(State or other jurisdiction incorporation or organization) Identification No.) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ASSETS Current Assets: Cash and cash equivalents Accounts receivable due from customers, net of reserves of $5 and $6, respectively Accounts receivable due from suppliers, net of reserves of $50 and $81, respectively Inventory, net of reserves of $1,162 and $1,791, respectively Other current assets Total current assets Property and equipment, net Restricted cash Total assets LIABILITIES AND STOCKHOLDERS’ DEFICIT Current Liabilities: Accounts payable Accrued liabilities Loan payable, net of discount Derivative liabilities Total current liabilities Deferred rent, net of current portion Total liabilities Commitments, Contingencies and Subsequent Events Stockholders’ Deficit: Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at July 31, 2012 and January 31, 2012, respectively Common stock, $0.10 par value, 50,625,000 shares authorized; 7,610,629 and 7,388,194 shares issued and outstanding at July 31, 2012 and January 31, 2012 Additional paid-in capital Accumulated deficit Total stockholders’ deficit Total liabilities and stockholders’ deficit Derived from the audited consolidated financial statements as of January 31, 2012. Revenue Cost of revenue(1) Gross profit (loss) Selling, general, and administrative expenses Engineering and support expenses Operating income (loss) Other loss, net Income (loss) from continuing operations before income taxes Income tax expense Income (loss) from continuing operations Loss from discontinued operations, net of income taxes Net income (loss) Basic and diluted income (loss) per share: Income (loss) from continuing operations Loss from discontinued operations Net income (loss) Weighted average common shares outstanding: Basic Diluted Common shares outstanding CASH FLOWS FROM OPERATING ACTIVITIES: Net loss Loss from discontinued operations Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: Depreciation Loan origination fees Loss on retirement of property and equipment Stock-based compensation Recovery from doubtful accounts receivable Provision for obsolete inventory Supplier settlement Changes in operating assets and liabilities: Accounts receivable due from customers Accounts receivable due from suppliers Inventory Other assets Accounts payable Accrued liabilities Deferred rent Net cash used in continuing operating activities Net cash used in discontinued operating activities Net cash used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loan payable Repayment of line of credit Loan origination fees Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Noncash investing and financing activities: Loan discount recorded in connection with issuance of warrants Issuance of common stock upon the vesting of restricted stock units Supplemental disclosures of cash flow information: Cash paid for interest Cash paid for income taxes, net of refunds needs. evaluate other alternatives or partially, or entirely curtail operations. established reserves. The second account was reduced from $15,000 in the third quarter of fiscal 2013, due to low credit card sales volumes and negligible chargeback history through our website sales to date. prior fiscal year. The increase is primarily attributable to the ongoing Bronx product litigation described in Note 12. Total stock-based compensation expense Impact on basic and diluted earnings per share assumptions: Transactions and other information related to stock options granted under these plans for the Balance, January 31, 2012 Options granted Options canceled or expired Options exercised Balance, July 31, 2012 Stock Options Exercisable at July 31, 2012 Balance, January 31, 2012 RSU’s granted RSU’s canceled or expired Common stock issued Balance, July 31, 2012 Range of Exercise/Grant Prices $ 0.16 to 1.20 2.89 to 4.90 8.08 to 10.43 455,224. us. effect would have been antidilutive. Basic: Net income (loss) from continuing operations Weighted average shares outstanding Basic and diluted income (loss) per share from continuing operations Net loss from discontinued operations Weighted average shares outstanding Basic and diluted earnings per share from discontinued operations Net income (loss) Weighted average shares outstanding Basic earnings (loss) per share Diluted: Net income (loss) from continuing operations Weighted average shares outstanding Effect of dilutive securities – stock options Weighted average shares used in the calculation of diluted earnings per share from continuing operations Basic and diluted income (loss) per share from continuing operations Net loss from discontinued operations Weighted average shares outstanding Basic and diluted earnings per share from discontinued operations Net income (loss) Weighted average shares outstanding Effect of dilutive securities – stock options Weighted average shares used in the calculation of diluted earnings (loss) per share Diluted earnings (loss) per share Total revenue Customer concentration: Dell Inc. and affiliates. Lenovo Information Products Co., Ltd. Total revenue Customer concentration: Dell Inc. and affiliates. Targus Group International, Inc. Lenovo Information Products Co., Ltd. Total gross accounts receivable due from customers Customer concentration: Dell Inc. and affiliates. Lenovo Information Products Co., Ltd. Total gross accounts receivable due from suppliers Customer concentration: EDAC Power Electronics Co. Ltd (see Note 12) Flextronics Electronics. Zheng Ge Electrical Co., Ltd. Power in the normal course and expect to offset the receivables due from Zheng Ge from amounts owed, which are included in accrued liabilities in our condensed consolidated balance sheet. Further, we anticipate proposing a settlement to Zheng Ge upon the conclusion of our litigation with Chicony Power Technology, Co. Ltd. (“Chicony”). Total gross accounts payable Accounts payable concentration: EDAC Power Electronics Co. Ltd Chicony Power Technology, Co. Ltd Pillsbury Winthrop Shaw Pittman, LLP. . During the first quarter of fiscal 2013, we began procuring all of the components included in the bill of materials for the product we sell to Lenovo. In recall and anticipate proposing a settlement with this supplier subsequent to the conclusion of the Chicony litigation. There can be no assurances, however, regarding the timing or outcome of the Chicony litigation, nor can there be any assurances that we