UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended January 31, 20142015

OR

Commission File Number 000-05449

COMARCO, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(949) 599-7400

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

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

Common Stock, $0.10 par value

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ☐ No ☒

As of July 31, 2013,2014, the last business day of our most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $2.3 million, based on the closing sales price of the registrant’s common stock as reported on the OTCQB market on such date. This calculation does not reflect a determination that persons are affiliates for any other purposes.

The number of shares of the registrant’s common stock outstanding as of April 15, 20142015 was 14,684,165.

Documents incorporated by reference:

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

COMARCO, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED JANUARY 31, 20142015

TABLE OF CONTENTS

PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

General

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

Through the third quarter of fiscal year 2014, we developed and designed innovative technologies and intellectual property that was used in power adapters to power and charge battery powered devices such as laptop computers, tablets, smart phones and readers. On August 19, 2013, Lenovo Information Products Co., Ltd. (“Lenovo”), then our only material customer, informed us that it intended to cease offering our Constellation product, the power adapter we designed and developed for Lenovo. Sales of the Constellation product to Lenovo accounted for materially all of our revenue for the fiscal years ended January 31, 2014 and 2013. We anticipate thatSince the termination of our business relationship with Lenovo, we will generatehave generated de minimus revenue in future periods from the development, design, distribution or sale of any products. We anticipate that this trend will continue into the foreseeable future. We have effectively suspended traditional operations and are now primarily focused on potentially realizing value from our ongoing IP enforcement actions and other litigation as well as exploring opportunities to further expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of our patent portfolio.

References to “fiscal” years in this report refer to our fiscal years ended January 31; for example, “fiscal 2014”2015” refers to our fiscal year that ended on January 31, 2014.2015.

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

Our Business

We have effectively suspended traditional operations and are now 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.

Going Concern

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

Working Capital

As of January 31, 2014,2015, we had negative working capital of approximately $7.8 million, of which $2.5 million relates to the fair value of derivative liabilities. During our third fiscal quarter of fiscal 2014, Lenovo notified us of its intention to cease offering our Constellation product.$0.6 million. We completed the delivery of all remaining units to Lenovo duringbelieve that quarter. In order forthis working capital will allow us to continue our operations for the next twelve monthsdischarge non-contingent and to be able to discharge ournon-disputed liabilities and commitments in the normal course of business it will be necessary for us to successfully conclude and/or prevail in our ongoing litigation and/or raise additional funds throughover the sale or licensing of our patent portfolio, or through additional debt and/or equity financing. No assurance can be given, however, that we will be successful in meeting those operating objectives or financing requirements.

As discussed above, these uncertainties raise substantial doubt about our ability to continue as a going concern.next twelve months.

Marketing, Sales, and Distribution

As we have effectively suspended traditional operations, resources previously focused on our limited marketing, sales or distribution activities have been refocuseddirected toward the monetization of our patent portfolio. Therefore, we had no marketing, sales or distribution expenditures in fiscal year 2015 and limited expenditures in fiscal year 2014.

Key Customers

For fiscal yearsyear 2015, we had no customers. For fiscal year 2014, and 2013, shipments to Lenovo, our only material customer, totaled $4.3 million and $6.2 million, respectively or 98 percent of total revenue.million. As discussed above, Lenovo terminated its relationship with us in August 2013 and we anticipate that we will generate no or de minimus revenue in future periods from the development, design, distribution or sale of our products. For more information regarding our customers, see Note 3 of the Notes to the Consolidated Financial Statements included in Item 8 of this report.

Research and Development

During fiscal 20142015 and fiscal 2013,2014, our financial constraints limited our research and development investment to approximately $0.4 million$0 and $0.9$0.4 million, respectively. In addition, we currently only have full-time one employee, who is our Chief Executive Officer and President. As we have effectively suspended traditional operations, we anticipate engaging in extremely limited research and development activities for the foreseeable future.

Manufacturing and Suppliers

As we have effectively suspended traditional operations, our manufacturing activities and related commercial relations with suppliers are extremely limited.limited and will likely remain so for the foreseeable future.

Patents, Trademarks and Other Intellectual Property

Our future exisitenceexistence and success depend in large part on our proprietary technology, including our patents, trademarks and other intellectual property, on which we have commenced efforts to monetize through enforcement actions and licensing arrangements. We are also looking atregularly consider the possibility of selling some or all of our entire intellectual property portfolio. We generally rely upon patent, copyright, trademark, and trade secret laws in the United States and in certain other countries, and upon confidentiality agreements with our employees, customers, and partners, to establish, maintain and protect our intellectual property rights in our proprietary technology. As of January 31, 2014,2015, we had approximately 48 issued U.S. patents and 3 U.S. patent applications pending. We also have 38 foreign patents, and 3however we are discontinuing maintenance of some of our foreign patents in order to focus our resources on monetization of our U.S. patent applications pendingportfolio. 21 of our issued U.S. andpatents expired in other countries. Our issuedApril of 2014. However, these expired patents are scheduled to expire at various times beginning in 2014.still enforceable for any infringement that occurred during the last 6 years of the patent term and we are pursuing certain enforcement actions. The patents we believe to be the most valuable extend throughinto 2024. Specifically, our patent portfolio addresses sophisticated charging challenges, including charging multiple simultaneous charging, light-weight compact dimensionsdevices simultaneously and analysis ofanalyzing power requirements of electronic devices.devices, as well as light-weight compact dimensions. In addition, we have registered trademarks in the United States for ChargeSource® and SmartTip®.

Environmental Laws

Compliance with federal, state, local and foreign laws enacted for the protection of the environment has to date had no significant effect on our financial results or competitive position.

Government Regulation

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

Employees

As of April 1, 2014,2015, we employed 1 full-time employee, who is our Chief Executive Officer and President. We also engage certain consultants on a part-time basis, including our Chief Accounting Officer. This significantly reduced headcount is the result of reductions in force targeted at reducing our cash burn.

