10-Q

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)

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.

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

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COMARCO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 (In thousands, except share and par value amounts)

	(Unaudited)
	October 31,			January 31,
	2016			2016
ASSETS
Current Assets
Cash and cash equivalents	$	938		$	680
Accounts receivable due from suppliers, net of reserves of $0		-			122
Other current assets		29			41
Total current assets		967			843
Property and equipment, net		-			2
Restricted cash		-			77
Total assets	$	967		$	922
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable	$	127		$	883
Accrued liabilities		318			687
Total current liabilities		445			1,570
Total liabilities		445			1,570
Commitments and Contingencies (Note 8)
Stockholders' Equity (Deficit):
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding		-			-
Common stock, $0.10 par value, 50,625,000 shares authorized; 14,644,165 shares issued and outstanding at October 31, 2016 and January 31, 2016		1,464			1,464
Additional paid-in capital		18,385			18,367
Accumulated deficit		(19,327	)		(20,479	)
Total stockholders' equity (deficit)		522			(648	)
Total liabilities and stockholders' equity (deficit)	$	967		$	922

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

3

COMARCO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	October 31,						October 31,
	2016			2015			2016			2015
Revenue	$	-		$	-		$	-		$	-
Cost of revenue		(472	)		-			(472	)		-
Gross profit		472			-			472			-
Selling, general and administrative expenses		222			236			686			789
Engineering and support expenses		79			10			339			58
		301			246			1,025			847
Operating loss		171			(246	)		(553	)		(847	)
Other income, net		(471	)		-			1,705			25
(Loss) income from operations before income taxes		(300	)		(246	)		1,152			(822	)
Income tax expense		-			-			-			-
Net (loss) income	$	(300	)	$	(246	)	$	1,152		$	(822	)
Basic (loss) income per share:	$	(0.02	)	$	(0.02	)	$	0.08		$	(0.06	)
Diluted (loss) income per share:	$	(0.02	)	$	(0.02	)	$	0.08		$	(0.06	)
Weighted-average shares outstanding:
Basic		14,644			14,644			14,644			14,654
Diluted		14,644			14,644			14,644			14,654

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

4

COMARCO, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended
	October 31,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,152		$	(822	)
Adjustments to reconcile net income (loss) to net cash provded by (used in) operating activities:
Depreciation and amortization		2			4
Stock-based compensation expense		18			29
Changes in operating assets and liabilities
Accounts receivable due from suppliers		122			-
Other assets		12			(73	)
Accounts payable		(756	)		(3	)
Accrued liabilities		(369	)		(173	)
Income taxes payable		-			(40	)
Net cash provided by (used in) operating activities		181			(1,078	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash		77			(77	)
Net cash provided by (used in) investing activites		77			(77	)
Net increase (decrease) in cash and cash equivalents		258			(1,155	)
Cash and cash equivalents, beginning of period		680			2,140
Cash and cash equivalents, end of period	$	938		$	985
Supplementary disclosures of cash flow information:
Cash paid for income taxes, net of refunds	$	-		$	40

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

5

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization

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

2. Current Developments, Future Operations, Liquidity and Capital Resources

The condensed consolidated financial statements have been prepared assuming that we will continue to operate as a going concern, which contemplates that we will realize returns on our assets and satisfy our liabilities and commitments in the ordinary course of business. 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 and future litigation, monetize our portfolio of patents, generate positive cash flows and/or obtain borrowings or raise capital to meet our liquidity needs. Although management believes additional funding is required to meet our liquidity needs will be obtained, there is no guarantee that we will be able to generate or raise the additional required funding or that funds will be available on terms acceptable to us. Our condensed consolidated financial statements do not reflect any adjustments related to the uncertainty of this outcome.

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 our patent portfolio.

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 resolved 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, and additionally agreed to making 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 Securities and Exchange Commission (“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.

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 demonstrates our ongoing and accelerated efforts to methodically pursue those companies that we believe have infringed on the intellectual property estate, which we have developed over the more than 20 years. We intend to vigorously pursue our rights in this case, although the outcome of this matter is not determinable as of the date of this report.

6

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On February 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 United States Patent and Trademark Office (“USPTO”) to institute an Inter Partes Review (“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.

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 working capital of approximately $0.5 million as of October 31, 2016, which includes $0.1 million in liabilities related to the remaining balance owed to our former counsel Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”). The $0.1 million remaining balance due 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 8). During the quarter ended April 30, 2016, we paid Pillsbury approximately $0.4 million as a result of the Settlement Agreement with Targus and 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. 

3. Summary of Significant Accounting Policies

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

7

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Basis of Presentation

The accompanying condensed consolidated balance sheet as of October 31, 2016, which has been derived from our audited financial statements, and our unaudited interim condensed consolidated financial statements for the three and nine months ended October 31, 2016 included herein have been prepared without audit in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and with the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for its fiscal year ended January 31, 2016 (the “2016 Form 10-K”), which was filed with the SEC on April 30, 2016. The accounting policies followed by the Company are set forth in Note 2 to the Company’s audited financial statements included in the 2016 Form 10-K. The unaudited interim condensed consolidated financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the consolidated results for the interim periods presented. The consolidated results for the three and nine months ended October 31, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2017.

Principles of Consolidation

The unaudited interim condensed consolidated financial statements of the Company include the accounts of Comarco, Inc. and CWT, its wholly owned subsidiary. All material intercompany balances, transactions, and profits and losses have been eliminated.

Cash and Cash Equivalents

All highly liquid investments with original maturity dates of three months or less when acquired are classified as cash and cash equivalents. The fair value of cash and cash equivalents approximates the amounts shown in the condensed consolidated financial statements.

Restricted Cash

Our restricted cash balance was secured by a separate bank account and represented a $77,000 letter of credit that served as the security deposit for our corporate office lease that was our previous headquarters, which we subletted to a third party until the lease expired on August 31, 2016. The letter of credit also expired on August 31, 2016 and $77,000 is no longer classified as restricted cash.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the periods reported. Actual results could materially differ from those estimates.

Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the valuation allowances for deferred tax assets and determination of stock-based compensation.

8

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts payable and accrued liabilities. The carrying amount of cash and cash equivalents, accounts payable, and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments.

Legal expense classification

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 condensed 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 condensed consolidated statement of operations.

Income tax expense

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

4. Stock-Based Compensation

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

We account for stock-based compensation using the modified prospective method, which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using a Lattice Binomial model for options with performance-based vesting tied to our stock price and the Black-Scholes valuation model for options with ratable term vesting. Both the Lattice Binomial and Black-Scholes valuation models require the input of subjective assumptions. These assumptions include estimating the length of time optionees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of our common stock price over the expected term, and the number of awards that will ultimately not complete their vesting requirements (“forfeitures”). Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related amount recognized as an expense on the consolidated statements of operations. As required under applicable accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value stock-based awards granted in future periods. The values derived from using either the Lattice Binomial or the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may differ from our current estimates.

9

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

	Three Months Ended					Nine Months Ended
	October 31,					October 31,
	2016		2015			2016			2015
Stock-based compensation expense	$	-	$	13		$	18		$	29
Impact on basic and diluted earnings per share	$	-	$	(0.00	)	$	(0.00	)	$	(0.00	)

The total compensation cost related to nonvested awards not yet recognized is approximately $40,000.

During the nine months ended October 31, 2016, 396,189 stock options and no restricted stock units were granted. During the nine months ended October 31, 2015, 350,000 stock options were granted and no restricted stock units were granted. The fair value of the options granted under our stock option plans during the nine months ended October 31, 2016 and 2015 was estimated on the date of grant using the following weighted average assumptions:

	Nine Months Ended October 31,
	2016			2015
Weighted average risk-free interest rate		2	%		2	%
Expected life (in years)		10			10
Expected stock volatility		150	%		152	%
Dividend yield		-			-
Expected forfeitures		-			-

Transactions and other information related to stock options granted under these plans for the nine months ended October 31, 2016 are summarized below:

	Outstanding Options
				Weighted-Ave.
	Number of			Exercise
	Shares			Price
Balance, January 31, 2016		950,000		$	0.96
Options granted		396,189			0.10
Options canceled or expired		(246,189	)		1.06
Options exercise		-			-
Balance, October 31, 2016		1,100,000		$	0.37
Stock Options Exercisable at October 31, 2016		663,811		$	0.48

As of October 31, 2016, the stock awards outstanding have an aggregate intrinsic value of $0, based on a closing market price of $0.10 per share on October 31, 2016. The following table summarizes information about the Company’s stock awards outstanding at October 31, 2016:

			Awards Outstanding						Options Exercisable
					Weighted-Ave.
Range of			Number		Remaining		Weighted-Ave.		Number		Weighted-Ave.
Exercise/Grant Prices			Outstanding		Contractual Life		Exercise/Grant Price		Exercisable		Exercise Price
$0.09				300,000		9.99	$	0.09		0	$	0.09
$0.14	-	$0.16		300,000		8.63	$	0.15		203,811	$	0.15
$0.40				385,000		5.75	$	0.40		385,000	$	0.40
$1.09				100,000		2.03	$	1.09		60,000	$	1.09
$4.53				15,000		1.33	$	4.53		15,000	$	4.53
				1,100,000			$	0.51		663,811

Shares available under the plans for future grants at October 31, 2016 totaled 323,535.

10

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5. Net (Loss) Income Per Share

We calculate basic (loss) income per share by dividing net (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted (loss) income per share reflects the effects of potentially dilutive securities. Because we incurred a net loss for the three and nine months ended October 31, 2015, basic and diluted loss per share for this period was the same because the inclusion of dilutive potential common shares related to outstanding stock awards in the calculation would have been antidilutive.

Potential common shares of 3,110,670 and 3,095,205 relating to outstanding stock awards to directors and our employee as well as stock purchase warrant to Broadwood, have been excluded from diluted weighted average common shares for the three and nine months ended October 31, 2016, respectively, as the effect would have been antidilutive.

Potential common shares of 787,912 and 662,868 relating to outstanding stock awards to directors and our employee, respectively, have been excluded from diluted weighted average common shares for the three and nine months ended October 31, 2015, as the effect would have been antidilutive.

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

	Three Months Ended October 31,						Nine Months Ended October 31,
	2016			2015			2016		2015
Net (loss) income	$	(300	)	$	(246	)	$	1,152	$	(822	)
Basic net income (loss) per share:
Weighted-average shares outstanding-Basic		14,644			14,644			14,644		14,654
Basic net (loss) income per share	$	(0.02	)	$	(0.02	)	$	0.08	$	(0.06	)
Diluted net (loss) income per share:
Weighted average shares outstanding - basic		14,644			14,644			14,644		14,654
Effect of potentially dilutive securities		-			-			-		-
Weighted average shares outstanding - diluted		14,644			14,644			14,644		14,654
Diluted net (loss) income per share	$	(0.02	)	$	(0.02	)	$	0.08	$	(0.06	)

6. Concentrations

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

	As of October 31,				As of January 31,
	2016				2016
Total gross accounts payable	$	127	100	%	$	883	100	%
Supplier concentration:
Pillsbury Winthrop Shaw Pittman, LLP		62	49	%		432	49	%
	$	62	49	%	$	432	49	%

Pillsbury was our former legal counsel for the Kensington litigation as well as other patent and intellectual property matters (see Note 8). On May 28, 2014, we entered into an agreement with Pillsbury in which we paid Pillsbury a lump sum of $1.5 million with the remaining contingent balance of $0.4 million (the “Contingent Balance”) to be paid, if at all, in the event we obtain any monetary recovery, whether through settlement, judgment or otherwise, after May 28, 2014 from or as a result of any of our current or future lawsuits related to our intellectual property. In connection with the $1.5 million lump-sum partial repayment, no gain was recognized. In April 2016, we paid Pillsbury approximately $0.4 million as a result of the settlement agreement with Targus. The remaining Contingent Balance is approximately $0.1 million. The total amount payable is equal to the Contingent Balance plus 20% per annum, compounded annually from May 28, 2014.

