
Impact on basic and diluted earnings per share	$	(0.00	)	$	(0.00	)

The total compensation cost related to non-vested awards not yet recognized is approximately $17,000, which will be expensed over a weighted average remaining life of 5 months.

Transactions and other information related to restricted stock granted under these plans for the year ended January 31, 2016 and 2015 are summarized below:

	Outstanding Restricted Stock
	Number of Shares			Weighted-Ave Exercise Price
Balance, January 31, 2014		420,000		$	0.18
Restricted stock granted		-			-
Restricted stock forfeited		(30,000	)		0.18
Balance, January 31, 2015		390,000		$	0.18
Restricted stock granted		-			-
Restricted stock forfeited		(40,000	)		0.18
Restricted stock vested		(350,000	)		0.18
Balance, January 31, 2016		-		$	0.18

At January 31, 2016 and 2015, the stock awards outstanding had no intrinsic value based upon closing market price of $0.11 and $0.14 per share, respectively.

The following table summarizes information about stock awards outstanding at January 31, 2016:

		Awards Outstanding						Options Exercisable
Range of Exercise/Grant Prices		Number Outstanding		Weighted-Ave Remaining Contractual Life		Weighted-Ave Exercise/Grant Price		Number Exercisable		Weighted-Ave Exercise Price
$	0.14		250,000		9.38	$	0.14		0	$	0.14
$	0.16		100,000		9.34	$	0.16		0	$	0.16
$	0.40		465,000		6.70	$	0.40		465,000	$	0.40
$	1.09		100,000		2.78	$	1.09		60,000	$	1.09
$	4.53		15,000		2.08	$	4.53		15,000	$	4.53
$	10.43		20,000		0.38	$	10.43		20,000	$	10.43
			950,000				0.66		560,000		0.94

Transactions and other information related to stock options granted under these plans for the years ended January 31, 2016 and 2015 are summarized below:

	Outstanding Options
	Number of Shares			Weighted-Ave. Exercise Price
Balance, January 31, 2014		638,500		$	1.22
Options granted		-			-
Options canceled or expired		(38,500	)		5.32
Options exercise		-			-
Balance, January 31, 2015		600,000		$	0.96
Options granted		350,000			0.15
Options canceled or expired		-			-
Options exercise		-			-
Balance, January 31, 2016		950,000		$	0.66
Stock Options Exercisable at January 31, 2016		560,000		$	0.94

There were 560,000 stock options exercisable at January 31, 2016 at a weighted-average exercise price of $0.94. Shares available under the plans for future grants at January 31, 2016 were 129,724.

8.	Net (Loss) Income Per Share

We calculate basic income (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted income (loss) per share reflects the effects of potentially dilutive securities. Because we incurred net losses for the fiscal year ended January 31, 2016, basic and diluted loss per share were the same because the inclusion of 647,000, as of January 31, 2016, potential common shares related to outstanding stock awards in the calculation would have been antidilutive. The summary of the basic and diluted earnings per share computations is as follows (in thousands, except per share data):

	Year Ended
	2016			2015

Net (loss) income	$	(1,346	)	$	6,040
Basic net income (loss) per share:
Weighted-average shares outstanding-Basic		14,652			14,684
Basic net (loss) income per share	$	(0.09	)	$	0.41
Diluted net (loss) inome per share:
Weighted average shares outstanding - basic		14,652			14,684
Effect of potentially dilutive securities		-			179
Weighted average shares outstanding - diluted		14,652			14,863
Diluted net (loss) income per share	$	(0.09	)	$	0.41

9.	Employee Benefit Plans

We have a Savings and Retirement Plan (the “Plan”) that provides benefits to eligible employees. Under the Plan, as amended and restated effective February 1, 2012, employees are eligible to participate on the first of the month following 30 days of employment, provided they are at least 18 years of age, by contributing between 1 percent and 20 percent of pre-tax earnings. Company contributions match employee contributions at levels as specified in the Plan document. In addition, we may contribute a portion of our net profits as determined by our Board of Directors. Participants are vested immediately in their voluntary contributions plus actual earnings thereon. Company contributions plus actual earnings thereon generally vest ratably over a four year period. Company contributions, which consist of matching contributions, with respect to the Plan for the years ended January 31, 2016 and 2015 were approximately $0.

We have obligations to match employee contributions made to the Plan. Generally, our obligation is equal to 100 percent of up to 5 percent of employees’ contribution amounts. If we are unable to meet the requisite matching, the Plan may need to be amended.

10.	Commitments and Contingencies

Rental commitments under non-cancelable operating leases, principally on our office space, are payable as follows (in thousands):

	Operating Leases
Fiscal Year:
2017		152
Total minimum lease payments	$	152

Rental expense for each of the years ended January 31, 2016 and 2015 was approximately $0.3 million.