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

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

We have effectively suspended our traditional operations and are focused now primarily focused on potentially realizing value from our ongoing or future IP enforcement actions and other litigation as well as further exploring opportunities to expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of some of all of our patent portfolio. While we have little experience or track record in generating revenues from these non-traditional methods, we have executed two settlement agreements through fiscal 2014. There2015. In the Chicony Power Technology, Co. Ltd., (“Chicony”) matter, effective as of May 15, 2014, Chicony entered into a settlement agreement with us that dismissed all claims between the two parties arising from the litigation. Pursuant to the terms of the settlement agreement, Chicony agreed to pay us $7.6 million. Settlement amounts of $4.0 million and $3.6 million were paid on May 16, 2014 and May 30, 2014, respectively. Of the $7.6 million, we received $6.5 million, net of $1.1 million in attorneys’ fees and other costs. In connection with the settlement, certain contract manufacturer costs payable to Chicony totaling $1.1 million were discharged and reflected as a reduction of cost of revenues. In our litigation with ACCO Brands USA LLC and its Computer Products Group division (collectively “Kensington”), on February 4, 2014, we entered into a confidential settlement and licensing agreement with an effective date of February 1, 2014 that established a forward royalty arrangement on sales of certain ACCO Brands products and dismissed all claims between the two parties arising from this matter.However, there can be no guarantees that we will execute additional agreements in the future.

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

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

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

On February 4, 2014, a jury returned a verdict in our favor in our litigation with Chicony Power Technology Co., LTD (“Chicony”). However, the verdict is subject to appeal. If Chicony elects to appeal the verdit any success Chicony would have in its appeal. would likely have a material adverse on our financial condition.

As previously reported, in our litigation with Chicony, we were awarded damages of approximately $10.8 million, offset by previously accrued liabilities of $1.1 million for a net award of approximately $9.7 million. The outcome of the trial is subject to appeal, though we have no knowledge as to whether Chicony will or will not appeal the judgment. With or without an appeal, , we would need to successfully collect whatever damages might ultimately be awarded to us. In addition, if the judgment is appealed and we are unable to sustain our operations through an appeal process, we may be required to raise additional capital through proceeds from other litigated matters or debt or equity financing. We cannot be certain that we will prevail or settle in any other ongoing litigation, or that any additional financing we may need will be available on terms acceptable to us, or at all. If we do not receive funds from other litigation matters or secure financing in the future, we may be forced to liquidate our assets or discontinue our operations altogether.

We entered into separate alternative fee arrangements in our third quarter of fiscal 2014 with our legal counsel representing us in both the Chicony matter and our ongoing intellectual property infringement and enforcement litigation, and if either of our existing counsel were to resign from representing us, we may not be able to engage new counsel on similar terms, if at all.

If either of the firms representing us in our ongoing commercial or I/P litigation resigns or, for any reason, is unable to conclude our existing litigation, the Company may not be able to replace counsel on similar terms, if at all. In the event that either of our legal firms resigns and we are unable to replace our legal counsel, we may be unable to conclude our litigation and may beforced to discontinue our operations altogether.

Our independent registered public accounting firm has expressed substantial doubt regarding our ability to continue as a going concern as a result of our recurring losses from operations, strategic shift in traditional operations, negative working capital and uncertainties surrounding our ability to raise additional funds.

Our audited consolidated financial statements for the fiscal year ended January 31, 2014, were prepared on a going concern basis in accordance with United States generally accepted accounting principles (“GAAP”). The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must begin to expand the monetization of our intellectual property; manage operating expenses; prevail in our ongoing litigation; suceed in collecting damages awarded to us and possibly raise additional funds, through either debt and/or equity financing to meet our working capital needs. We cannot guarantee that we will be able to monetize our intellectual property, manage expenses, prevail in our ongoing litigation and succeed in collecting any damages awarded to us, or obtain additional funds through either debt or equity financing transactions or that such funds, if available, will be obtainable on satisfactory terms. If we are unable to expand the monetization of our intellectual property, manage expenses, prevail in our ongoing litigation and succeed in collecting damages awarded to us, or raise additional capital through debt or equity financings, we may be unable to continue to fund our operations, or realize value from our assets and discharge our liabilities in the normal course of business. These uncertainties continues to raise substantial doubt about our ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our consolidated financial statements, and stockholders may lose all or part of their investment in our common stock. The accompanying financial statements do not contain any adjustments for this uncertainty.

Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation, settlement or licensing costs and expenses or be prevented from selling certain products.expenses.

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

Infringement claims by third parties also could subject us to significant damage awards or fines or require us to pay large amounts to settle such claims. Additionally, claims of intellectual property infringement might require us to enter into royalty or license agreements. If we cannot or do not license the infringed technology on acceptable terms or substitute similar technology from other sources, we could be prevented from or restricted in selling our products containing, or manufactured with, the infringed technology.

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

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

During fiscal 2012, we notified approximately 11 companies, including ACCO Brands USA LLC and its Kensington Computer Products Group division (collectively “Kensington”), that we believe they are manufacturing and distributing products that infringe on one or more of our patents. One of the companies entered into a license agreement with us shortly after being notified of the infringement. Kensington entered into license agreement with us in settlement of time consuming and costly infringement litigation.Welitigation. On March 10, 2014, we filed a lawsuit against Targus Group International, Inc. (“Targus”) for patent infringement, breach of contract, intentional interference with contract, violation of business and professional codes, misrepresentation and fraudulent concealment (the “Federal Action”). Targus sought reexamination the patents at issue. The Federal Action was voluntarily dismissed without prejudice to re-filing the federal claims.  A state court action for Breach of Contract, Fraudulent Concealment, Unfair Competition and Accounting was then filed in the Orange County Superior Court on June 5, 2014 (the “State Court Action”).  On December 4, 2014, the Court ordered the State Court Action into Arbitration and the arbitration hearing is set for December 2015.In February 2015, we initiated litigation against Best Buy and Apple, Inc. To date, we have to date not taken any formal action against the other 9 companies who had previously been noticed.remaining prior noticed alleged infringers, and at present we have not determined if or when we will do so. Whether or not we are successful in enforcing and protecting our intellectual property rights, litigation is time-consuming and costly, and may result in our intellectual property rights being held invalid or unenforceable.

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

On March 10, 2014, we filed a lawsuit against Targus seeking damages for patent infringement and breach of contract claims. We incurred approximately $0.6 million in non-contingent legal and related expert fees during fiscal 2014 related to the Chicony matter, which is net of approximately $0.4 million in payments made by our insurance carrier under a reservation of rights. Additionally, we incurred approximately $1.2 million in legal fees during fiscal 2014 related to the Kensington matter. On March 10, 2014, we filed a lawsuit against Targus seeking damages for patent infringement and breach of contract claims. We are unable to determine the future expenditures related to the Targus matter. The costs incurred for the current litigation may continue to significantly adversely impact our operating results and we may determine that due to the unpredictable nature of the costs and timing of the outcomes, we will no longer be able to peruse these actions.