will reach a mutually agreeable settlement with Zheng Ge at a future time. Raw materials Finished goods Beginning balance Accruals for warranties issued during the period Utilization The Company intends to repay the Loan and accrued interest from the $3.0 million in proceeds expected to be received from Broadwood in the fourth quarter of fiscal 2013, pursuant to the Stock Purchase Agreement discussed below. report. price as described below. . The Warrants and the Additional Warrant have been accounted for as derivative liabilities resulting from the instruments' price protection features. report. Description Derivative Liabilities Average expected life Expected volatility Expected dividends (in thousands): purposes only. The Company is committed to accepting delivery of materials pursuant to its purchase orders subject to various contract provisions that allow it to delay receipt of such order or allow it to cancel orders beyond certain agreed lead times. Such cancellations may or may not include cancellation costs payable by the Company. In the past, the Company has been required to take delivery of materials from its suppliers that were in excess of its requirements and the Company has previously recognized charges and expenses related to such excess material. During the second quarter of fiscal 2012 we accrued a charge of $380,000 relating to such excess material relating to purchase commitments made to support the Targus business. Conversely, should we prevail the Company may be awarded a royalty which would generate license revenue to the Company in the future. these matters. Form 10-Q. strategies are tightly aligned with our limited available assets and resources. April, 2014, we may not generate significant royalties, if any, until fiscal 2015. However, the outcome of our ongoing litigation matters is not determinable as of the date of filing this report. However, there can be no assurance that we will be successful in any of these objectives. Revenue Operating income (loss) Net income (loss) from continuing operations Revenue: North America Europe Asia Revenue: Dell Lenovo Targus Other us. Cost of revenue: Product cost Accrued product recall costs Supplier Settlement Supply chain overhead Inventory reserve and scrap charges Gross margin (loss) 2012, we incurred scrap charges of $0.2 million relating to reserves taken against slow-moving inventory. Operating expenses: SG&A expenses, excluding corporate overhead Corporate overhead Engineering and support expenses The increase in legal expenses related to the Chicony litigation during the nine months ended October 31, 2012 was offset by decreases in other corporate overhead expenses of $0.3 million including board of director compensation, other legal fees, insurance costs and rent and occupancy costs. (See Note 11 of Part I, Item 1 of this report). Benefit Cash provided by (used in): Operating activities Investing activities Financing activities cash flows contained elsewhere in this report. liabilities. Additionally, during the third quarter of fiscal 2012, our security deposit of $77,000 for our corporate lease became collateralized by cash in a separate bank account. Prior to the third quarter of fiscal 2012, the letter of credit was treated as a reduction in available borrowings available to the Company under the SVB Agreement described below. · unpredictable nature of the costs and timing of the outcomes, we will no longer be able to defend against these actions.xX JULYFor the quarterly period endedJULY 31, 2012¨California 95-2088894 (I.R.S. Employer of (I.R.S. Employer Yes x No ¨Yes Ö No Yes x No ¨Yes Ö No Large accelerated filer ¨ Accelerated filer ¨Non-accelerated filer ¨ Smaller reporting company xÖ Yes ¨ No xYes No Ö 7,610,6297,614,954 shares of common stock outstanding as of September 12,December 7, 2012.PART I — FINANCIAL INFORMATION Page PagePART I— FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS (Unaudited) Condensed Consolidated Balance Sheets as of JulyOctober 31, 2012 and January 31, 20123 3 Condensed Consolidated Statements of Operations for the Three and SixNine Months Ended JulyOctober 31, 2012 and 20114 4 5 5 Notes to Condensed Consolidated Financial Statements 7 6ITEM 2. 24 21ITEM 4. CONTROLS AND PROCEDURES 33 30 PART II— OTHER INFORMATION PART II — OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 34 31ITEM 1A. RISK FACTORS 35 31ITEM 6. EXHIBITS EXHIBITS35 32SIGNATURES SIGNATURES3337 ASSETS Current Assets: Cash and cash equivalents $ 560 $ 908 Accounts receivable due from customers, net of reserves of $1 and $6, respectively 1,127 934 Accounts receivable due from suppliers, net of reserves of $24 and $81, respectively 833 673 Inventory, net of reserves of $1,082 and $1,791, respectively 1,219 1,131 Other current assets 33 63 Total current assets 3,772 3,709 Property and equipment, net 102 126 Restricted cash 82 92 Total assets $ 3,956 $ 3,927 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current Liabilities: Accounts payable $ 3,454 $ 3,912 Accrued liabilities 1,583 1,315 Loan payable, net of discount 1,153 — Derivative liabilities 1,754 — Total current liabilities 7,944 5,227 Deferred rent, net of current portion 43 41 Total liabilities 7,987 5,268 Commitments, Contingencies and Subsequent Events Stockholders’ Deficit: Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at October 31, 2012 and January 31, 2012, respectively — — Common stock, $0.10 par value, 50,625,000 shares authorized; 7,614,954 and 7,388,194 shares issued and outstanding at October 31, 2012 and January 31, 2012, respectively 762 739 Additional paid-in capital 15,535 15,443 Accumulated deficit (20,328 ) (17,523 ) Total stockholders’ deficit (4,031 ) (1,341 ) Total liabilities and stockholders’ deficit $ 3,956 $ 3,927 July 31,
2012 January 31,
2012(A) $ 1,619 $ 908 1,674 934 564 673 1,127 1,131 53 63 5,037 3,709 101 126 92 92 $ 5,230 $ 3,927 $ 2,834 $ 3,912 2,179 1,315 635 — 1,365 — 7,013 5,227 44 41 7,057 5,268 — — 761 739 15,496 15,443 (18,084 ) (17,523 ) (1,827 ) (1,341 ) $ 5,230 $ 3,927 (A)Derived from the audited consolidated financial statements as of January 31, 2012. Three Months Ended
July 31, Six Months Ended