Executive Severance Commitments

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 January 31, 2016 and 2015, no compensation expense has been accrued under this deferred compensation plan as its goal was not achieved.

Legal Contingencies

On February 13, 2015, we filed a lawsuit against Best Buy Co., Inc. 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. This lawsuit is part of 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.

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 Comarco’s most significant enforcement effort to date, and 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.

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.

11.

Legal

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. The trial date was held in October, 2013. In an effort to resolve this litigation before the previous trial date of April, 2013, we sent Chicony a settlement offer, which has since lapsed. 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. A number of these patents are currently the subject of re-examination proceedings initiated by Kensington or other third parties. 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.

12.	Subsequent Events

On March 10, 2014, we filed a lawsuit against Targus Group International, Inc. for patent infringement, breach of contract, intentional interference with contract, violation of business and professional codes, misrepresentation and fraudulent concealment. On March 26, 2016, we entered into a confidential settlement and license agreement with Targus that resolves all claims arising from our litigation with Targus in exchange for a confidential lump sum settlement payment from Targus to us plus per-unit royalty payments to us if Targus exceeds the limit on licensed products that Targus may sell to OEMs under the settlement agreement.

In February 2016, we moved our headquarters to Laguna Niguel and entered into new lease agreement that expires in August 2016. In addition, we are subletting the office space that was our previous headquarters. The lease for the former headquarter facility and the sublease expire on August 31, 2016.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

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 the periodic reports that we file or submit with the SEC 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 rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as such term is defined under Rules 13a-15(e) and 15(d)-15(e) promulgated under the Exchange Act as of the end of the period covered by this report. Based upon this evaluation, our management, including our principal executive officer and principal financial officer, as more fully explained below, have concluded that, as of January 31, 2016, our disclosure controls and procedures were not effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Rule 13a-15(f) promulgated under the Exchange Act. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer, and effected by the Company’s Board of Directors, management, and other personnel. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly and in accordance with GAAP, that disclosures are adequate, and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our internal control over financial reporting includes 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 Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was ineffective as of January 31, 2016. 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 the lack of effective internal control over financial reporting during the fiscal year ended January 31, 2016 did not result in any particular deficiency in our financial reporting for the fiscal year, 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 raise additional capital or improve our working capital position to allow us to hire additional staff.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to either error or fraud will not occur at all or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks.

Because we are a smaller reporting company, the rules and regulations of the SEC do not require that we include a report of our independent registered public accounting firm regarding our internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

During the fourth quarter of the fiscal year ended January 31, 2016, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of January 31, 2016, and delivered to shareholders in connection with our 2016 annual meeting of shareholders.

ITEM 11.

EXECUTIVE COMPENSATION

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The other information required by this Item is incorporated herein by reference to our definitive Proxy Statement, which will be filed within 120 days of January 31, 2016, and delivered to shareholders in connection with our 2016 annual meeting of shareholders.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	1.	Financial Statements (See Item 8 of this report)

	2.	Financial Statement Schedule:

The following additional information for the years ended January 31, 2016 and 2015 is submitted herewith:

II Valuation and Qualifying Accounts

Exhibits

Articles of Incorporation; Bylaws

	3.1	Restated Articles of Incorporation. The Restated Articles of Incorporation are incorporated herein by reference to Exhibit 3.1 to the Company’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on December 12, 2000.

	3.2	Amended and Restated By-Laws. The Amended and Restated Bylaws, as amended through July 28, 2012, are incorporated herein by reference to Exhibit 3.02 to the Company’s report on Form 10-Q filed with the Securities and Exchange Commission on September 14, 2012.

	3.3	Certificate of Determination of Series A Participating Preferred Stock. The Certificate of Determination is incorporated herein by reference to Exhibit 99.1 to the Company’s registration statement on Form 8-A (Filing No. 000-05449) filed with the Securities and Exchange Commission on February 6, 2003.

Material Contracts

	10.1	1995 Employee Stock Option Plan is incorporated by reference to Exhibit 4.1 to the Company’s registration statement on Form S-8 (File No. 33-63219) filed with the Securities and Exchange Commission on October 5, 1995. *

	10.2	2005 Equity Incentive Plan, as amended, is incorporated by reference to Exhibit 4.3 to the Company’s registration statement on Form S-8 (File No. 33-156518) filed with the Securities and Exchange Commission on December 31, 2008. *

	10.3	2011 Equity Incentive Plan is incorporated by reference to Appendix A to the Company’s definitive Proxy Statement filed with the Securities and Exchange Commission on May 31, 2011. *

	10.4	Amended and Restated Severance Agreement, dated June 11, 2007, between the Company and Thomas W. Lanni is incorporated herein by reference to Exhibit 10.9 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2007. *

	10.5	Loan Agreement, dated February 12, 2013, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., and Elkhorn Partners Limited Partnership together with copies of the Promissory Note, the Security Agreement and the Pledge Agreement attached as Exhibits A, B and C, respectively to the Loan Agreement is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February 12, 2013.