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

As noted above, during fiscal 2012 we notified approximately 11 companies, including Kensington and Best Buy, that we believe they are manufacturing andand/or distributing products that infringe on one or more of our patents. One of the companies entered into a license agreement with us shortly after being notified of the infringement. On February 4, 2014, Kensington entered into a settlement agreement and licensing agreement with us with an effective date of February 1, 2014 that dismissesdismissed all claims between the two parties arising from this matter. On March 10, 2014, we filed a lawsuit against Targus Group International, Inc. (“Targus”) for patent infringement, breach of contract, intentional interference with contract, violation of business and professional codes, misrepresentation and fraudulent concealment (the “Federal Action”). Targus sought reexamination the patents at issue. The Federal Action was voluntarily dismissed without prejudice to re-filing the federal claims.  A state court action for Breach of Contract, Fraudulent Concealment, Unfair Competition and Accounting was then filed in the Orange County Superior Court on June 5, 2014 (the “State Court Action”).  On December 4, 2014, the Court ordered the State Court Action into Arbitration and the arbitration hearing is set for December 2015.In February, 2015 we initiated litigation against Best Buy based on our belief that they have manufactured and/or distributed and/or sold products that infringe on one or more of our patents. We do not know the ultimate course or outcome of the remaining 9 notificationsprior noticed infringers and we may not be successful in our efforts to monetize our intellectual property through these enforcement actions.

If Also in February we fail to successfully resolve our dispute with Broadwood Partners, L.P. (“Broadwood”), we may be subjected todisclosed initiation of similar litigation and/or may be required to issue additional shares of common stock.

As described elsewhere in this report, on July 27, 2012, we entered into a Stock Purchase Agreement (the “SPA”) with Broadwood which provided for the purchase by Broadwood of up to 3,000,000 shares of our common stock at a price of $1.00 per share. The SPA provided that if at any time up to July 27, 2013 we sold any shares of our common stock at a price of less than $1.00 per share we would be required to issue outright to Broadwood a number of additional shares sufficient to reduce the per share price paid by Broadwood to that lower price. On July 27, 2012, we also entered into a Warrant Commitment Letter, which provided that if we raised less than $3.0 million from sales of equity securities to other investors during the six months ended January 28, 2013, then Broadwood would receive an additional warrant entitling it to purchase up to 1,000,000 additional shares.

We were informed by Broadwood on January 28, 2013, that it was Broadwood’s position that one or more of the conditions precedent to its obligation to purchase the Company’s shares pursuant to the SPA had not been satisfied and, as a result, Broadwood would not consummate that purchase.

It is our position that, contrary to Broadwood’s assertions, all of the conditions under the SPA had been satisfied, and Broadwood’s refusal to purchase 3,000,000 shares of our common stock, at the price of $1.00 per share, constituted a material breach by Broadwood of its obligations under the SPA. As of the date of filing this report, we have not issued any additional shares to Broadwood and each party has reserved its rights under and with respect to the SPA and the Broadwood Warrants. If we are unable to successfully resolve this dispute with Broadwood, we may be subjected to litigation and/or may be required to issue additional warrants and/or shares to Broadwood.

We cannot be certain of the availability of debt or equity financing or the impact that Broadwood’s failure to fund the SPA will have on our future financing efforts.

Due to our suspension of traditional operations, our success is highly dependent on our ability to monetize our proprietary technology and successful outcome in our ongoing litigation matters. If we are not successfully in collecting damages awarded to us in the Chicony matter or monetizing our patents, we will require additional capital from debt or equity financing to fund our operations. Although we took action to reduce personnel and related costs in fiscal years 2014 and 2013, there can be no assurance that we will generate positive cash flow. We cannot be certain that any additional financing we may need will be available on terms acceptable to us, or at all. Additionally, Broadwood’s failure to have funded the SPA and our related dispute with Broadwood may adversely impact our financing efforts. If we cannot secure financing in the future, we may be forced to liquidate our assets or discontinue operations and our shareholders may lose all or a part of their investment in our common stock.against Apple, Inc.

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

As of April 1, 2014,2015, our two largest stockholdersshareholders owned an aggregate of approximately 60% of the outstanding shares of our common stock. Elkhorn Partners Limited Partnership (“Elkhorn”) owned approximately 49% and Broadwood Partners, L.P. (“Broadwood”) owned approximately 11%, respectively, of the outstanding shares of our common stock at April 1, 2014.2015. These stockholders,shareholders, and Elkhorn in particular, will have significant influence over all matters submitted to our stockholdersshareholders for approval including the election of our directors and other corporate actions. In addition, such influence by one or more of these stockholdersshareholders could have the effect of discouraging others from attempting to purchase us, take us over, and/or reducing the market price offered for our common stock in such an event.

If we default on our loan agreement with Elkhorn, we could lose all of our assets.

On February 11, 2013, we entered into a secured loan agreement with Elkhorn. Our obligations under the loan agreement and corresponding loan are secured by substantially all of our assets, including a pledge to Elkhorn of the stock of our operating subsidiary, CWT. The loan matures on November 30, 2014. The loan agreement provides that if and to the extent we do not pay the Elkhorn Loan in full byNovember 30, 2014, then, Elkhorn will have the right, at its option (but not the obligation), to convert the then unpaid balance of the loan, in whole or in part, into shares of Company common stock at a conversion price of $0.25 per share. That conversion price is subject to possible adjustment on (i) certain sales of Company common stock at a price lower than $0.25 per share, (ii) stock splits of, stock dividends on and any reclassification of the Company’s outstanding shares, and (iii) certain mergers or reorganizations of the Company.If we default on our obligation relating to the loan agreement, Elkhorn could foreclose on all of our assets, both tangible and intangible, leaving us with no assets.

If the Elkhorn transaction in fiscal 2014 resulted in a Section 382 ownership change, it would substantially limit our research and experimentation credits and net operating loss carryforwards.

Concurrent with the execution of the Elkhorn Loan Agreement, on February 11, 2013, Elkhorn entered into a Stock Purchase Agreement with us (the “Elkhorn Stock Purchase Agreement”). Pursuant to that Elkhorn Stock Purchase Agreement, we sold 6,250,000 shares of our common stock to Elkhorn at a price of $0.16 per share, resulting in an aggregate purchase price of $1.0 million. As a result of our sale of the 6,250,000 shares of common stock to Elkhorn pursuant to the Elkhorn Stock Purchase Agreement, Elkhorn’s beneficial ownership has increased from approximately 9% to approximately 49% of our outstanding voting stock, making Elkhorn our largest shareholder. We are reviewing whether a Section 382 ownership change may have occurred as a result of this Elkhorn transaction. If this transaction results in an ownership change, it would substantially limit our research and experimentation credits and net operating loss carryforwards.

