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UNITED STATES     

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________

 

FORM 10-Q

 

 

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

 

For the quarterly period ended

 

October 31, 2016

 

OR

 

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

 

For the transition period from ______________ to ______________

 

Commission file number 0-5449

 

 

COMARCO, INC.

(Exact name of registrant as specified in its charter)

____________________

California	95-2088894
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

 

28202 Cabot Road, Suite 300, Laguna Niguel, California 92677

(Address of principal executive offices and zip code)

 

(949) 599-7400

(Registrant’s telephone number, including area code)

 

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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

√

No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

Yes

√

No

 

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

√

 

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

Yes

No

√

 

The registrant had 14,644,165 shares of common stock outstanding as of December 15, 2016.

 

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COMARCO, INC. AND SUBSIDIARY

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE NINE MONTHS ENDED OCTOBER 31, 2016

 

 

TABLE OF CONTENTS

 

 

Page

PART I — FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS (Unaudited)
	Condensed Consolidated Balance Sheets as of October 31, 2016 and January 31, 2016	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2016 and 2015	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2016 and 2015	5
	Notes to Condensed Consolidated Financial Statements	6
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
ITEM 4.	CONTROLS AND PROCEDURES	20
PART II — OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	21
ITEM 1A.	RISK FACTORS	21
ITEM 6.	EXHIBITS	21
SIGNATURES		23

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

COMARCO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 (In thousands, except share and par value amounts)

 

 

 

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

 

 

 

 

COMARCO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

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

  

 

COMARCO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

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

  

 

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

 

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

 

 

ITEM 2.

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

 

The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this quarterly report on Form 10-Q.

 

Forward-Looking Statements

 

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

 

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements are only based on facts and factors known by us as of the date of this report. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the section below entitled “Risk Factors,” as well as those discussed elsewhere in this report and in our other filings” with the Securities and Exchange Commission, or the SEC. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

 

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, whether as a result of new information, future events or otherwise, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

 

In addition to the risks, uncertainties, and other factors discussed above or elsewhere in this report, additional risks, uncertainties, and other factors that could cause or contribute to actual results differing materially from those expressed or implied in any forward-looking statements include, without limitation, those set forth under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2016 (the “2016 Form 10-K”) filed with the SEC and those contained in the Company’s other filings with the SEC. Readers of this report are urged to review the descriptions of the risks, uncertainties and other factors contained in those other reports.

 

Going Concern

 

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

 

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.

 

 

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 our patented intellectual property. Best Buy’s supplier Battery Biz Inc (“Battery Biz”) petitioned the USPTO to institute an IPR proceeding which was granted on August 23, 2016. On October 28, 2016 we entered into a mutual settlement agreement with Best Buy and Battery Biz dismissing our claims against them for certain of our patents in return for terminating the IPR proceeding.

 

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

 

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. On March 26, 2016, we entered into a confidential settlement and license agreement with Targus that resolves all claims arising from the aforementioned litigation.

 

Pursuant to the terms of the settlement agreement, we granted Targus a world-wide license to make, use, sell and distribute Licensed Products (as defined below), as well as a sublicense to have Licensed Products manufactured by third parties solely for the benefit of and sale to Targus. In addition, we granted Targus, for a limited number of units, the right to make, use, sell and distribute Licensed Products for third-party original equipment manufacturers (“OEMs”). “Licensed Products” means any power adaptor or power supply incorporating patents or other intellectual property owned or licensed by us.

 

In exchange for the license granted under the settlement agreement, Targus paid us a one-time, lump-sum payment on April 1, 2016, plus future per-unit royalty payments if Targus exceeds the limit on Licensed Products that Targus may sell to OEMs under the settlement agreement. We have been granted confidential treatment from the SEC related to the one-time payment, the calculation of royalty payments and the OEM unit limit pursuant to a confidential treatment request filed by us with the SEC.

 

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 working capital of approximately $0.5 million as of October 31, 2016, which includes liabilities related to the remaining balance owed to our former counsel Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”). The $0.1 million remaining balance to Pillsbury is a contingent obligation (the “Contingent Balance”) that will be paid, if at all, in the event we obtain any monetary recovery, whether through settlement, judgment or otherwise, from or as a result of any of our current or future lawsuits related to our intellectual property (see Note 6). During the first quarter of fiscal 2017, we paid Pillsbury $0.4 million as a result of the Settlement Agreement with Targus and we owe a Contingent Balance of approximately $0.1 million. The total amount payable is to equal to the Contingent Balance plus 20% per annum, compounded annually from May 28, 2014. During the quarter ended July 31, 2016, we recorded a reduction of accounts receivable of $0.1 million, which was deemed to be uncollectable, and a reduction of accounts payable of $0.6 million that were due from and due to Zheng Ge, a former supplier of the Company. The de-recognition of the accounts payable liability was recorded based on the lapsing of the statute of limitation laws applicable to the underlying contracts, as supported by a legal opinion obtained by the Company specific to jurisdictions of the underlying contracts. As the original costs related to the material purchased from Zheng Ge were charged to cost of sales, the write off of the related liability, net of the charge related to the write off of the previously outstanding accounts receivable, was recorded as a reduction to cost of sales in the condensed consolidated statement of operations. We believe that our working capital will allow us to discharge non-contingent liabilities 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.