	10.6	Mutual Release of All Claims executed between Comarco, Inc. and Hartford Casualty Insurance Company and Hartford Insurance Company of the Midwest on August 26, 2013 is incorporated herein by reference to Exhibit 10.1 to the Company’s quarterly report on Form 10 Q filed with the Securities and Exchange Commission on December 13, 2013.**

	10.7	Settlement Agreement and Release, effective May 15, 2014, between Comarco, Inc. and Chicony Power Technology, Co. Ltd. is incorporated herein by reference to Exhibit 10 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on May 19, 2014.

	10.8	Amendment and Release Agreement, dated August 13, 2014, by and among Broadwood Partners, L.P., Comarco, Inc. and Comarco Wireless Technologies, Inc. is incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2014.

	10.9	Amended and Restated Common Stock Purchase Warrant, dated August 13, 2014, issued by Comarco, Inc. to Broadwood Partners, L.P. is incorporated herein by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2014.

	10.10	Confidential Settlement Agreement and License, dated March 26, 2016, by and among Comarco, Inc., Comarco Wireless Technologies, Inc., Targus International LLC, and FT 1, Inc. (formerly known as Targus Group International, Inc.).**†

Other Exhibits

	21.1	Subsidiaries of the Company†

	23.1	Consent of Independent Registered Public Accounting Firm – SQUAR, MILNER, PETERSON, MIRANDA &WILLIAMSON, LLP†

	31.1	Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002†

	31.2	Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002†

	32.1	Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002+†

	32.2	Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002+†

	101.INS	XBRL Instance Document ^Ω

	101.SCH	XBRL Taxonomy Extension Schema Document ^Ω

	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document ^Ω

	101.DEF	XBRL Taxonomy Extension Definition ^Ω

	101.LAB	XBRL Taxonomy Extension Label Linkbase Document ^Ω

	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document ^Ω

†	Filed herewith.
+	Furnished herewith.
*	These exhibits are identified as management contracts or compensatory plans or arrangements of the registrant pursuant to Item 15 of Form 10-K.
**	Portions of this exhibit indicated in the body of the exhibit by “####” have been omitted pursuant to the Company’s request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended, and the omitted material has been separately filed with the Securities and Exchange Commission.
Ω	Pursuant to Rule 406T of Regulations S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of registration statement prospectus for purposes of Sections 11 or 12 of the Securities and Exchange Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on April 29, 2016.

	COMARCO, INC.

	/s/ THOMAS W. LANNI
	Thomas W. Lanni President and Chief Executive Officer

POWER OF ATTORNEY

We, the undersigned directors and officers of Comarco, Inc., do hereby constitute and appoint Thomas Lanni, as our true and lawful attorney-in-fact and agent with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which such attorney-in-fact and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ THOMAS W. LANNI	President and Chief Executive Officer	April 29, 2016
Thomas W. Lanni	(Principal Executive Officer), Director

/s/ JANET N. GUTKIN	Chief Accounting Officer	April 29, 2016
Janet N. Gutkin	(Principal Financial Officer and Principal
	Accounting Officer)

/s/ LOUIS E. SILVERMAN	Chairman of the Board,	April 29, 2016
Louis E. Silverman	Director

/s/ WAYNE CADWALLADER	Director	April 29, 2016
Wayne Cadwallader

/s/ RICHARD T. LEBUHN	Director	April 29, 2016
Richard T. LeBuhn

/s/ MICHAEL R. LEVIN	Director	April 29, 2016
Michael R. Levin

COMARCO, INC. AND SUBSIDIARY

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

Years Ended January 31, 2016 and 2015

(In thousands)

	Balance at Beginning of Year		Charged to Cost and Expense (Recovery)		Deductions		Other Changes Add (Deduct)			Balance at End of Year
Allowance for doubtful accounts and provision for unbilled receivables (deducted from accounts receivable):
Year ended January 31, 2016	$	—	$	—	$	—	$	—		$	—
Year ended January 31, 2015	$	40	$	—	$	—	$	(40	)	$	—
Allowance for deferred tax assets:
Year ended January 31, 2016	$	16,106	$	—	$	—	$	625		$	16,731
Year ended January 31, 2015	$	16,675	$	—	$	—	$	(569	)	$	16,106

COMARCO INC - FORM 10-K - April 29, 2016

Attached files

COMARCO INC Reports