We are highly dependent on our onefull-timeemployee, Tom Lanni.

In January 2014, Ms. Alisha Charlton, our Chief Accounting Officer, resigned. Currently, we have one employee, Tom Lanni, who is our Chief Executive Officer and President. In addition to being our Chief Executive Officer, President and only full-time employee, Mr. Lanni has extensive knowledge concerning the technology underlying our patent portfolio as a result of his 20 year tenure with us. The loss of Mr. Lanni’s services could adversely impact our ability to maximize the value of our patent portfolio or otherwise negatively affect our operations.

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

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

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

We have concluded that our internal controls over financial reporting were not effective as of January 31, 20142015 which could cause deficiencies in our financial reporting and investors to lose confidence in the reliability of our consolidated financial statements and result in a decrease in the value of our securities.

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

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

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

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

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

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

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

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

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

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

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

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

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

None.

Our headquarters are located in Lake Forest, California. We entered into an amended and restated lease agreement with the landlord during fiscal 2012, upon the expiration of our original lease. Under the amended and restated lease we rent approximately 9,971 square feet of office space. The lease for this facility expires on August 31, 2016, but allows for early termination on June 30, 2014 with advance written notice and payment of abated base rent of approximately $60,000 as well as a termination fee and other costs. Our remaining rental obligation through August 31, 2016 is $0.7 million. Although the amended and restated lease is approximately 33% of the space occupied under the former lease, the premises are larger than we require for our current anticipated future operations. The lease may be terminated at our option in June 2014 and includes an early termination penalty. We continue to evaluate options including but not limited to subleasing the facility space or terminating lease after June 30, 2014.2016.

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 the Company’s patented intellectual property. This lawsuit is part of the Company’s ongoing and accelerated efforts to methodically pursue those companies that the Company believes have infringed on the intellectual property estate that the Company has developed over the last 20 years.

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, Inc. (“Apple”) for patent infringement. The complaint alleges that Apple products sold in the United States utilizing the Apple Lightning® power supply adapter system, including most iPad®, iPhone®, and iPod® products, infringe the Company’s patented intellectual property. This lawsuit represents Comarco’s most significant enforcement effort to date, and demonstrates the Company’s ongoing and accelerated efforts to methodically pursue those companies that the Company believes have infringed on the intellectual property estate that the Company has developed over the last 20 years.

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

On March 10, 2014, we filed a lawsuit 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.concealment (the “Federal Action”). Targus sought reexamination the patents at issue. The Federal Action was voluntarily dismissed without prejudice to re-filing the federal claims.  A state court action for Breach of Contract, Fraudulent Concealment, Unfair Competition and Accounting was then filed in the Orange County Superior Court on June 5, 2014 (the “State Court Action”).  On December 4, 2014, the Court ordered the State Court Action into Arbitration and the arbitration hearing is set for December 2015. Comarco seeks $17,000,000 in damages as well as accounting and injunctive relief.

Chicony Power Technology Co., LTD., (“Chicony”) vs. Comarco, Inc., Case No. 30-2011-00470249, Superior Court of California County of Orange – Central Justice Center. On April 26, 2011,

Effective as of May 15, 2014, Chicony which wasentered into a settlement agreement with us that dismissed all claims between the contract manufacturerparties arising from the litigation referenced above. Pursuant to the terms of the Bronx product thatsettlement agreement, Chicony agreed to pay us $7.6 million. $4.0 million of the settlement amount was paid to us on May 16, 2014, with the balance of $3.6 million paid to us on May 30, 2014. We recorded a gain of $7.6 million associated with this settlement in fiscal 2015. Of the $7.6 million, we received $6.5 million, net of attorneys’ fees and other costs.

Further pursuant to the settlement agreement, each party released the other and its affiliates from any and all claims related to the subject of a product recall, filed a complaint against us for breach of contract seeking payment of $1.2 million for the alleged non-payment by us for products manufactured by Chicony. We denied liability and filed a cross-complaint on May 13, 2011 seeking the recovery of damages of $4.9 million attributable to Chicony's failure to adhere to our technical specifications when manufacturing the Bronx product, which we believe resulted in the recallmatter of the product. We filed a first-amended cross-complaint which was approved by the court on April 16, 2013, which adds intentional interference to our complaint and increases the damages to at least $15.0 million. On February 4, 2014, a jury returned a verdict in our favor and awarded up approximately $10.8 million, offset by previously accrued liabilities of $1.1 million for a net award of approximately $9.7 million. The award may be appealed. A portion of the award may be payable to our attorneys pursuant to an alternative professional fee arrangementlitigation and we may be entitledcovenanted not to reimbursementsue Chicony on the next 500,000 power adapters sold by Chicony after May 15, 2014 that we allege infringe on our intellectual property rights. The settlement agreement also contains other representations, warranties and covenants of attorney’s and other fees pending final judgment. Together, these matters may increase or decrease the net financial impactboth parties that are customary for an agreement of this verdict on the Company.type.

Acco Brands USA LLC (“Acco”) vs. Comarco Wireless Technologies, Inc., Case No. 5:11-cv-04378-HRL, U.S. District Court for the Northern District of California. 

On September 1, 2011, ACCO Brands USA LLC and its Kensington Computer Products Group division (collectively “Kensington”) filed a lawsuit against us alleging that five of our patents relating to power technology are invalid and/or not infringed by products manufactured and/or sold by Kensington. On February 29, 2012, we denied these claims and filed a cross-complaint alleging infringement by Kensington of each of these five patents. Efforts to resolve the dispute, by court ordered mediation, have been unsuccessful. The trial date was scheduled for early 2014 and then postponed to mid-2014. On February 4, 2014, Kensington entered into a settlement and licensing agreement with the Company with an effective date of February 1, 2014 that dismissesdismissed all claims between the two parties arising from this matter.