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COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

7. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	October 31,		January 31,
	2016		2016
Uninvoiced materials and services received	$	7	$	331
Accrued legal and professional fees		83		169
Accrued payroll and related expenses		14		33
Consulting		90		16
Other		124		138
	$	318	$	687

During the quarter ended July 31, 2016, we wrote off $0.3 million of uninvoiced materials and services received liabilities to Zheng Ge as the statute of limitations on the related contracts has lapsed.   

8. Commitments and Contingencies

Executive Severance Commitments

We have a severance compensation agreement with our Chief Executive Officer, Thomas Lanni. This agreement requires us to pay Mr. Lanni, in the event of a termination of employment following a change of control of the Company or certain other circumstances, the amount of his then current annual base salary and the amount of any bonus amount hewould have achieved for the year in which the termination occurs plus the acceleration of unvested options. We have not recorded any liability in the condensed consolidated financial statements for this agreement.

Executive and Board of Directors Compensation

On November 2, 2013, the Company approved a deferred compensation plan for its Chief Executive Officer and Board of Directors. As of October 31, 2016 no compensation expense has been accrued under this deferred compensation plan as its goal has not yet been attained.

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COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Legal Contingencies

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 prior actions initiated and settlements reacheddemonstrates the our ongoing and accelerated efforts to methodically pursue those companies that we believe have infringed on the intellectual property estate that we have developed over the last 20 years. Although we intend to vigorously pursue our rights in this case, the outcome of this matter is not determinable as of the date of this report.

On February 13, 2015, we filed a lawsuit against Best Buy 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 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.

9. Legal Settlement

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. 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 the confidential treatment request filed by us with the SEC.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited interim 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.

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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.

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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.

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● 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	%

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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.

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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.

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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.

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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

21

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.

22

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)

23

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.

24

EX-31.1

Exhibit 31.1

Certification of Principal Executive Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Thomas W. Lanni, President and Chief Executive Officer of Comarco, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Comarco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 15, 2016	/s/ Thomas W. Lanni
	Thomas W. Lanni
	President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of Principal Financial Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Janet Gutkin, Chief Accounting Officer of Comarco, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Comarco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 15, 2016	/s/ Janet N. Gutkin
	Janet N. Gutkin Chief Accounting Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certification of Principal Executive Officer

Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

In connection with this quarterly report on Form 10-Q of Comarco, Inc., I, Thomas W. Lanni, President and Chief Executive Officer of Comarco, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Comarco, Inc.

Date: December 15, 2016	/s/ Thomas W. Lanni
	Thomas W. Lanni President and Chief Executive Officer (Principal Executive Officer)

This certification accompanies the Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section. This certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.

EX-32.2

Exhibit 32.2

Certification of Principal Financial Officer

Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

In connection with this quarterly report on Form 10-Q of Comarco, Inc., I, Janet N. Gutkin, Chief Accounting Officer of Comarco, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1. The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Comarco, Inc.

Date: December 15, 2016	/s/ Janet N. Gutkin
	Janet N. Gutkin Chief Accounting Officer (Principal Financial Officer)

This certification accompanies the Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section. This certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.

XML

Document And Entity Information - shares	9 Months Ended
	Oct. 31, 2016	Dec. 15, 2016
Document Information [Line Items]
Entity Registrant Name	Comarco Inc
Entity Central Index Key	0000022252
Trading Symbol	cmro
Current Fiscal Year End Date	--01-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		14,644,165
Document Type	10-Q
Document Period End Date	Oct. 31, 2016
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Oct. 31, 2016	Jan. 31, 2016
ASSETS
Cash and cash equivalents	$ 938	$ 680
Accounts receivable due from suppliers, net of reserves of $0		122
Other current assets	29	41
Total current assets	967	843
Property and equipment, net		2
Restricted cash		77
Total assets	967	922
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable	127	883
Accrued liabilities	318	687
Total current liabilities	445	1,570
Total liabilities	445	1,570
Commitments and Contingencies (Note 8)
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding	0	0
Common stock, $0.10 par value, 50,625,000 shares authorized; 14,644,165 shares issued and outstanding at October 31, 2016 and January 31, 2016	1,464	1,464
Additional paid-in capital	18,385	18,367
Accumulated deficit	(19,327)	(20,479)
Total stockholders' equity (deficit)	522	(648)
Total liabilities and stockholders' equity (deficit)	$ 967	$ 922

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Oct. 31, 2016	Jan. 31, 2016
Accounts receivable due from suppliers, reserves	$ 0	$ 0
Preferred stock, par value (in dollars per share)	$ 0	$ 0
Preferred stock, shares authorized (in shares)	10,000,000	10,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.10	$ 0.10
Common stock, shares authorized (in shares)	50,625,000	50,625,000
Common stock, shares issued (in shares)	14,644,165	14,644,165
Common stock, shares outstanding (in shares)	14,644,165	14,644,165

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Oct. 31, 2016	Oct. 31, 2015	Oct. 31, 2016	Oct. 31, 2015
Revenue
Cost of revenue	(472)		(472)
Gross profit	472		472
Selling, general and administrative expenses	222	236	686	789
Engineering and support expenses	79	10	339	58
	301	246	1,025	847
Operating loss	171	(246)	(553)	(847)
Other income, net	(471)		1,705	25
(Loss) income from operations before income taxes	(300)	(246)	1,152	(822)
Income tax expense
Net (loss) income	$ (300)	$ (246)	$ 1,152	$ (822)
Basic net (loss) income per share (in dollars per share)	$ (0.02)	$ (0.02)	$ 0.08	$ (0.06)
Diluted net (loss) income per share (in dollars per share)	$ (0.02)	$ (0.02)	$ 0.08	$ (0.06)
Weighted-average shares outstanding:
Weighted-average shares outstanding-Basic (in shares)	14,644	14,644	14,644	14,654
Diluted (in shares)	14,644	14,644	14,644	14,654