July 31, 2012 2011 2012 2011 $ 1,681 $ 1,926 $ 3,883 $ 4,876 (127 ) 2,232 1,742 5,006 1,808 (306 ) 2,141 (130 ) 897 1,114 1,401 2,065 703 475 1,244 974 1,600 1,589 2,645 3,039 208 (1,895 ) (504 ) (3,169 ) (55 ) (13 ) (55 ) (2 ) 153 (1,908 ) (559 ) (3,171 ) (2 ) (2 ) (2 ) (2 ) 151 (1,910 ) (561 ) (3,173 ) — (21 ) — (21 ) $ 151 $ (1,931 ) $ (561 ) $ (3,194 ) $ 0.02 $ (0.26 ) $ (0.07 ) $ (0.43 ) — — — — $ 0.02 $ (0.26 ) $ (0.07 ) $ (0.43 ) 7,585 7,344 7,508 7,344 7,608 7,344 7,508 7,344 7,611 7,344 7,611 7,344 2012 2011 2012 2011 $ 1,135 $ 2,252 $ 5,018 $ 7,128 929 1,926 2,672 6,932 206 326 2,346 196 Selling, general, and administrative expenses 903 563 2,303 2,628 640 497 1,884 1,471 1,543 1,060 4,187 4,099 (1,337 ) (734 ) (1,841 ) (3,903 ) (518 ) (26 ) (573 ) (62 ) Loss due to change in fair value of derivative liabilities (389 ) — (389 ) — — — — 34 Loss from continuing operations before income taxes (2,244 ) (760 ) (2,803 ) (3,931 ) — — (2 ) (2 ) (2,244 ) (760 ) (2,805 ) (3,933 ) — — — (21 ) $ (2,244 ) $ (760 ) $ (2,805 ) $ (3,954 ) Basic and diluted loss per share: loss from continuing operations $ (0.29 ) $ (0.10 ) $ (0.37 ) $ (0.54 ) Loss from discontinued operations — — — — Net loss $ (0.29 ) $ (0.10 ) $ (0.37 ) $ (0.54 ) Weighted average common shares outstanding: Basic 7,613 7,382 7,518 7,356 Diluted 7,613 7,382 7,518 7,356 7,615 7,388 7,615 7,388 (1) Six Months Ended
July 31, 2012 2011 $ (561 ) $ (3,194 ) $ — $ 21 54 271 — 53 11 — 75 95 (32 ) — (630 ) (185 ) (1,443 ) — (739 ) 1,470 (393 ) (51 ) 634 (31 ) 10 (195 ) 886 (1,498 ) 876 (498 ) 3 39 (1,249 ) (3,703 ) — (21 ) (1,249 ) (3,724 ) (40 ) (48 ) (40 ) (48 ) 2,000 — — (1,000 ) — (53 ) 2,000 (1,053 ) 711 (4,825 ) 908 6,381 $ 1,619 $ 1,556 $ 1,365 $ — $ 22 $ — $ — $ 12 $ 2 $ 2 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES: $ (2,805 ) $ (3,954 ) $ — $ 21 Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: Depreciation 75 342 Loan origination fees — 53 Amortization of loan discount 492 — Loss (gain) on retirement of property and equipment 11 (1 ) Stock-based compensation 115 121 Provision for doubtful accounts receivable (62 ) 22 Provision for obsolete inventory (709 ) (5 ) Change in fair value of derivative liabilities 389 — Supplier settlement (1,443 ) — Changes in operating assets and liabilities: Accounts receivable due from customers (188 ) 1,173 Accounts receivable due from suppliers (636 ) 50 Inventory 621 202 Other assets 30 3 Accounts payable 1,506 (1,744 ) Accrued liabilities 306 (1,192 ) Deferred rent 2 59 Net cash used in continuing operating activities (2,296 ) (4,850 ) Net cash used in discontinued operating activities — (21 ) Net cash used in operating activities (2,296 ) (4,871 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (62 ) (71 ) Proceeds from sale of property and equipment — 1 Change in restricted cash 10 (92 ) Net cash used in investing activities (52 ) (162 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loan payable 2,000 — Repayment of line of credit — (1,000 ) Loan origination fees — (53 ) Net cash provided by (used in) financing activities 2,000 (1,053 ) (348 ) (6,086 ) 908 6,381 $ 560 $ 295 2012 2011 Supplemental disclosures of cash flow information: Noncash investing and financing activities: Loan discount recorded in connection with issuance of warrants $ 1,365 $ — Issuance of common stock upon the vesting of restricted stock units $ 23 $ — Cash paid during the period for: Interest $ — $ 12 Income taxes, net of refunds $ 2 $ 2 1.Organizationleading developer and designer of mobile power adapters used to simultaneously power and charge certain notebook computers, mobile phones, smartphones, E-readers, iPads®, iPods®iPads®, and many other portable, rechargeable handheld devices.iPods®. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”), which was incorporated in the State of Delaware in September 1993. 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.2.Summary of Significant Accounting PoliciesJulyOctober 31, 2012 and its consolidated results of its operations and cash flows for the three and sixnine months ended JulyOctober 31, 2012 and 2011. The accounting policies followed by the Company are set forth in Note 2 to the Company’s audited financial statements included in its Annual Report on Form 10-K for its fiscal year ended January 31, 2012 (the “2012 10-K”), which was filed with the SEC on April 30, 2012. The consolidated results of operations for the three and sixnine months ended JulyOctober 31, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2013 or any other interim period during such year.forin the sixnine months ended JulyOctober 31, 2012 and 2011 totaling $0.6$2.8 million and $3.2$3.9 million, respectively. In addition, the Company experienced pre-tax losses from operations for fiscal 2012 totaling $5.3 million. The condensed consolidated financial statements have been prepared assuming thatCompany also has negative working capital and uncertainties surrounding the Company willCompany’s future ability to obtain borrowings and raise additional capital. During the third quarter of fiscal 2013 the Company’s cash balance declined by approximately $1.1 million. Approximately $0.6 million of the decline related to the ongoing litigation described in Note 12 and approximately $0.1 million related to legal expenses associated with the loan and related agreements described in Note 11 and to our public company legal counsel. These factors, among others, raise substantial doubt about our ability to continue to operate as a going concern, which contemplates that the Company will realize its assets and satisfy its liabilities and commitments in the ordinary course of business.concern. The Company’s condensed consolidated financial statements do not reflectinclude any adjustments related tothat might result from the outcome of this uncertainty.these uncertainties. The Company’s future is highly dependent on its ability to sell its products at a profit, to successfully resolve current litigation, to capitalize on our growing portfolio of patents, to generate positive cash flows and to obtain borrowings or raise capital to meet our liquidity and its ultimate return to overall profitability. To accomplish this, we must increase the sales volumes of our current and newly designed ChargeSource® products. Information Products Co., Ltd. (“Lenovo”) and Dell Inc. and affiliates (“Dell”), both of which are original equipment manufacturers, or “OEM’s.” However, we exited the business with Dell, and sold Dell all remaining product in inventory in May 2012, due to low sales volumes and thin product margins.providednotified the Company with written notification of non-renewal of the Targusthat