Comarco Inc. vs. EDAC Electronics Co. Ltd. (“EDAC”) Case No. 30-2012-00551827, Superior Court of California County of Orange – Central Justice Center. On March 6, 2012, we filed a lawsuit against EDAC for breach of contract seeking payment of $2.5 million for failure to deliver goods we ordered in the time, place, manner and price indicated by each purchase order. We entered a Settlement and Mutual Release on July 24, 2012, which ended the litigation among the parties. The settlement involved no cash payments by either party, but allowed us to reverse $1.4 million of net liabilities payable to EDAC.

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.

Not applicable.

PART II

Market Information

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

Holders

As of April 1, 2014,2015, there were 295293 holders of record of our common stock.

Dividends

We did not declare any dividends during fiscal 20142015 or fiscal 2013.2014. We do not expect to pay cash dividends in the near future, as we intend to retain any future earnings to fund working capital and operations. Any determinations to pay dividends in the future will be at the discretion of our boardBoard of directors.Directors.

Repurchases

We did not repurchase any securities during fiscal 2014years 2015 or fiscal 2013.2014. 

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

Overview

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”. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”).

Going Concern Qualification

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

We generated de minimis revenue during the year ended January 31, 2015. As previously announced in August 2013, Lenovo Information Products Co., Ltd. (“Lenovo”), our only material customer, notified us of their intention to cease offering our Constellation product, the power adapter we designed and developed for Lenovo, and terminated its relationship with us. We completed shipping product to Lenovo during our third quarter ended November 30, 2013. The loss of Lenovo as a customer has had a material adverse impact on our results of operations. We have reduced and/or eliminated certain operating expenses to minimize future losses and cash burn and will continue our efforts in this regard.

Two of our recent litigation matters have concluded. In the Chicony Power Technology, Co. Ltd., (“Chicony”) matter, effective as of May 15, 2014, Chicony entered into a settlement agreement with us that dismissed all claims between the two parties arising from the litigation. Pursuant to the terms of the settlement agreement, Chicony agreed to pay us $7.6 million. $4.0 million of the settlement amount was paid on May 16, 2014, with the balance of $3.6 million paid on May 30, 2014. Of the $7.6 million, we received $6.5 million, net of attorneys’ fees and other costs. Regarding our litigation with ACCO Brands USA LLC and its Computer Products Group division (collectively “Kensington”), on February 4, 2014, we entered into a settlement and licensing agreement with an effective date of February 1, 2014 that dismissed all claims between the two parties arising from this matter. As part of the settlement and licensing agreement with Kensington, we recorded $0.2 million in other income, net during the fiscal year ended January 31, 2015.

On March 10, 2014, we filed a lawsuit against Targus Group International, Inc. (“Targus”) for patent infringement, breach of contract, intentional interference with contract, violation of business and professional codes, misrepresentation and fraudulent concealment (the “Federal Action”). Targus sought reexamination the patents at issue. The Federal Action was voluntarily dismissed without prejudice to re-filing the federal claims.  A state court action for Breach of Contract, Fraudulent Concealment, Unfair Competition and Accounting was then filed in the Orange County Superior Court on June 5, 2014 (the “State Court Action”).  On December 4, 2014, the Court ordered the State Court Action into Arbitration and the arbitration hearing is set for December 2015.

On February 13, 2015, we filed a lawsuit against Best Buy Co., Inc. (“Best Buy”) for patent infringement under the patent laws of the United States. The complaint alleges that certain Best Buy power charging products sold in the United States under the Rocketfish brand infringe the Company’s patented intellectual property. This lawsuit is part of the Company’s ongoing and accelerated efforts to methodically pursue those companies that the Company believes have infringed on the intellectual property estate that the Company has experienced pre-tax losses from continuing operationsdeveloped over the last 20 years.

On February 3, 2015, we filed a lawsuit against Apple, Inc. (“Apple”) for fiscal 2014patent 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 fiscal 2013 totaling $2.1 millioniPod® products, infringe the Company’s patented intellectual property. This lawsuit represents Comarco’s most significant enforcement effort to date, and $5.6 million, respectively. Thedemonstrates the Company’s ongoing and accelerating efforts to methodically pursue those companies that the Company alsobelieves have infringed on the intellectual property estate that the Company has negativedeveloped over the last 20 years.

We believe 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 these possible opportunities will occur or be successful.

We had working capital and uncertainties surrounding the Company’s future ability to obtain borrowings and raise additional capital. In order fortotaling approximately $0.6 million as of January 31, 2015. We believe that this working capital will allow us to continue operations beyond the next twelve monthsdischarge non-contingent and be able to discharge ournon-disputed liabilities and commitments in the normal course of business we must beginover the next twelve months.

We continue to monetizeanalyze a range of alternatives to build and/or preserve value for its stakeholders, including, but not limited to, exploring additional investment and incremental financing from current and/or new investors. We have in the recent past engaged 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 intellectual property; manage operating expenses; prevail in our ongoing litigation;patent portfolio and raise additional funds, through either debt and/or equity financing to meet our working capital needs. We cannot guaranteepast, present, and future infringement claims. There can be no assurances that we will be able to monetize our intellectual property, manage expenses, prevailsuccessful in our ongoing litigation,implementing any of these alternatives, or obtain additional funds through either debtif implemented, that any of these alternatives will successfully preserve or equity financing transactions or that such funds, if available, will be obtainable on satisfactory terms. If we are unable to monetize our intellectual property, manage expenses, prevail in our ongoing litigation, or raise additional capital through debt or equity financings, we may be unable to continue to fund our operations, or realize value from our assets and discharge our liabilities in the normal course of business. These uncertainties raise substantial doubt about our ability to continue as a going concern.increase shareholder value. 

Business Strategy and Future Plans

Through the third quarter of fiscal year 2014, we developed and designed innovative technologies and intellectual property that waswere used in power adapters to power and charge battery powered devices such as laptop computers, tablets, smart phones and readers. On August 19, 2013, Lenovo Information Products Co., Ltd. (“Lenovo”), our only material customer, informed us that it intended to cease offering our Constellation product, the power adapter we designed and developed for Lenovo. Sales of the Constellation product to Lenovo accounted for materially all of our revenue for the fiscal years 2014 and 2013. We anticipate that we will generate de minimus revenue in future periods from the development, design, distribution or sale of any products. WeIn the third quarter of fiscal quarter 2014, we have effectively suspended traditional operations and are now primarily focused on potentially realizing value from our ongoing IP enforcement actions and other litigation as well as further exploring opportunities to expand, protect, and monetize our patent portfolio, including through the potential sale or licensing of some or all of our patent portfolio. In the future, we may resume our traditional operations, if and when possible.