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Oct. 31, 2016	Oct. 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ 1,152	$ (822)
Adjustments to reconcile net income (loss) to net cash provded by (used in) operating activities:
Depreciation and amortization	2	4
Stock-based compensation expense	18	29
Accounts receivable due from suppliers	122
Other assets	12	(73)
Accounts payable	(756)	(3)
Accrued liabilities	(369)	(173)
Income taxes payable		(40)
Net cash provided by (used in) operating activities	181	(1,078)
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash	77	(77)
Net cash provided by (used in) investing activites	77	(77)
Net increase (decrease) in cash and cash equivalents	258	(1,155)
Cash and cash equivalents, beginning of period	680	2,140
Cash and cash equivalents, end of period	938	985
Supplementary disclosures of cash flow information:
Cash paid for income taxes, net of refunds		$ 40

XML

Note 1 - Organization

9 Months Ended

Oct. 31, 2016

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

1. Organization

Comarco, Inc. was incorporated in California

in 1960

and its common stock has been publicly traded since

1971,

when it was spun off from Genge Industries, Inc. Comarco Inc.’s wholly owned subsidiary, Comarco Wireless Technologies, Inc. (“CWT”), was incorporated in the state of Delaware in

September 1993.

Comarco and CWT are collectively referred to as “we,” “us,” “our,” “Comarco,” or the “Company”.

XML

Note 2 - Current Developments, Future Operations, Liquidity and Capital Resources

9 Months Ended

Oct. 31, 2016

Notes to Financial Statements

Going Concern [Text Block]

2. Current Developments, Future Operations, Liquidity and Capital Resources

The condensed consolidated financial statements have been prepared assuming that we will continue to operate as a going concern, which contemplates that we will realize returns on our assets and satisfy our liabilities and commitments in the ordinary course of business. 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 and future litigation, monetize our portfolio of patents, generate positive cash flows and/or obtain borrowings or raise capital to meet our liquidity needs. Although management believes additional funding is required to meet our liquidity needs will be obtained, there is no guarantee that we will be able to generate or raise the additional required funding or that funds will be available on terms acceptable to us. Our condensed consolidated financial statements do not reflect any adjustments related to the uncertainty of this outcome.

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 our patent portfolio.

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 resolved 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,

and additionally agreed to making 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 Securities and Exchange Commission (“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.

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 demonstrates our ongoing and accelerated efforts to methodically pursue those companies that we believe have infringed on the intellectual property estate, which we have developed over the more than

20

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

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 United States Patent and Trademark Office (“USPTO”) to institute an Inter Partes Review (“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.

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 working capital of approximately

$0.5

million as of

October 31, 2016,

which includes

$0.1

million in liabilities related to the remaining balance owed to our former counsel Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”). The

$0.1

million remaining balance due 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

8).

During the quarter ended

April 30, 2016,

we paid Pillsbury approximately

$0.4

million as a result of the Settlement Agreement with Targus and 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. 

XML

Note 3 - Summary of Significant Accounting Policies

9 Months Ended

Oct. 31, 2016

Notes to Financial Statements

Significant Accounting Policies [Text Block]

3. Summary of Significant Accounting Policies

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

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Basis of Presentation

The accompanying condensed consolidated balance sheet as of

October 31, 2016,

which has been derived from our audited financial statements, and our unaudited interim condensed consolidated financial statements for the

three

and

nine months ended

October 31, 2016

included herein have been prepared without audit in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and with the instructions for Form

10

Q and Article

8

of Regulation S X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form

10

K for its fiscal year ended

January 31,

2016

(the

“2016

Form

10

K”), which was filed with the SEC on

April 30,

2016.

The accounting policies followed by the Company are set forth in

Note 2

to the Company’s audited financial statements included in the

2016

Form

10

K. The unaudited interim condensed consolidated financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the consolidated results for the interim periods presented. The consolidated results for the

three

and

nine months ended

October 31, 2016

are not necessarily indicative of the results to be expected for the fiscal year ending

January 31, 2017.

Principles of Consolidation

The unaudited interim condensed consolidated financial statements of the Company include the accounts of Comarco, Inc. and CWT, its wholly owned subsidiary. All material intercompany balances, transactions, and profits and losses have been eliminated.

Cash and Cash Equivalents

All highly liquid investments with original maturity dates of

three

months or less when acquired are classified as cash and cash equivalents. The fair value of cash and cash equivalents approximates the amounts shown in the condensed consolidated financial statements.

Restricted Cash

Our restricted cash balance was secured by a separate bank account and represented a

$77,000

letter of credit that served as the security deposit for our corporate office lease that was our previous headquarters, which we

subletted to a

third

party until the lease expired on

August 31, 2016.

The letter of credit also expired on

August 31, 2016

and

$77,000

is no longer classified as restricted cash.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the periods reported. Actual results could materially differ from those estimates.

Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the valuation allowances for deferred tax assets and determination of stock based compensation.

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts payable and accrued liabilities. The carrying amount of cash and cash equivalents, accounts payable, and accrued liabilities are considered to be representative of their respective fair values because of the short term nature of those instruments.

Legal expense classification

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 condensed 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 condensed consolidated statement of operations.

Income tax expense

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

October 31, 2016.