it would not renew that Agreement. As such,a result, there has been no sales revenue from Targus since the second quarter of fiscal 2012, which was minor. We do not expect any future sales to Targus.changepursue expansion of our sales strategy to sellinclude selling our products directly to end users. Although we planIn addition to continue to sellselling select products in the OEM channel, we believe that we can complement our OEM sales and increase sales and margins by selling our products direct to end users. To implement this strategy, we launched our website,www.chargesource.com during the fourth quarter of fiscal 2012, to sell our newest generation of AC adapter. We anticipate analyzing additional marketing and sales avenues for our ChargeSource product line during the balance of calendar 2012 and into 2013. There can be no assurance, however, that we will be able to successfully achievemeaningfully increase our product sales volume initiatives through the launch of our direct selling efforts and/or our new website, and the failure to achieve such initiativesdo so could have a material adverse effect on our operations and financial condition.COMARCO, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)$2.0$4.2 million at JulyOctober 31, 2012. In order for us to conductbe able to continue operating our business for the next twelve months and to continue operations thereafter and be able to discharge our liabilities and commitments in the normal course of business, we must increase sales, closely manage operating expenses, and potentially raise additional funds, through either debt and/or equity financing, to meet our working capital needs.needs (See Note 10 Loan & Related Agreements)Basis of PresentationThe interim condensed consolidated financial statements of Comarco included herein have been prepared without audit. There is no assurance that we will succeed in accordance with accounting principles generally accepted in the United States of America for interim informationdoing so and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended January 31, 2012. The unaudited interim condensed consolidated financial information presented herein reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the consolidated results for the interim periods presented. The consolidated results for the three and six months ended July 31, 2012if we are not necessarily indicative of the resultssuccessful in raising additional funds, we may have to be expected for the fiscal year ending January 31, 2013.CWT, its wholly owned subsidiary.CWT. All material intercompany balances, transactions, and profits and losses have been eliminated.performsperform ongoing credit evaluations of our customers. Accounts receivable balances result primarily from the timing of remittance payments by these customers to the Company. Accounts receivable are stated net of an allowance for doubtful accounts. Management develops its estimate of this reserve 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. Historically, such losses have been minimal and within management’s expectations and the reserves established. locally that we later sell to our contract manufacturers (“CM’s”), who build the finished goods, and to other suppliers. This is especially the case when new products are initially introduced into production. Sales to our contract manufacturers and other suppliers are excluded from revenue and are instead reclassified to cost of revenue. During fiscal 2013, our relationship with Power System Technologies, Ltd. (formerly Flextronics Electronics (“Flex”),Electronics) the CM who builds the product we sell to Lenovo transitioned from a relationship where we directly sourced just a few components in the bill of material to a process where we directly source all of the component parts in the bill of material.COMARCO, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)$15,000$5,000 which serves as collateral for credit card chargebacks associated with our internet website.including(including product recall costs,costs), valuation of derivative liabilities, valuation allowances for deferred tax assets, and determination of stock based compensation expense.sixnine months ended JulyOctober 31, 2012.complexcertain financing transactions in fiscal 2013 that involve financial equity instruments containing certain features that have resulted in the instruments being deemed derivatives. The Company may engage in other similar complex debtfinancing 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 which may impactcan materially affect the levelestimate of precisionthe fair value of derivative liabilities and, consequently, the related amount recognized as loss due to change in fair value of derivative liabilities on the financial statements.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.COMARCO, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)(“FASB”("FASB") Accounting Standards Codification (“ASC”("ASC") 815-40,Derivatives and Hedging,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, that requires us to apply a two-step model in determining whether a financial instrument or an embedded feature is indexed to our own stock and thus enables it to qualify for equity classification. The warrants issued to Broadwood Partners, L.P. ("Broadwood") contain provisions that adjust the exercise price in the event of certain dilutive issuance of securities.our securities (see Note 10). Accordingly, the Company considered the warrants to be subject to price protection and classified them as derivative liabilities at the date of issuance with a fair value of $1.3 million and a corresponding discount to the underlying loan payable.payable (see Note 11).third party valuation reportof the derivative liabilities discussed below.JulyOctober 31, 2012 was $1.4 million, based upon a third party valuation report that we commissioned.