Company Trends and Uncertainties

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

Critical Accounting Policies

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

Revenue Recognition

We recognized product revenue upon shipment provided there were no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price was fixed or determinable, and collectability was probable. Generally, our products were shipped FOB named point of shipment, whether it is Lake Forest, which is the location of our corporate headquarters, or China, the shipping point for most of our contract manufacturers. Subsequent to October 1, 2013 and the termination of the Lenovo relationship, we had minimal revenue activities.

Stock-based Compensation

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

Derivative Liabilities

A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts and for hedging activities. As a matter of policy, we do not invest in separable financial derivatives or engage in hedging transactions. However, we have entered into certain financing transactions in fiscal 2013 that involve financial equity instruments containing certain features that have resulted in the instruments being deemed derivatives. We may engage in other similar complex financing transactions in the future, but not with the intention to enter into derivative instruments. Derivatives are measured at fair value using the Monte Carlo simulation pricing model and marked to market through earnings. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions. Changes in these subjective assumptions can materially affect the estimate of the fair value of derivative liabilities and, consequently, the related amount recognized as loss due to change in fair value of derivative liabilities on the consolidated statement of operations. Furthermore, depending on the terms of a derivative, the valuation of derivatives may be removed from the financial statements upon exercise or conversion of the underlying instrument into some other security.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits and related terms based upon payment history and the customer’s current credit worthiness. We continually monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Because our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.

Specifically, our management must make estimates of the collectability of our accounts receivable. Management analyzes specific customer accounts and establishes reserves for uncollectible receivables based upon specific identification of account balances that have indications of uncertainty of collection. Indications of uncertainty of collections may include the customer’s inability to pay, customer dissatisfaction, or other factors. Significant management judgments and estimates must be made and used in connection with establishing the allowance for doubtful accounts in any accounting period. Material differences may result in the amount and timing of our losses for any period if management made different judgments or utilized different estimates.

Income Taxes

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

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any required valuation allowance. We continue to maintain a full valuation allowance on the entire deferred tax asset balance. This valuation allowance was established based on management’s overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating loss carry forwards and temporary differences. Due to the current and prior years’history of operating losses, the adjusted net deferred tax assets remained fully reserved as of January 31, 2014.2015. We have a net operating loss carryforward of $40.7 million for federal and $33.6 million for state, which expire in increments through 2033 We are reviewing whether2033. Based on a review performed in fiscal 2015, we concluded that a Section 382 ownership change may havedid not occurred as a result of the Elkhorn transaction in fiscal 2014 (Part II, Item 8, Note 7). If this transaction results in an ownership change, it would substantially limit our research and experimentation credits and net operating loss carryforwards.

Valuation of Long-Lived Assets

We evaluate long-lived assets used in operations when indicators of impairment, such as reductions in demand or significant economic slowdowns that negatively impact our customers or markets, are present. Reviews are performed to determine whether the carrying value of assets is impaired based on comparison to the undiscounted expected future cash flows. If the comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using a weighted average of the market approach and the discounted expected future cash flows using a discount rate based upon our cost of capital. Impairment is based on the excess of the carrying amount over the fair value of those assets. Significant management judgment is required in the forecast of future operating results that is used in the preparation of expected discounted cash flows. It is reasonably possible that the estimates of anticipated future net revenue, the remaining estimated economic life of the products and technologies, or both, could differ from those used to assess the recoverability of these assets. In that event, additional impairment charges or shortened useful lives of certain long-lived assets could be required.2014. 

Results of Operations—Continuing Operations

The following tables set forth certain items as a percentage of revenue from our audited consolidated statements of operations for fiscal 20142015 and fiscal 2013:2014:

Revenue

RevenueWe generated de minimis revenue for fiscal 2014 decreasedyear ended January 31, 2015 compared to $4.4 million compared to $6.3 million for fiscal 2013.year ended January 31, 2014. The decrease is attributable to by decreaseda cessation of sales to our only materialprior customer Lenovo. In the third quarter of fiscal 2014, Lenovo terminated its relationship with us. We completed our final shipment of product to Lenovo during the third quarter ended October 31, 2013 and2013. We anticipate that we generatedwill generate de minimusminimis revenue in our fourth quarter ending January 31, 2014. from the development, design, distribution or sale of any products.

		(in thousands)
		Years Ended January 31,
		2015				2014				% Change
Revenue:
Asia-Pacific		$	-			$	4,319				-100	%
North America			-				73				-100	%
Europe			-				37				-100	%
		$	-			$	4,429				-100	%

		(in thousands)
		Years Ended January 31,
		2015				2014				% Change
Revenue:
Lenovo		$	-			$	4,319				-100	%
Other			-				110				-100	%
		$	-			$	4,429				-100	%

		(in thousands)
		Years Ended January 31,
		2015								2014								% Change
						% of Total								% of Total
Cost of Revenue:
Product costs		$	-				0	%		$	2,994				76	%			-100	%
Supplier settlement			(1,099	)			100	%			-				0	%			n/a
Supply chain overhead			-				0	%			534				14	%			-100	%
Inventory reserve and scrap charges			-				0	%			402				10	%			-100	%
		$	(1,099	)			100	%		$	3,930				100	%			-128	%

 

		Years Ended January 31,
		2015				2014				% Change
Gross profit percent			n/a				11	%			n/a
Gross profit percent, excludingsupplier settlement			n/a				11	%			n/a

Cost of Revenue and Gross Margin

Fiscal 2014 gross profit percent was comparablerevenue for the fiscal year ended January 31, 2015 decreased by $5.0 compared to the corresponding period of fiscal 2013 levels, excluding supplier settlement. In fiscal 2013, we recorded a benefit of $1.4 million in cost of revenue as2014. The decrease is a result of aus having $0 in revenue during fiscal 2015 and the settlement agreement with our supplier, EDAC Power Electronics, Co. Ltd. (“EDAC”). We reversed previously incurred product and freight costs and discharged $1.4 million in net liabilities due to EDAC.

Our supply chain overhead expenses decreased $0.28 million or 34 percent in fiscal 2014 compared to fiscal 2013. The decrease is due to reductions in personnel and related costs as well as other expenses asChicony on May 14, 2014. As a result of continued cost cutting measures.this settlement agreement, the previously accrued obligation of $1.1 million to Chicony was legally dismissed and was reversed during the year ended January 31, 2015.