XML

Note 4 - Stock-based Compensation

9 Months Ended

Oct. 31, 2016

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

4. Stock Based Compensation

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

We account for stock based compensation using the modified prospective method, which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using a Lattice Binomial model for options with performance based vesting tied to our stock price and the Black Scholes valuation model for options with ratable term vesting. Both the Lattice Binomial and Black Scholes valuation models require the input of subjective assumptions. These assumptions include estimating the length of time optionees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of our common stock price over the expected term, and the number of awards that will ultimately not complete their vesting requirements (“forfeitures”). Changes in these subjective assumptions can materially affect the estimate of fair value of stock based compensation and, consequently, the related amount recognized as an expense on the consolidated statements of operations. As required under applicable accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value stock based awards granted in future periods. The values derived from using either the Lattice Binomial or the Black Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates,

may

differ from our current estimates.

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

	Three Months Ended					Nine Months Ended
	October 31,					October 31,
	2016		2015			2016			2015
Stock-based compensation expense	$	-	$	13		$	18		$	29
Impact on basic and diluted earnings per share	$	-	$	(0.00	)	$	(0.00	)	$	(0.00	)

The total compensation cost related to nonvested awards not yet recognized is approximately

$40,000.

During the

nine months ended

October 31, 2016,

396,189

stock options and no restricted stock units were granted.

During the

nine months ended

October 31, 2015,

350,000

stock options were granted and no restricted stock units were granted. The fair value of the options granted under our stock option plans during the

nine months ended

October 31, 2016

and

2015

was estimated on the date of grant using the following weighted average assumptions:

	Nine Months Ended October 31,
	2016			2015
Weighted average risk-free interest rate		2	%		2	%
Expected life (in years)		10			10
Expected stock volatility		150	%		152	%
Dividend yield		-			-
Expected forfeitures		-			-

Transactions and other information related to stock options granted under these plans for the

nine months ended

October 31, 2016

are summarized below:

	Outstanding Options
				Weighted-Ave.
	Number of			Exercise
	Shares			Price
Balance, January 31, 2016		950,000		$	0.96
Options granted		396,189			0.10
Options canceled or expired		(246,189	)		1.06
Options exercise		-			-
Balance, October 31, 2016		1,100,000		$	0.37
Stock Options Exercisable at October 31, 2016		663,811		$	0.48

As of

October 31, 2016,

the stock awards outstanding have an aggregate intrinsic value of

$0,

based on a closing market price of

$0.10

per share on

October 31, 2016.

The following table summarizes information about the Company’s stock awards outstanding at

October 31, 2016:

			Awards Outstanding						Options Exercisable
					Weighted-Ave.
Range of			Number		Remaining		Weighted-Ave.		Number		Weighted-Ave.
Exercise/Grant Prices			Outstanding		Contractual Life		Exercise/Grant Price		Exercisable		Exercise Price
$0.09				300,000		9.99	$	0.09		0	$	0.09
$0.14	-	$0.16		300,000		8.63	$	0.15		203,811	$	0.15
$0.40				385,000		5.75	$	0.40		385,000	$	0.40
$1.09				100,000		2.03	$	1.09		60,000	$	1.09
$4.53				15,000		1.33	$	4.53		15,000	$	4.53
				1,100,000			$	0.51		663,811

Shares available under the plans for future grants at

October 31, 2016

totaled

323,535.

XML

Note 5 - Net (Loss) Income Per Share

9 Months Ended

Oct. 31, 2016

Notes to Financial Statements

Earnings Per Share [Text Block]

5. Net (Loss) Income Per Share

We calculate basic (loss) income per share by dividing net (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted (loss) income per share reflects the effects of potentially dilutive securities. Because we incurred a net loss for the

three

and

nine months ended

October 31, 2015,

basic and diluted loss per share for this period was the same because the inclusion of dilutive potential common shares related to outstanding stock awards in the calculation would have been antidilutive.

Potential common shares of

3,110,670

and

3,095,205

relating to outstanding stock awards to directors and our employee as well as stock purchase warrant to Broadwood, have been excluded from diluted weighted average common shares for the

three

and

nine months ended

October 31, 2016,

respectively, as the effect would have been antidilutive.

Potential common shares of

787,912

and

662,868

relating to outstanding stock awards to directors and our employee, respectively, have been excluded from diluted weighted average common shares for the

three

and

nine months ended

October 31, 2015,

as the effect would have been antidilutive.

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

	Three Months Ended October 31,						Nine Months Ended October 31,
	2016			2015			2016		2015
Net (loss) income	$	(300	)	$	(246	)	$	1,152	$	(822	)
Basic net income (loss) per share:
Weighted-average shares outstanding-Basic		14,644			14,644			14,644		14,654
Basic net (loss) income per share	$	(0.02	)	$	(0.02	)	$	0.08	$	(0.06	)
Diluted net (loss) income per share:
Weighted average shares outstanding - basic		14,644			14,644			14,644		14,654
Effect of potentially dilutive securities		-			-			-		-
Weighted average shares outstanding - diluted		14,644			14,644			14,644		14,654
Diluted net (loss) income per share	$	(0.02	)	$	(0.02	)	$	0.08	$	(0.06	)

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Note 6 - Supplier Concentrations

9 Months Ended

Oct. 31, 2016

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

6. Concentrations

The companies comprising

10 percent

or more of our gross accounts payable at either

October 31, 2016

and

January 31,

2016

are listed below (in thousands, except percentages).

	As of October 31,				As of January 31,
	2016				2016
Total gross accounts payable	$	127	100	%	$	883	100	%
Supplier concentration:
Pillsbury Winthrop Shaw Pittman, LLP		62	49	%		432	49	%
	$	62	49	%	$	432	49	%

Pillsbury was our former legal counsel for the Kensington litigation as well as other patent and intellectual property matters (see Note

8).

On

May 28, 2014,

we entered into an agreement with Pillsbury in which we paid Pillsbury a lump sum of

$1.5

million with the remaining contingent balance of

$0.4

million (the “Contingent Balance”) to be paid, if at all, in the event we obtain any monetary recovery, whether through settlement, judgment or otherwise, after

May 28, 2014

from or as a result of any of our current or future lawsuits related to our intellectual property. In connection with the

$1.5

million lump sum partial repayment, no gain was recognized. In

April 2016,

we paid Pillsbury approximately

$0.4

million as a result of the settlement agreement with Targus. The remaining Contingent Balance is approximately

$0.1

million. The total amount payable is equal to the Contingent Balance plus

20%

per annum, compounded annually from

May 28, 2014.