 

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 the our patent portfolio and past, present, and future infringement claims. However, there can be no assurances that we will be successful in identifying and/or implementing any of these alternatives, or if implemented, that any of these alternatives will successfully preserve or increase shareholder value. 

 

Basis of Presentation

 

The condensed consolidated results of our operations presented in this report are not audited and are not necessarily indicative of the results to be expected for the entirety of the fiscal year ending January 31, 2017 or any other interim period during such year. Our fiscal year ends on January 31 and our fiscal quarters end on April 30, July 31, and October 31. Unless otherwise stated, all dates refer to our fiscal year and those fiscal quarters.

 

Executive Summary

 

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

 

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

 

In addition to the risks, uncertainties and factors discussed elsewhere in this quarterly report on Form 10-Q and in the Company’s other filings with the SEC, management currently considers the following additional trends, events, and uncertainties to be important to understanding our results of operations for the three and nine months ended October 31, 2016:

 

●

We generated no revenue for three and nine months ended October 31, 2016 and 2015. We anticipate that we will generate no future revenue from the development, design, distribution or sale of any products.

 

●

During the second quarter of fiscal 2017, we determined that the statute of limitations on the Zheng Ge contracts has lapsed.  As a direct result, we wrote off receivables of $0.1 million from and liabilities of $0.6 million to Zheng Ge.

 

●

On March 26, 2016, we entered into a confidential settlement and license agreement with Targus that resolves all claims arising from our litigation with Targus. Pursuant to the terms of the settlement agreement, we granted Targus a world-wide license to make, use, sell and distribute Licensed Products, as well as a sublicense to have Licensed Products manufactured by third parties solely for the benefit of and sale to Targus. In addition, we granted Targus, for a limited number of units, the right to make, use, sell and distribute Licensed Products for third-party OEMs. In exchange for the license granted under the settlement agreement, Targus paid us a one-time, lump-sum payment on April 1, 2016, plus future per-unit royalty payments if Targus exceeds the limit on Licensed Products that Targus may sell to OEMs under the settlement agreement. We have been granted confidential treatment from the SEC related to the one-time payment, the calculation of royalty payments and the OEM unit limit pursuant to a confidential treatment request filed by the SEC.

 

 

●

On February 13, 2015, we filed a lawsuit against Best Buy 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 our patented intellectual property. Best Buy’s supplier Battery Biz Inc (“Battery Biz”) petitioned the USPTO to institute an IPR proceeding which was granted on August 23, 2016. On October 28, 2016 we entered into a mutual settlement agreement with Best Buy and Battery Biz dismissing our claims against them for certain of our patents in return for terminating the IPR proceeding.

 

●

On February 3, 2015, we filed a lawsuit against Apple for patent infringement. The complaint alleges that Apple products sold in the United States utilizing the Apple Lightning® power supply adapter system, including most iPad®, iPhone®, and iPod® products, infringe our patented intellectual property. This lawsuit represents our most significant enforcement effort to date, and, together with the Targus and Best Buy lawsuits described above, demonstrates our ongoing and accelerated efforts to methodically pursue those companies that we believe have infringed on the intellectual property estate that we have developed over the last 20 years. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

Critical Accounting Policies

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited interim condensed consolidated financial statements appearing elsewhere in this report, which have been prepared in accordance with GAAP. The preparation of these unaudited interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from our estimates.

 

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Management believes there have been no significant changes during the three and nine months ended October 31, 2016 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the fiscal year ended January 31, 2016.

 

Results of Operations

 

The following tables set forth certain items as a percentage of revenue from our unaudited interim condensed consolidated statements of operations for the three and nine months ended October 31, 2016 and 2015:

 

		(in thousands)								(in thousands)
		Three Months Ended October 31,								Nine Months Ended October 31,								Year over Year
		2016				2015				2016				2015				Three Months				Nine Months
Revenue		$	-			$	-			$	-			$	-				0	%			0	%
Operating loss		$	171			$	(246	)		$	(553	)		$	(847	)			170	%			35	%
Net (loss) income		$	(300	)		$	(246	)		$	1,152			$	(822	)			-22	%			240	%

 

  

Cost of Sales

 