The inventory reserve and scrap charges of $0.4 million recorded in fiscal 2014 relates primarily to reserves established for excess Constellation components and other slow-moving inventory. The inventory reserve and scrap charges of $0.4 million recorded in fiscal 2013 relates primarily to reserves established for excess ChargeSource components as well as slow-moving inventory.

Operating Costs and Expenses

The fiscal 20142015 decrease in selling, general and administrativeoperating expenses of $2.5$0.9 million compared to fiscal 20132014 relates primarily to decreased legal expenses and personnel and related costs.

Corporate overhead consists of salaries and other personnel-related expenses of our accounting and finance, human resources and benefits, and other administrative personnel, as well as professional fees, directors’ fees, and other costs and expenses attributable to being a public company. The decrease of $0.5$0.4 million for the fiscal year ended January 31, 2015 compared to the fiscal year ended January 31, 2014 relates primarily to decreased personnel and related costs and consulting expenses offset by increases in rent expense, insurance and other expenses.

Engineering and support expenses generally consist of salaries, employer paid benefits, and other personnel related costs of our engineers and testing personnel, as well as facility and IT costs, professional and consulting fees, lab costs, material usages, and travel and related costs incurred in the development and support of our products. The fiscal 20142015 decrease in engineering and support costs includes approximately $1.2$0.4 million in decreased legal fees primarily as result of alternative fee agreements we entered into with our legal counsel in the Chicony litigation and our other intellectual infringement and enforcement litigation matters and $0.4 million in decreased personnel and related expenses (due primarily to a reduction in overall headcount).matters.

Interest Expense, Net

InterestFiscal year 2015 interest expense, net consists primarily ofrelates to interest expense as well as amortization expense related toof the loandebt discount and interest expense offset by interest income, if any. on the Elkhorn Loan. On June 3, 2014, the Company repaid the Elkhorn Loan in full.

During fiscal 2014, we incurred approximately $0.3 million in amortization of the loan discount. Additionally, interest expense of $0.1 million related to our Loan Agreement with Elkhorn was expensed as incurred. During fiscal 2013, we incurred approximately $1.4 million in amortization of the loan discount. Additionally, loan fees totaling $55,000 related to our Loan Agreement with Broadwood were expensed as incurred.

Change in Fair Value of Derivative Liabilities

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

For fiscal 2014, the change in fair value of derivative liabilities is the result of a result decrease in the fair value of our derivative liabilities of $0.6 million. Our derivative liabilities consist of conversion features embedded in the Elkhorn Loan Agreement entered into in the first quarter of fiscal 2014 and warrants issued to Broadwood in the second quarter of fiscal 2013. (See Note 8 of Part II, Item 8 of this report)

ForOther Income, net

During the fiscal 2013,year ended January 31, 2015, other income, net, was $6.7 million. We settled and were paid $7.6 million from Chicony. Of the $7.6 million, we reported an increase inreceived $6.5 million, net of attorneys’ fees and other costs. As a result of this settlement agreement, the fair valuepreviously accrued obligation of our derivative liabilities of approximately $1.1 million. Our derivative liabilities consist solely ofmillion to Chicony was legally dismissed and was reversed during the warrants issued to Broadwood inyear ended January 31, 2015. In addition, we received $0.2 million from a settlement and licensing agreement during the second quarter of fiscal 2013.year ended January 31, 2015.

Income Taxes

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any required valuation allowance. We continue to maintain a full valuation allowance on the entire deferred tax asset balance. This valuation allowance was established based on management’s overall assessment of risks and uncertainties related to our future ability to realize, and hence, utilize certain deferred tax assets, primarily consisting of net operating loss carry forwards and temporary differences. Due to the current and prior years’history of operating losses, the adjusted net deferred tax assets remained fully reserved as of January 31, 2014.2015.

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

During fiscal 2014, we recorded a net loss of $2.1 million and recorded income tax expense of $1,600, which represents the minimum tax due in the state of California. The net deferred tax asset as of January 31, 2014 was $16.7 million, all of which is fully reserved.

During fiscal 2013, we recorded a net loss of $5.6 million and recorded income tax expense of $1,600, which represents the minimum tax due in the state of California. The net deferred tax asset of $17.7 million, all of which is fully reserved.

Liquidity and Capital Resources

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

Cash Flows from Operating Activities

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

The cash provided in operating activities during fiscal 2014 of $0.4 million is a result of cash collected from customers and suppliers of $1.8 million, net of operating expenses paid of $1.4 million.

The cash used in operating activities during fiscal 2013 of $2.7 million related to $1.3 million decrease from accounts receivable from customers and suppliers and of $1.4 million in operating expenses paid in fiscal 2013.

In the fiscalfiscals 2014 and 2013,2015, we initiatedcontinued a reduction in force across all departments in order to reduce our cash burn. While we anticipate that our cost cutting measures will reduce our cash burn during fiscal 2015, we may require further cost cutting measures and/or additional capital from debt or equity financing to fund our operations. We cannot be certain that such financing will be available to us on acceptable terms, or at all.

Cash Flows from Investing Activities

In fiscal years 2015 and 2014, we reduced our work force across all departments in order to reduce our cash burn. While our cost cutting measures reduced our cash burn during fiscal years 2014 and 2015, we may be required further cost cutting measures and/or obtain additional capital from debt or equity financing to fund our operations. We cannot be certain that such financing will be available to us on acceptable terms, or at all.

During fiscal 2014, we spent $9,000 in capital equipment purchases and received $28,000 in proceeds from the sale of equipment.

During fiscal 2013, we spent $0.1 million in capital equipment purchases, which primarily related to purchases of tooling and other equipment used by our contract manufacturers and engineers for the manufacture and design of our products. Our restricted cash balance declined by $10,000 in fiscal 2013 as we reduced the collateral requirement for our chargebacks related to our merchant services account, which we opened in the third quarter of fiscal 2012 in anticipation of the launch of our retail websitewww.chargesource.com.

Cash Flows from Financing Activities; Loan Agreement & Credit Facility

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

On July 27, 2012, we entered into a Senior Secured Six Month TermCompany repaid the Elkhorn Loan Agreement (the “Broadwood Loan Agreement”) with Broadwood. Pursuantin full.(See Note 6 of the Notes to the Broadwood Loan Agreement, on July 27, 2012, Broadwood made a $2,000,000 senior secured six month loan (the “Broadwood Loan”) to us. The Broadwood Loan bore interest at 5% per annum, ranked seniorConsolidated Financial Statements included in right of payment to all of our other indebtedness, was secured by a first priority security interest granted to Broadwood in all of our assets, and was due and payable in full on January 28, 2013. The Broadwood Loan was paid in full on February 11, 2013 with debt and equity financing secured from Elkhorn Partners Limited Partnership (“Elkhorn”). (See Notes 7 and 14 of Part II, Item 8 of this report). In conjunction with the Broadwood Loan Agreement, we incurred $55,000 in loan fees that are reported in interest expense, net in our consolidated statement of operations for fiscal 2013.