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Note 7 - Accrued Liabilities

9 Months Ended

Oct. 31, 2016

Notes to Financial Statements

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

7. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	October 31,		January 31,
	2016		2016
Uninvoiced materials and services received	$	7	$	331
Accrued legal and professional fees		83		169
Accrued payroll and related expenses		14		33
Consulting		90		16
Other		124		138
	$	318	$	687

During the quarter ended

July 31, 2016,

we wrote off

$0.3

million of uninvoiced materials and services received liabilities to Zheng Ge as the statute of limitations on the related contracts has lapsed.   

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Note 8 - Commitments and Contingencies

9 Months Ended

Oct. 31, 2016

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

8. Commitments and Contingencies

Executive Severance Commitments

We have a severance compensation agreement with our Chief Executive Officer, Thomas Lanni. This agreement requires us to pay Mr. Lanni, in the event of a termination of employment following a change of control of the Company or certain other circumstances, the amount of his then current annual base salary and the amount of any bonus amount he

would have achieved for the year in which the termination occurs plus the acceleration of unvested options. We have not recorded any liability in the condensed consolidated financial statements for this agreement.

Executive and Board of Directors Compensation

On

November 2, 2013,

the Company approved a deferred compensation plan for its Chief Executive Officer and Board of Directors. As of

October 31, 2016

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

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Legal Contingencies

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 prior actions initiated and settlements reached

demonstrates the our ongoing and accelerated efforts to methodically pursue those companies that we believe have infringed on the intellectual property estate that we have developed over the last

20

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

On

February 13, 2015,

we filed a lawsuit against Best Buy 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 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.

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Note 9 - Legal Settlement

9 Months Ended

Oct. 31, 2016

Notes to Financial Statements

Legal Matters and Contingencies [Text Block]

9. Legal Settlement

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. 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 the confidential treatment request filed by us with the SEC.

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Significant Accounting Policies (Policies)

9 Months Ended

Oct. 31, 2016

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

The accompanying condensed consolidated balance sheet as of

October 31, 2016,

which has been derived from our audited financial statements, and our unaudited interim condensed consolidated financial statements for the

three

and

nine months ended

October 31, 2016

included herein have been prepared without audit in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and with the instructions for Form

10

Q and Article

8

of Regulation S X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form

10

K for its fiscal year ended

January 31,

2016

(the

“2016

Form

10

K”), which was filed with the SEC on

April 30,

2016.

The accounting policies followed by the Company are set forth in

Note 2

to the Company’s audited financial statements included in the

2016

Form

10

K. The unaudited interim condensed consolidated financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the consolidated results for the interim periods presented. The consolidated results for the

three

and

nine months ended

October 31, 2016

are not necessarily indicative of the results to be expected for the fiscal year ending

January 31, 2017.

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

The unaudited interim condensed consolidated financial statements of the Company include the accounts of Comarco, Inc. and CWT, its wholly owned subsidiary. All material intercompany balances, transactions, and profits and losses have been eliminated.

Cash and Cash Equivalents, Policy [Policy Text Block]

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 condensed consolidated financial statements.

Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, Policy [Policy Text Block]

Restricted Cash

Our restricted cash balance was secured by a separate bank account and represented a

$77,000

letter of credit that served as the security deposit for our corporate office lease that was our previous headquarters, which we

subletted to a

third

party until the lease expired on

August 31, 2016.

The letter of credit also expired on

August 31, 2016

and

$77,000

is no longer classified as restricted cash

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the periods reported. Actual results could materially differ from those estimates.

Certain accounting principles require subjective and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not specifically limited to, those required in the valuation allowances for deferred tax assets and determination of stock based compensation.

Fair Value of Financial Instruments, Policy [Policy Text Block]

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts payable and accrued liabilities. The carrying amount of cash and cash equivalents, accounts payable, and accrued liabilities are considered to be representative of their respective fair values because of the short term nature of those instruments

Selling, General and Administrative Expenses, Policy [Policy Text Block]

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 condensed 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 condensed consolidated statement of operations.

Income Tax, Policy [Policy Text Block]

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.

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Note 4 - Stock-based Compensation (Tables)

9 Months Ended

Oct. 31, 2016

Notes Tables

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Table Text Block]

	Three Months Ended					Nine Months Ended
	October 31,					October 31,
	2016		2015			2016			2015
Stock-based compensation expense	$	-	$	13		$	18		$	29
Impact on basic and diluted earnings per share	$	-	$	(0.00	)	$	(0.00	)	$	(0.00	)

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Nine Months Ended October 31,
	2016			2015
Weighted average risk-free interest rate		2	%		2	%
Expected life (in years)		10			10
Expected stock volatility		150	%		152	%
Dividend yield		-			-
Expected forfeitures		-			-

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

	Outstanding Options
				Weighted-Ave.
	Number of			Exercise
	Shares			Price
Balance, January 31, 2016		950,000		$	0.96
Options granted		396,189			0.10
Options canceled or expired		(246,189	)		1.06
Options exercise		-			-
Balance, October 31, 2016		1,100,000		$	0.37
Stock Options Exercisable at October 31, 2016		663,811		$	0.48

Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding and Exercisable [Table Text Block]

			Awards Outstanding						Options Exercisable
					Weighted-Ave.
Range of			Number		Remaining		Weighted-Ave.		Number		Weighted-Ave.
Exercise/Grant Prices			Outstanding		Contractual Life		Exercise/Grant Price		Exercisable		Exercise Price
$0.09				300,000		9.99	$	0.09		0	$	0.09
$0.14	-	$0.16		300,000		8.63	$	0.15		203,811	$	0.15
$0.40				385,000		5.75	$	0.40		385,000	$	0.40
$1.09				100,000		2.03	$	1.09		60,000	$	1.09
$4.53				15,000		1.33	$	4.53		15,000	$	4.53
				1,100,000			$	0.51		663,811