		(in thousands)																(in thousands)
		Three Months Ended October 31,																Nine Months Ended October 31,
		2016								2015								2016								2015								Year over Year
						% of Total								% of Total								% of Total								% of Total				Three Months				Nine Months
Cost of Revenue:
Product costs		$	-				0	%		$	-				0	%		$	-				0	%		$	-				0	%			0	%			0	%
Supplier Settlement			-				0	%			-				0	%			(472	)			0	%			-				0	%			0	%			100	%
		$	-				0	%		$	-				0	%		$	(472	)			0	%		$	-				0	%			0	%			100	%

 

During the quarter ended July 31, 2016, we performed a review of applicable laws underlying the related contracts with Zheng Ge. Based on this review, we determined that the statute of limitations on the Zheng Ge contracts has lapsed and we wrote off receivables of $0.1 million from and liabilities of $0.6 million to Zheng Ge to cost of sales in the accompanying condensed consolidated statement of operations.   

 

Operating Costs and Expenses 

 

		(in thousands)																(in thousands)
		Three Months Ended October 31,																Nine Months Ended October 31,
		2016								2015								2016								2015								Year over Year
						% of Rev								% of Rev								% of Rev								% of Rev				Three Months				Nine Months
Operating expenses:
Selling, general and administrative expenses		$	222				0	%		$	236				0	%		$	686				0	%		$	789				0	%			-6	%			-13	%
Engineering and support expenses			79				0	%			10				0	%			339				0	%			58				0	%			690	%			484	%
		$	301				0	%		$	246				0	%		$	1,025				0	%		$	847				0	%			22	%			21	%

 

Selling, general, and administrative (“SG&A”) expenses for the three and nine months ended October 31, 2016 increased $0.1 million and $0.2 million, respectively compared to the corresponding periods of fiscal 2016 related to litigation expenses. We had no employees in our sales and marketing department during the three and nine months ended October 31, 2016 and 2015. Corporate related expenses consist of the salary of our only employee, our Chief Executive Officer and President, as well as professional fees, directors’ fees, and other costs and expenses attributable to being a public company.

 

For the three and nine months ended October 31, 2016 and 2015, engineering and support expenses consisted of legal expenses incurred related to our intellectual property, including associated litigation expense and maintenance of our patent portfolio.

 

Other Income, net

 

During the nine months ended October 31, 2016, other income, net, was $1.7 million related to our settlement with Targus.  

 

Income Tax Expense

 

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any required valuation allowance. We continue to maintain a full valuation allowance on the entire deferred tax asset balance. This valuation allowance was established based on management’s overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating loss carry forwards and temporary differences. Due to the current and prior years’ operating losses, the adjusted net deferred tax assets remained fully reserved as of October 31, 2016.

  

 

Liquidity and Capital Resources

 

Cash and cash equivalents at October 31, 2016 increased $0.3 million from January 31, 2016 to $0.9 million. The following table is a summary of our Condensed Consolidated Statements of Cash Flows.

 

		(in thousands)
		Nine Months Ended October 31,
		2016				2015
Cash provided by (used in):
Operating activities		$	181			$	(1,078	)
Investing activites		$	77			$	(77	)
Financing activities		$	-			$	-

 

Operating Activities

 

Cash provided by operating activities was $0.2 million for the nine months ended October 31, 2016 and was primarily driven by our net income of $1.2 million primarily resulting from the $1.7 million settlement received from Targus.

 

Cash used in operating activities was $1.1 million for the nine months ended October 31, 2015 and was primarily driven by our net loss of $0.8 million.

 

Investing Activities

 

During the nine months ended October 31, 2016, the letter of credit of $77,000, which was our security deposit for our former corporate headquarters lease, expired.

 

During the nine months ended October 31, 2015, our security deposit of $77,000 for our former corporate headquarters lease became collateralized by cash in a separate bank account.

 

Financing Activities

 

We had no financing activities during the three and nine months ended October 31, 2016 and 2015.

 

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

 

We had working capital of approximately $0.5 million as of October 31, 2016, which includes liabilities related to the remaining balance owed to our former counsel Pillsbury Wint hrop Shaw Pittman, LLP (“Pillsbury”). The $0.1 million remaining balance to Pillsbury is a contingent obligation (the “Contingent Balance”) that will be paid, if at all, in the event we obtain any monetary recovery, whether through settlement, judgment or otherwise, from or as a result of any of our current or future lawsuits related to our intellectual property (see Note 6). During the first quarter of fiscal 2017, we paid Pillsbury $0.4 million as a result of the Settlement Agreement with Targus and we owe a Contingent Balance of approximately $0.1 million. The total amount payable is to equal to the Contingent Balance plus 20% per annum, compounded annually from May 28, 2014. During the quarter ended July 31, 2016, we performed a review of applicable laws underlying the related contracts with Zheng Ge. Based on this review, we determined that the statute of limitations on the Zheng Ge contracts has lapsed and we wrote off receivables of $0.1 million from and liabilities of $0.6 million to Zheng Ge to cost of sales in the accompanying condensed consolidated statement of operations.   We believe that our working capital will allow us to discharge non-contingent liabilities 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.