$1.75 million. Warrants classified as derivative liabilities are reported at their estimated fair value, with changes in fair value being reported in current period results of operations. Duringsecond quarternature of the legal expense. All legal expenses incurred related to our intellectual property, including associated litigation expense and maintenance of our patent portfolio, are included in engineering and support expenses in our consolidated statement of operations. The legal expenses included in engineering and support expenses increased approximately $0.1 million and $0.8 million during the three and nine months ended October 31, 2012, respectively, when compared to the comparable periods of the prior fiscal year. The increase in legal expenses during the first three quarters of fiscal 2012 we did not record any charge or credit2013 is predominantly due to the current period resultsongoing patent infringement litigation described in Note 12. All other legal expenses, including all other litigation expense and public company legal expense are included in selling, general, and administrative expenses in our consolidated statement of operation asoperations. The legal expense included in selling, general and administrative expenses increased approximately $0.3 million during the warrants were issued on July 27,three and nine months ended October 31, 2012 in conjunction withwhen compared to the executioncomparable periods of the Loan Agreement.3.Discontinued Operationstheour Wireless Test Solutions (“WTS”) business and related assets. Comarco’s shareholders approved the transaction on November 26, 2008, which closed on January 6, 2009. year to date loss from WTS discontinued operations of $21,000 relates to a sales tax audit performed by the California State Board of Equalization during the second quarter of fiscal 2012. The expensed amount represents the portion of the assessment that is to be borne by Comarco for the sale of the WTS business to Ascom and we do not expect to incur any future costs related to the sale of the WTS business.4.Stock-Based CompensationCOMARCO, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)we are likely to change ourthe valuation assumptions used to value stock-based awards granted in future periods.periods are subject to possible change. The values derived from using either the Lattice Binomial or the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires significant judgment. Actual results,changes in vesting and forfeitures, and future changes in estimates, may differ from the our current estimates. Three Months Ended
July 31, Six Months Ended
July 31, 2012 2011 2012 2011 $ 36 $ 24 $ 75 $ 95 $ 0.00 $ 0.00 $ 0.01 $ 0.01 2012 2011 2012 2011 Total stock-based compensation expense $ 39 $ 26 $ 115 $ 121 Impact on basic and diluted earnings per share $ 0.00 $ 0.00 $ 0.01 $ 0.02 $136,000,$159,000, which will be expensed over a weighted average remaining life of 97.0 months.and six months ended JulyOctober 31, 2011 no stock options or restricted stock units were granted. During the nine months ended October 31, 2012, 0 and 300,000 restricted stock units were granted and no465,000 stock options were granted. During the three and sixnine months ended JulyOctober 31, 2011, 220,000 and 295,000 restricted stock units were granted and no stock options were granted. The fair value of the restricted stock units granted during the sixnine months ended JulyOctober 31, 2012 was estimated using the stock price on the date of the grant of $0.16 and a forfeiture rate of 10.6 percent. The fair value of the restricted stock units granted during the three and sixnine months ended JulyOctober 31, 2011 was estimated using the weighted-average stock price on the date of the grants of $0.33 and a weighted-average forfeiture rate of 9.3 percent.which averaged $0.30 andusing the following weighted average forfeiture rates of 9.6 percent and 9.3 percent, respectively.Year-to-date October 31, 2012 0.7 % 5.5 121 % None 8.2 % “Employee“Prior Employee Plan”) expired during May 2005. As a result, no new options could be granted under the plan thereafter. This plan provided for the issuance of up to 825,000 shares of common stock. During December 2005, the Board of Directors approved and adopted the Company’s 2005 Equity Incentive Plan (the “2005 Plan”) covering 450,000 shares of common stock. The 2005 Plan was approved by the Company’s shareholders at its annual shareholders’ meeting in June 2006, and subsequently amended at its annual shareholders’ meeting in June 2008 to increase the number of shares issuable under the plan from 450,000 to 1,100,000 shares. In July 2011, the Company’s shareholders approved the 2011 Equity Incentive Plan (the “2011” Plan) covering 750,000 shares of common stock. both the 2011 and 2005 Plan,Plans, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, and performance based awards to employees, consultants and directors. Under all plans, awards vest or become exercisable in installments or upon achievement of performance objectives determined by the compensation committee of the Company’s Board of Directors;Directors at the time equity awards are granted; however, under the 2005 Plan no option may be exercised prior to one year following the grant of the option. The optionsOptions granted under the Prior Employee Plan expire as determined by the committee at the time of grant, but no later than ten years and one week after the date of grant (five years for 10 percent shareholders). The optionsOptions granted under the 2011 and 2005 PlanPlans expire as determined by the committee at the time of grant, but no later than ten years after the date of grant (five years for 10 percent shareholders).sixnine months ended JulyOctober 31, 2012 are summarized below: Outstanding Options Number of Shares Weighted-Average
Exercise Price 380,000 $ 3.93 — — (80,500 ) 7.9 — — 299,500 $ 3.15 179,325 $ 4.53 Outstanding Options Number of Shares 380,000 $ 3.93 Options granted 465,000 0.40 Options canceled or expired (80,500 ) 7.90 Options exercised — — 764,500 $ 1.48 179,325 $ 4.53 sixnine months ended JulyOctober 31, 2012 are summarized below: Outstanding Restricted Stock Units Number of Shares Weighted-Average
Stock Price
On Grant Date 293,651 $ 0.37 300,000 0.16 (32,565 ) 0.26 (222,435 ) 0.31 338,651 $ 0.23 Outstanding Restricted Stock Units Number of Shares 293,651 $ 0.37 RSU’s granted 300,000 0.16 RSU’s canceled or expired (32,565 ) 0.26 Common stock issued (226,760 ) 0.31 334,326 $ 0.20 JulyOctober 31, 2012, the stock awards outstanding have an aggregate intrinsic value of $16,000,$29,000, based on a closing market price of $0.21$0.25 per share of our common stock on JulyOctober 31, 2012. The following table summarizes information about the Company’s stock awards outstanding at JulyOctober 31, 2012: Awards Outstanding Awards Exercisable Number
Outstanding Weighted-Avg.
Remaining
Contractual Life Weighted-Avg.
Exercise/Grant
Price Number
Exercisable Weighted-Avg.