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

As of January 31, 2014,2015, we had negative working capital of approximately $7.8 million, of which $2.5 million relates to the fair value of derivative liabilities. During our third fiscal quarter of fiscal 2014, Lenovo notified us of its intention to cease offering our Constellation product.$0.6 million. We completed the delivery of all remaining units to Lenovo duringbelieve that quarter. In order forthis working capital will allow us to continue our operations for the next twelve monthsdischarge non-contingent and to be able to discharge ournon-disputed liabilities and commitments in the normal course of business it will be necessary for us to successfully conclude and/or prevail in our ongoing litigation and raise additional funds through the sale or licensing of our patent portfolio, or through additional debt and/or equity financing, to meet our cash requirements duringover the next twelve months. No assurance can be given, however, that we will be successful in meeting those operating objectives or cash requirements.

These uncertainties raise substantial doubt about our ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and shareholders may lose all or part of their investment in our common stock. The consolidated financial statements do not reflect any adjustments related to the outcome of this uncertainty.

There are several factors and events that could significantly affect our cash flows from operations, including, without limitation the following: 

We are currently analyzing and will continue to analyze a range of alternatives to build and preserve value for our stakeholders, including, but not limited to exploring additional investment and incremental financing from current and/or new investors, entering litigation partnerships with outside entities with regard to certain current previously disclosed and/or future litigation matters, 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. There can be no assurances that we will be successful in implementing any of these alternatives, or if implemented, that any of these alternatives will successfully preserve or increase shareholder value.

If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and shareholders may lose all or part of their investment in our common stock. The consolidated financial statements included in this report do not reflect any adjustments related to the outcome of this uncertainty.

Contractual Obligations

In the course of our business operations, we incur certain commitments to make future payments under contracts such as operating leases and purchase orders. Payments under these contracts are summarized as follows as of January 31, 20142015 (in thousands):

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

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

Although the contemplated sale of shares of common stock and the issuance of the warrants and possible issuance of additional warrant shares by us to Broadwood could result in a "Change of Control" for purposes of the severance compensation agreements, each of the then executives who were parties to those agreements waived their rights to receive payments under those agreements in the event that a "Change of Control" occurs as a result of the sale of shares and the issuance of warrants and additional warrants to Broadwood.this agreement.

Additionally, as a result of ourthe Company’s sale of the 6,250,000 shares of common stock to Elkhorn as discussed above,(see Note 8), Elkhorn’s beneficial ownership of our common stockthe Company has increased from approximately 9% to approximately 49%, of the Company’s outstanding voting stock, making Elkhorn ourthe Company’s largest shareholder. Eachshareholder and resulting in a change of control of 25% or more, as defined for purposes of the executives who were parties to severance compensation agreementsagreement. Mr. Lanni has waived their rightshis right to receive payments under those agreementshis severance compensation agreement as a result of the issuancechange in Elkhorn’s beneficial ownership of shares to Elkhorn.the Company.

Recent Accounting Pronouncements

In July 2013, theThe Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, PresentationASU 2014-08, Reporting Discontinued Operations and Disclosures of Components of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 amends Accounting Standards Codification (“ASC”) 740, Income Taxes,Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The standard is required to be adopted by providing guidance on the financial statement presentation of an unrecognized benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The ASU does not affect the recognition or measurement of uncertain tax positions under ASC 740. ASU 2013-11 will be effective for the Company for interim andpublic business entities in annual periods beginning on or after December 15, 2013,2014, and interim periods within those annual periods. The Company will be required to adopt this ASU beginning with earlythe quarter ending March 31, 2015. The adoption permitted.of this ASU is not expected to have a material impact on the Company’s financial statements. The Company does not expect the adoption ofanticipate that adopting this ASU toupdate will have a material impact on its consolidated financial statements.

In February 2013, theThe FASB issued ASU 2013-02 (“ASU 2013-02”), “Reporting2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of Amounts Reclassified Out of Other Comprehensive Income”.  ASU 2013-02 finalizedan Award Provide That a Performance Target Could Be Achieved after the reporting for reclassifications out of accumulated other comprehensive income, which was previously deferred, as discussed below. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, they do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. An entity is also required to present on the face of the financials where net income is reported or in the footnotes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. Other amounts need only be cross-referenced to other disclosures required that provide additional detail of these amounts.Requisite Service Period, (ASU 2014-12). The amendments in this update areASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. ASU 2014-12 becomes effective for reportingannual and interim periods beginning after December 15, 2012, and2015 with early adoption is permitted. The adoption of this standard didASU is not expected to have a material impact on the Company’s financial position and results of operations.statements. The Company does not anticipate that adopting this update will have a material impact on its consolidated financial statements.

The FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the Emerging Issues Task Forceentity’s ability to continue as a going concern and the SEC have issued certain other accounting standards updatesprovide related disclosures. The ASU is effective for annual and regulations asinterim reporting periods beginning January 1, 2017. The adoption of December 31, 2013 that will become effective in subsequent periods; however, management of the Company doesthis ASU is not believe that any of those updates would have significantly affected the Company’s financial accounting measures or disclosures had they been in effect during 2013 or 2012, and it does not believe that any of those pronouncements willexpected to have a significantmaterial impact on the Company’s financial statements. The Company does not anticipate that adopting this update will have a material impact on our consolidated financial statements at the time they become effective.as such matters are currently disclosed.

Not applicable.

COMARCO, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Comarco, Inc.

Lake Forest, California

We have audited the accompanying consolidated balance sheets of Comarco, Inc. and subsidiary (the “Company”) as of January 31, 20142015 and 20132014 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended. Our audits also included the financial statement schedule of Comarco, Inc. listed in Part IV, Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comarco, Inc. and subsidiary as of January 31, 20142015 and 20132014 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

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

/s/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP

Newport Beach, California

April 28, 201430, 2015

COMARCO, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

COMARCO, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

COMARCO, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)DEFICIT

(In thousands, except share data)

COMARCO, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)thousands except share data)