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (Principal Executive Officer) and Chief Accounting Officer (Principal Financial Officer), to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer of the effectiveness, as of October 31, 2016, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). “Internal control over financial reporting” includes those policies and procedures that: 

 

(1)

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

 

(2)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

 

(3)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.

 

In connection with its evaluation, our management has concluded that, as of October 31, 2016, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP due to lack of segregation of duties. Our management’s finding of ineffective internal control over financial reporting results primarily from a lack of sufficient accounting and information technology staff which results in a lack of segregation of duties necessary for an appropriate system of internal controls. While management believes that the lack of effective internal control over financial reporting during the fiscal quarter ended October 31, 2016 did not result in any particular deficiency in our financial reporting for the fiscal quarter then ended, management believes that the lack of effectiveness of our internal control over financial reporting could result in a failure to provide reliable financial reporting in the future. In order to remedy our existing internal control deficiency, we will need to raise additional capital or improve our working capital position to allow us to hire additional staff. 

 

 Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the quarter ended October 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II — OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

Comarco, Inc. vs. Apple Inc., Case No. 8:15-cv-00145, United States District Court for the Central District of California. 

 

On February 3, 2015, we filed a lawsuit against Apple for patent infringement. The complaint alleges that Apple products sold in the United States utilizing the Apple Lightning® power supply adapter system, including most iPad®, iPhone®, and iPod® products, infringe our patented intellectual property. This lawsuit represents our most significant enforcement effort to date, and, together with the Targus and Best Buy lawsuits described above, demonstrates our ongoing and accelerated efforts to methodically pursue those companies that we believe have infringed on the intellectual property estate that we have developed over the last 20 years. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

 

Comarco, Inc. vs. Best Buy Co. Inc., Case No. 8:15-cv-00256, United States District Court for the Central District of California. 

 

On February 13, 2015, we filed a lawsuit against Best Buy 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 our patented intellectual property. Best Buy’s supplier Battery Biz Inc (“Battery Biz”) petitioned the USPTO to institute an IPR proceeding which was granted on August 23, 2016. On October 28, 2016 we entered into a mutual settlement agreement with Best Buy and Battery Biz dismissing our claims against them for certain of our patents in return for terminating the IPR proceeding.

 

       In addition to the matters described above, we are from time to time involved in various legal proceedings incidental to the conduct of our business. The legal proceedings potentially cover a variety of allegations spanning our entire business. We are unable to predict the ultimate outcome of all such matters.

 

 

ITEM 1A.

RISK FACTORS

 

Our business, financial condition and operations are subject to a number of factors, risks and uncertainties, including those previously disclosed under Part I. Item 1A “Risk Factors” of our annual report on 2016 Form 10-K as well as any amendments thereto or additions and changes thereto contained in any subsequent filings of quarterly reports on Form 10-Q or current reports on Form 8-K. The disclosures in our annual report on Form 10-K and our subsequent reports and filings are not necessarily a definitive list of all factors that may affect our business, financial condition and future results of operations. There have been no material changes to the risk factors as disclosed in 2016 Form 10-K.

 

 

ITEM 6.

EXHIBITS

 

31.1 *

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

 

31.2 *

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

 

32.1 *

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

 

32.2 *

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

 

 

101.INS**

XBRL Instance Document

 

101.SCH**

XBRL Taxonomy Extension Schema Document

 

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF**

XBRL Taxonomy Definition Linkbase Document

 

101.LAB**

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase Document

 

______________

 

 

 

*	Filed herewith.

 

**

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

 

 

SIGNATURES

 

 

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

 

 

 

	COMARCO, INC.
Date: December 15, 2016	/s/ THOMAS W. LANNI
	Thomas W. Lanni President and Chief Executive Officer (Principal Executive Officer)
Date: December 15, 2016	/s/ JANET N. GUTKIN
	Janet N. Gutkin Chief Accounting Officer (Principal Financial and Accounting Officer)

 

 

EXHIBIT INDEX

 

 

Exhibit

Description

 

31.1 *

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

 

31.2 *

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

 

32.1 *

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

 

32.2 *

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

 

101.INS**

XBRL Instance Document

 

101.SCH**

XBRL Taxonomy Extension Schema Document

 

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF**

XBRL Taxonomy Definition Linkbase Document

 

101.LAB**

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase Document

 

______________

 

*	Filed herewith.

 

**

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

 

 

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