Exercise/Grant
Price 548,500 3.03 $ 0.54 98,325 $ 1.10 23,651 4.45 4.16 15,000 4.90 66,000 3.36 9.56 66,000 9.56 638,151 3.12 years 1.60 179,325 4.53 COMARCO, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) Awards Outstanding Awards Exercisable $ 0.16 to 1.09 1,013,500 5.90 $ 0.47 98,325 $ 1.10 2.89 to 4.90 19,326 4.34 4.45 15,000 4.90 8.08 to 10.43 66,000 2.71 9.56 66,000 9.56 1,098,826 5.68 1.09 179,325 4.53 JulyOctober 31, 2012, shares available for future grants were 920,224.5.Recent Accounting PronouncementsFinancial Accounting Standards Board (the “FASB”)FASB issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends current fair value measurement and disclosure guidance to converge with International Financial Reporting Standards and provides increased transparency around valuation inputs and investment categorization. ASU 2011-04 also requires new disclosures about qualitative and quantitative information regarding the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The Company adopted ASU 2011-04 in the second quarter of fiscal 2013, when it became applicable to our Company.In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment,” which is intended to reduce the complexity and cost of performing a quantitative test for impairment of indefinite-lived intangible assets by permitting an entity the option to perform a qualitative evaluation about the likelihood that an indefinite-lived intangible asset is impaired in order to determine whether it should calculate the fair value of the asset. The update also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value is an indefinite-lived intangible asset is less than its carrying amount. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, or in fiscal 2014 for Comarco’s annual impairment test. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.6.Earnings (Loss) Per Sharesixnine months ended JulyOctober 31, 20112012 and the six months ended July 31, 2012,2011, basic and diluted loss per share were the same for those periods were the same because the inclusion of potential common shares related to outstanding stock options in the calculation would have been antidilutive. common shares of 255,000 and 230,000 have been excluded from diluted weighted average common shares for the three and six months ended July 31, 2011, as the effect would have been antidilutive. Similarly, potential common shares of 330,000 have been excluded from diluted weighted average common shares for the sixthree and nine months ended JulyOctober 31, 2012, as the effect would have been antidilutive.The following table presents reconciliations Similarly, potential common shares of 90,000 and 140,000, respectively, have been excluded from diluted weighted average common shares for the numeratorsthree and denominators ofnine months ended October 31, 2011, as the basic and diluted earnings (loss) per share computations for net income (loss). In the tables below, “Net income or loss” represents the numerator and “Shares” represents the denominator (in thousands, except per share amounts): Three Months Ended
July 31, Six Months Ended
July 31, 2012 2011 2012 2011 $ 151 $ (1,910 ) $ (561 ) $ (3,173 ) 7,585 7,344 7,508 7,344 $ 0.02 $ (0.26 ) $ (0.07 ) $ (0.43 ) $ — $ (21 ) $ — $ (21 ) 7,585 7,344 7,508 7,344 $ — $ — $ — $ — $ 151 $ (1,931 ) $ (561 ) $ (3,194 ) 7,585 7,344 7,508 7,344 $ 0.02 $ (0.26 ) $ (0.07 ) $ (0.43 ) Three Months Ended
July 31, Six Months Ended
July 31, 2012 2011 2012 2011 $ 151 $ (1,910 ) $ (561 ) $ (3,173 ) 7,585 7,344 7,508 7,344 23 — — — 7,608 7,344 7,508 7,344 $ 0.02 $ (0.26 ) $ (0.07 ) $ (0.43 ) $ — $ (21 ) $ — $ (21 ) 7,608 7,344 7,508 7,344 $ — $ — $ — $ — $ 151 $ (1,931 ) $ (561 ) $ (3,194 ) 7,585 7,344 7,508 7,344 23 — — — 7,608 7,344 7,508 7,344 $ 0.02 $ (0.26 ) $ (0.07 ) $ (0.43 ) COMARCO, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)7.Customer and Supplier Concentrationsprovidingthat accounted for 10 percent or more of the Company’s revenue for any of the periods presented below are listed here: Three Months Ended July 31, 2012 2011 (In thousands) $ 1,681 100 % $ 1,926 100 % $ 15 1 % $ 314 16 % 1,657 98 % 1,593 83 % $ 1,672 99 % $ 1,907 99 % Six Months Ended July 31, 2012 2011 (In thousands) $ 3,883 100 % $ 4,876 100 % $ 67 1 % $ 685 14 % — — % 1,174 24 % 3,793 98 % 2,947 60 % $ 3,860 99 % $ 4,806 98 % Three Months Ended October 31, 2012 2011 (In thousands) $ 1,135 100 % $ 2,252 100 % Customer concentration: Dell Inc. and affiliates $ — — $ 376 17 % Lenovo Information Products Co., Ltd. 1,119 99 % 1,826 81 % $ 1,119 99 % $ 2,202 98 % Nine Months Ended October 31, 2012 2011 (In thousands) $ 5,018 100 % $ 7,128 100 % Customer concentration: Dell Inc. and affiliates $ 67 1 % $ 1,061 15 % Targus Group International, Inc. — — % 1,174 16 % Lenovo Information Products Co., Ltd. 4,913 98 % 4,773 67 % $ 4,980 99 % $ 7,008 98 % AsAlso, as previously described, on January 25, 2011, Targus provided us with written notification of non-renewal of the Targus Agreement. We didhave not generategenerated any revenue from Targus induring the first three quarters of fiscal 2013 nor do we expect any revenue from sales to Targus in the future.JulyOctober 31, 2012 or January 31, 2012 are listed below (in thousands)thousands, except percentages): July 31, 2012 January 31, 2012 $ 1,679 100 % $ 940 100 % 4 — % 371 39 % 1,668 99 % 562 60 % $ 1,672 99 % $ 933 99 % COMARCO, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) October 31, 2012 January 31, 2012 Total gross accounts receivable due from customers $ 1,128 100 % $ 940 100 % Customer concentration: — — % 371 39 % 1,119 99 % 562 60 % $ 1,119 99 % $ 933 99 % comprisingthat accounted for 10 percent or more of the Company’s gross accounts receivable due from suppliers at either JulyOctober 31, 2012 or January 31, 2012 are listed below (in thousands)thousands, except percentages). July 31, 2012 January 31, 2012 $ 614 100 % $ 754 100 % $ — — % $ 532 71 % 442 72 % 40 5 % 122 20 % 122 16 % $ 564 92 % $ 694 92 % October 31, 2012 January 31, 2012 Total gross accounts receivable due from suppliers $ 857 100 % $ 754 100 % Customer concentration: $ — — % $ 532 71 % 711 83 % 40 5 % 122 14 % 122 16 % $ 833 97 % $ 694 92 % FlexPower Systems Technologies, Ltd. (“Power,” formerly Flextronics Electronics) is driven by a change in our business processes. Flexprocess. Power is the contract manufacturer for the products we sell to OEM’s. In the prior fiscal year, we sourced only a few components on behalf of Flex.Power. During the first quarter of fiscal 2013, we began procuring all of the components included in the bill of material on behalf of FlexPower for the products we sell to OEM’s and by doing so we have been able to secure more favorable payment terms among our expanded supplier base.recoverreverse previously incurred product and freight costcosts and to remove all liabilities and assets related to EDAC