XML

Note 5 - Net (Loss) Income Per Share (Tables)

9 Months Ended

Oct. 31, 2016

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended October 31,						Nine Months Ended October 31,
	2016			2015			2016		2015
Net (loss) income	$	(300	)	$	(246	)	$	1,152	$	(822	)
Basic net income (loss) per share:
Weighted-average shares outstanding-Basic		14,644			14,644			14,644		14,654
Basic net (loss) income per share	$	(0.02	)	$	(0.02	)	$	0.08	$	(0.06	)
Diluted net (loss) income per share:
Weighted average shares outstanding - basic		14,644			14,644			14,644		14,654
Effect of potentially dilutive securities		-			-			-		-
Weighted average shares outstanding - diluted		14,644			14,644			14,644		14,654
Diluted net (loss) income per share	$	(0.02	)	$	(0.02	)	$	0.08	$	(0.06	)

XML

Note 6 - Supplier Concentrations (Tables)

9 Months Ended

Oct. 31, 2016

Notes Tables

Schedules of Concentration of Risk, by Risk Factor [Table Text Block]

	As of October 31,				As of January 31,
	2016				2016
Total gross accounts payable	$	127	100	%	$	883	100	%
Supplier concentration:
Pillsbury Winthrop Shaw Pittman, LLP		62	49	%		432	49	%
	$	62	49	%	$	432	49	%

XML

Note 7 - Accrued Liabilities (Tables)

9 Months Ended

Oct. 31, 2016

Notes Tables

Schedule of Accrued Liabilities [Table Text Block]

	October 31,		January 31,
	2016		2016
Uninvoiced materials and services received	$	7	$	331
Accrued legal and professional fees		83		169
Accrued payroll and related expenses		14		33
Consulting		90		16
Other		124		138
	$	318	$	687

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Note 2 - Current Developments, Future Operations, Liquidity and Capital Resources (Details Textual) - USD ($)	1 Months Ended	3 Months Ended
	Apr. 30, 2016	Jul. 31, 2016	Apr. 30, 2016	Oct. 31, 2016	Jan. 31, 2016	May 28, 2014
Working Capital				$ 500,000
Liabilities, Current				445,000	$ 1,570,000
Zheng Ge Electrical Company Ltd [Member]
Accounts Receivable, Write-offs		$ 100,000
Accounts Payable, Write-offs		$ 600,000
Pillsbury Winthrop Shaw Pittman L L P [Member]
Interest Rate for Outstanding Legal Fees Payable Solely with Settlement						20.00%
Pillsbury Winthrop Shaw Pittman L L P [Member]
Payments for Legal Settlements	$ 400,000		$ 400,000
Pillsbury Winthrop Shaw Pittman L L P [Member] | Litigation Reserve [Member]
Liabilities, Current	$ 100,000		$ 100,000	$ 100,000

XML

Note 3 - Summary of Significant Accounting Policies (Details Textual)	Oct. 31, 2016 USD ($)
Letter of Credit [Member]
Restricted Cash and Cash Equivalents	$ 77,000

XML

Note 4 - Stock-based Compensation (Details Textual) - USD ($)	9 Months Ended
	Oct. 31, 2016	Oct. 31, 2015
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	$ 40,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	396,189	350,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Intrinsic Value	$ 0
Share Price	$ 0.10
Common Stock, Capital Shares Reserved for Future Issuance	323,535

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Note 4 - Stock-based Compensation - Share-based Compensation Expense (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Oct. 31, 2016	Oct. 31, 2015	Oct. 31, 2016	Oct. 31, 2015
Stock-based compensation expense		$ 13	$ 18	$ 29
Impact on basic and diluted earnings per share (in dollars per share)		$ 0	$ 0	$ 0

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Note 4 - Stock-based Compensation - Weighted Average Assumptions (Details)	9 Months Ended
	Oct. 31, 2016	Oct. 31, 2015
Weighted average risk-free interest rate (Dimensionless number)	2.00%	2.00%
Expected life (in years) (Year)	10 years	10 years
Expected stock volatility (Dimensionless number)	150.00%	152.00%
Dividend yield (Dimensionless number)
Expected forfeitures (Dimensionless number)

XML

Note 4 - Stock-based Compensation - Stock Options Activity (Details) - $ / shares	9 Months Ended
	Oct. 31, 2016	Oct. 31, 2015
Balance, stock options (in shares)	950,000
Balance, stock options, weighted-average exercise price (in dollars per share)	$ 0.96
Options granted (in shares)	396,189	350,000
Options granted, weighted-average exercise price (in dollars per share)	$ 0.10
Options canceled or expired (in shares)	(246,189)
Options canceled or expired, weighted-average exercise price (in dollars per share)	$ 1.06
Options exercise (in shares)	0
Options exercise, weighted-average exercise price (in dollars per share)	$ 0
Balance, stock options (in shares)	1,100,000
Balance, stocks options, weighted-average exercise price (in dollars per share)	$ 0.37
Stock options exercisable (in shares)	663,811
Stock options exercisable, weighted-average exercise price (in dollars per share)	$ 0.48