from our condensed consolidated balance sheet. The settlement resulted in a decrease to cost of revenue of $1.4 million.suppliers listed above.comprisingthat accounted for 10 percent or more of our gross accounts payable at either JulyOctober 31, 2012 or January 31, 2012 are listed below (in thousands, except percentages). July 31, 2012 January 31, 2012 $ 2,834 100 % $ 3,912 100 % $ — — % $ 1,964 50 % 1,100 39 % 1,100 28 % 817 29 % 386 10 % $ 1,917 68 % $ 3,450 88 % October 31, 2012 January 31, 2012 $ 3,454 100 % $ 3,912 100 % Accounts payable concentration: $ — — % $ 1,964 50 % 1,100 32 % 1,100 28 % 1,213 35 % 386 10 % $ 2,313 67 % $ 3,450 88 % iscan be no assurance, however, as to the likely outcome of this litigation.litigation (see Note 12)contract manufacturers (“CM’s”)CM’s and other suppliers. The loss of one or more of our significant CM’s or suppliers could materially and adversely affect our operations. For the three and sixnine months ended JulyOctober 31, 2012, threefour of our CM’ssuppliers provided an aggregate of 6176 and 4967 percent, respectively, of total product costs. For the three and sixnine months ended JulyOctober 31, 2011, one and two of our CM’s provided an aggregate of 5041 and 8898 percent, respectively, of total product costs.COMARCO, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)the prior fiscal year2012, we procured the finished good directly from FlexPower and they were responsible for procuring the components.JulyOctober 31, 2012, approximately $0.8 million or 6489 percent of total uninvoiced materials and services of $1.2$0.9 million, included in accrued liabilities, were payable to FlexPower and Zhengge Electrical Co. Ltd. (“Zhengge”).Zheng Ge. At January 31, 2012, approximately $0.3 million or 54 percent of total uninvoiced materials and services of $0.6 million, included in accrued liabilities, were payable to Zhengge. Zhengge was a tip supplier for the Bronx product, andZheng Ge. As noted above, we ceased paying ZhenggeZheng Ge during the course of the product recall.8.Inventory July 31,
2012 January 31,
2012 $ 824 $ 1,002 303 129 $ 1,127 $ 1,131 $ 825 $ 1,002 394 129 $ 1,219 $ 1,131 JulyOctober 31, 2012, approximately $520,000$680,000 of total inventory was located at our corporate headquarters. The remaining balance is located at various contract manufacturer locations in the United States and Asia.9.Warranty Arrangements As of And For the
Six Months Ended
July 31, 2012 2011 $ 193 $ 310 — 399 (123 ) (679 ) $ 70 $ 30 2012 2011 Beginning balance $ 193 $ 310 Accruals for warranties issued during the period — 318 Utilization (125 ) (548 ) $ 68 $ 80 JulyOctober 31, 2012 is adequate to cover standard warranty costs and believes that we have accruedpaid for and paid substantially all of our material financial obligations with respect to the Bronx product recall.COMARCO, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)10.Loan & Related Agreements Current Report on Form 8-K filed with the SEC on August 2, 2012, the Company entered into a Senior Secured Six Month Term Loan Agreement dated July 27, 2012 (the “Loan Agreement”) with Broadwood Partners, L.P. (“Broadwood”), a partnership managed by Broadwood Capital, Inc., the general partner of Broadwood. Broadwood is a significant shareholder of the Company.2013 (the “Maturity Date”).2013. The Company is using the net proceeds of the Loan primarily to fund its working capital requirements and those of CWT, but may use up to $400,000 of those proceeds to fund capital expenditures required in the conduct of its business and the business of CWT.Related Debt Agreementsrelated debt agreements are not intended to be complete and are qualified by reference to the more detailed descriptions thereof contained in the above-referenced Current Report on Form 8-K and to the Loan Agreement and the Related Agreementsrelated agreements filed as exhibits to that Current Report.Agreementagreement provides for the purchase by Broadwood of up to 3,000,000 shares of the Company’s common stock (the “Shares”), at a price of $1.00 per Share, subject to the following conditions: (i) during the six month term of the Loan, the Company will use its best commercial efforts to raise at least $3.0 million from the sale of additional equity securities to other investors, which may include other shareholders of the Company, and (ii) the Company remains in compliance with its covenants under the Loan Agreement. The Company will decide how many of those 3,000,000 Shares to sell to Broadwood pursuant to the Stock Purchase Agreement, based primarily on the Company’s cash requirements. The Stock Purchase Agreement provides that if, at any time during the next 12 months, the Company sells any shares of its common stock (or sells or issues securities that are convertible or exercisable into shares of common stock) at a price less than $1.00 per share, the Company will be required to issue outright to Broadwood, without additional consideration from it, a number of additional Shares (the “Make-Whole Shares”) sufficient to reduce the per share price paid by Broadwood for the total number of the Shares and Make-Whole Shares issued under the Stock Purchase Agreement to that lower price.price.sheet.sheet (see Note 11) Current Report on Form 8-K and to the Stock Purchase Agreement, the form of Common Stock Purchase Warrant and the Warrant Commitment Letter which provides for the possible issuance by the Company of the Additional Warrant to Broadwood, which were filed as exhibits to that Current Report.COMARCO, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)11.Fair Value Measurements“Fair"Fair Value Measurements and Disclosures”Disclosures" (“ASC 820”), in connection with assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The guidance applies to our derivative liabilities. We had no assets or liabilities measured at fair value on a non-recurring basis for any period reported.JulyOctober 31, 2012 reporting date are classified based on the valuation technique level noted in the table below (in thousands): July 31,
2012 Quoted Prices
in Active
Markets for
(Level 1) Significant Other
Observable
(Level 2) Significant
Unobservable