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Note 4 - Stock-based Compensation - Stock Awards Outstanding (Details)	9 Months Ended
	Oct. 31, 2016 $ / shares shares
Range 1 [Member]
Lower Range of Exercise/Grant Prices (in dollars per share)	$ 0.09
Upper Range of Exercise/Grant Prices (in dollars per share)
Number Outstanding (in shares) | shares	300,000
Weighted-Ave. Remaining Contractual Life (Year)	9 years 361 days
Weighted-Ave. Exercise/Grant Price (in dollars per share)	$ 0.09
Number Exercisable (in shares) | shares	0
Weighted-Ave. Exercise Price (in dollars per share)	$ 0.09
Range 2 [Member]
Lower Range of Exercise/Grant Prices (in dollars per share)	0.14
Upper Range of Exercise/Grant Prices (in dollars per share)	$ 0.16
Number Outstanding (in shares) | shares	300,000
Weighted-Ave. Remaining Contractual Life (Year)	8 years 229 days
Weighted-Ave. Exercise/Grant Price (in dollars per share)	$ 0.15
Number Exercisable (in shares) | shares	203,811
Weighted-Ave. Exercise Price (in dollars per share)	$ 0.15
Range 3 [Member]
Lower Range of Exercise/Grant Prices (in dollars per share)	0.40
Upper Range of Exercise/Grant Prices (in dollars per share)
Number Outstanding (in shares) | shares	385,000
Weighted-Ave. Remaining Contractual Life (Year)	5 years 273 days
Weighted-Ave. Exercise/Grant Price (in dollars per share)	$ 0.40
Number Exercisable (in shares) | shares	385,000
Weighted-Ave. Exercise Price (in dollars per share)	$ 0.40
Range 4 [Member]
Lower Range of Exercise/Grant Prices (in dollars per share)	1.09
Upper Range of Exercise/Grant Prices (in dollars per share)
Number Outstanding (in shares) | shares	100,000
Weighted-Ave. Remaining Contractual Life (Year)	2 years 10 days
Weighted-Ave. Exercise/Grant Price (in dollars per share)	$ 1.09
Number Exercisable (in shares) | shares	60,000
Weighted-Ave. Exercise Price (in dollars per share)	$ 1.09
Range 5 [Member]
Lower Range of Exercise/Grant Prices (in dollars per share)	4.53
Upper Range of Exercise/Grant Prices (in dollars per share)
Number Outstanding (in shares) | shares	15,000
Weighted-Ave. Remaining Contractual Life (Year)	1 year 120 days
Weighted-Ave. Exercise/Grant Price (in dollars per share)	$ 4.53
Number Exercisable (in shares) | shares	15,000
Weighted-Ave. Exercise Price (in dollars per share)	$ 4.53
Range 6 [Member]
Number Outstanding (in shares) | shares	1,100,000
Weighted-Ave. Exercise/Grant Price (in dollars per share)	$ 0.51
Number Exercisable (in shares) | shares	663,811

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Note 5 - Net (Loss) Income Per Share (Details Textual) - shares	3 Months Ended		9 Months Ended
	Oct. 31, 2016	Oct. 31, 2015	Oct. 31, 2016	Oct. 31, 2015
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	3,110,670	787,912	3,095,205	662,868

XML

Note 5 - Net (Loss) Income Per Share - Summary of Basic and Diluted Earnings Per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Oct. 31, 2016	Oct. 31, 2015	Oct. 31, 2016	Oct. 31, 2015
Net (loss) income	$ (300)	$ (246)	$ 1,152	$ (822)
Basic net income (loss) per share:
Weighted-average shares outstanding-Basic (in shares)	14,644	14,644	14,644	14,654
Basic net (loss) income per share (in dollars per share)	$ (0.02)	$ (0.02)	$ 0.08	$ (0.06)
Diluted net (loss) income per share:
Weighted-average shares outstanding-Basic (in shares)	14,644	14,644	14,644	14,654
Effect of potentially dilutive securities (in shares)
Weighted average shares outstanding - diluted (in shares)	14,644	14,644	14,644	14,654
Diluted net (loss) income per share (in dollars per share)	$ (0.02)	$ (0.02)	$ 0.08	$ (0.06)

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Note 6 - Supplier Concentrations (Details Textual) - USD ($)		1 Months Ended	3 Months Ended
	May 28, 2014	Apr. 30, 2016	Apr. 30, 2016	Oct. 31, 2016	Jan. 31, 2016
Liabilities, Current				$ 445,000	$ 1,570,000
Pillsbury Winthrop Shaw Pittman L L P [Member]
Payments for Legal Settlements		$ 400,000	$ 400,000
Pillsbury Winthrop Shaw Pittman L L P [Member] | Litigation Reserve [Member]
Liabilities, Current		$ 100,000	$ 100,000	$ 100,000
Pillsbury Winthrop Shaw Pittman L L P [Member]
Lump Sum Legal Fee	$ 1,500,000
Accrued Professional Fees	$ 400,000
Interest Rate for Outstanding Legal Fees Payable Solely with Settlement	20.00%
Gain (Loss) Related to Litigation Settlement	$ 0

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Note 6 - Supplier Concentrations - Supplier Concentration Risk Accounts Payable (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Oct. 31, 2016	Jan. 31, 2016
Accounts payable	$ 127	$ 883
Supplier Concentration Risk [Member]
Accounts payable	$ 127	$ 883
Concentration percentage, accounts payable (Dimensionless number)	100.00%	100.00%
Supplier Concentration Risk [Member] | Accounts Payable [Member]
Accounts payable	$ 62	$ 432
Concentration percentage, accounts payable (Dimensionless number)	49.00%	49.00%
Supplier Concentration Risk [Member] | Accounts Payable [Member] | Pillsbury Winthrop Shaw Pittman L L P [Member]
Accounts payable	$ 62	$ 432
Concentration percentage, accounts payable (Dimensionless number)	49.00%	49.00%

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Note 7 - Accrued Liabilities (Details Textual) $ in Millions	3 Months Ended
	Jul. 31, 2016 USD ($)
Zheng Ge Electrical Company Ltd [Member]
Uninvoiced Materials and Services Received, Write-offs	$ 0.3

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Note 7 - Accrued Liabilities - Accrued Liabilities (Details) - USD ($) $ in Thousands	Oct. 31, 2016	Jan. 31, 2016
Uninvoiced materials and services received	$ 7	$ 331
Accrued legal and professional fees	83	169
Accrued payroll and related expenses	14	33
Consulting	90	16
Other	124	138
	$ 318	$ 687