(Level 3) $ 1,365 $ — $ — $ 1,365 Description Derivative Liabilities $ 1,754 $ -- $ -- $ 1,754 Three Months Ended JulyOctober 31, 20121.22%1.29% (years) 8 years100.05%105.21%None Since the warrants and contingent warrants were issued on July 27, 2012,market value reported at Julyof our Level 3 financial instruments for the three months ended October 31, 2012 the end of the fiscal quarter, is deemed to represent the fair market value on the date of the issuance. Accordingly, there has been no change in fair value reported in current period results of operations.12.Commitments and Contingencies Derivative liabilities $ 1,365 $ – $ 389 $ 1,754 long-lead timelong-lead-time parts procurementCOMARCO, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)“Change"Change of Control”Control" for purposes of the severance compensation agreements, each of the executives who are parties to those agreements has waived their rights to receive payments under those agreements in the event that a “Change"Change of Control”Control" occurs as a result of the sale of shares and the issuance of Warrants and Additional Warrants to Broadwood.SVBSilicon Valley Bank (“SVB”) to allow for continuous and unlapsed compliance with a lease provision for the Company’s corporate offices. The letter of credit expires on August 1, 2014.manufacturedpurchased from it by Chicony.the Company. We denied liability and filed a cross-complaint on May 13, 2011 seeking the recovery of damages of $4.9 million caused by Chicony’sChicony's failure to adhere to our technical specifications when manufacturing the Bronx product, which we believe resulted in the recall of the product. The trial date is currently set for March 11,April 8, 2013. In an effort to resolve this litigation before the existing trial date, we sent Chicony a settlement offer, which has since lapsed. The outcome of this matter is not determinable as of the date of the filing of this report. We have previously accrued $1.1 million for the possibility that we could incur a liability to Chicony should it prevail in the lawsuit.“Programmable"Programmable Power Supply to Simultaneously Power a Plurality of Electronic Devices”Devices"; 7,495,941 titled “Power"Power Supply Equipment with Matching Indicators on Converter and Connector Adaptors”Adaptors"; 7,613,021 titled “Small"Small Form Factor Power Supply”Supply"; 7,863,770 titled “Power"Power Supply Equipment for Simultaneously Providing Operating Voltages To a Plurality of Devices”Devices"; and 7,999,412 titled “Detachable"Detachable Tip for Communicating with Adapter and Electronic Device.” On February 29, 2012, we denied these claims and filed a cross-complaint alleging infringement by Kensington of each of these five patents. The Courtcourt required that the parties mediate the dispute by the end of July, 2012. Although the parties met for mediation, the dispute was not settled. Currently, the trial date is set for April, 2014. This matter is ongoing and the outcome is not determinable, however if we do not prevail we will likely not obtain a license agreement to earn future license revenue from products sold by Kensington.recoverreverse previously incurred product and freight costs and to discharge net liabilities of $1.4 million from our consolidated balance sheet that would otherwise have been due to EDAC had it prevailed in the lawsuit. The settlement resulted in a decrease to cost of revenue of $1.4 million.believe thatare unable to predict the ultimate outcome of all such legal proceedings will not, in the aggregate, have a material adverse effect on our consolidated results of operations and financial position.ITEM 2. MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSChargeSource®ChargeSource® products or to obtain cost reductions, including risks related to market acceptance of our products; failure to accurately forecast customer demand and the risk that our customers may cancel their orders, change production quantities or delay production; the fact that our products are complex and have short life cycles and the average selling prices of our products will likely decrease over their sales cycles; disruptions in our relationships with our suppliers; failure to meet financial expectations of analysts and investors; risks related to our ability to meet contractual and technical commitments with our customers; activities by us and others regarding protection of intellectual property; competitors’ release of competitive products and other actions; product recalls and product liability claims; the loss of key employees; and costs and potential adverse determinations in pending litigation. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, we cannot assure that the results contemplated in forward-looking statements will be realized in the timeframe anticipated or at all. In light of the significant uncertainties inherent in the forward-looking information included in this report, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans or that our future financial results or outcomes, as set forth in the forward looking statements in this report will be achieved. Accordingly, investors are cautioned not to place undue reliance on our forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.our operationsoperation presented in this report are not audited and those results are not necessarily indicative of the results to be expected for the entirety of the fiscal year ending January 31, 2013 or any other interim period during such fiscal year. Our fiscal year ends on January 31 and our fiscal quarters end on April 30, July 31, and October 31. Unless otherwise stated, all dates refer to our fiscal year and those fiscal quarters. leading developer and designer of innovative mobile power products. These standalone, multi-function mobile power adapters are used to simultaneously power and charge notebook computers, mobile phones, smartphones, E-readers, iPads®, iPods®iPads®, and many other portable, rechargeable consumer electronic devices.iPods®. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”).JulyOctober 31, 2012:On July 28, 2012 the Company’s Board of Directors appointed Mr. Louis Silverman to the board and as Chairman of the Board.On July 27, 2012, the Company entered into a Senior Secured Six Month Term Loan Agreement (the “Loan Agreement”) with Broadwood Partners, L.P. (“Broadwood”), a partnership managed by Broadwood Capital, Inc., the general partner of Broadwood. Broadwood is a significant shareholder of the Company. Pursuant to the Loan Agreement, on July 27, 2012, Broadwood made a $2,000,000 senior secured six month loan (the “Loan”) to the Company. The Loan bears interest at 5% per annum, ranks senior in right of payment to all other indebtedness of the Company and is due and payable in full on January 28, 2013. See Note 10 to the Company’s condensed consolidated financial statements contained elsewhere in this report for additional information regarding the Loan Agreement, the Loan and certain related agreements.· Revenue for the third quarter of fiscal 2013 decreased to $1.1 million compared to $2.3 million for the third quarter of fiscal 2012. The decrease is attributable to our previously described exit from the Dell business during the second quarter of fiscal 2013, as well as reduced sales to our principal customer Lenovo. Concurrent with the execution of the Loan Agreement, the Company and Broadwood entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”). The Stock Purchase Agreement provides for the purchase by Broadwood of up to $3.0 million worth of the Company’s common stock, at a price of up to $1.00 per share, at the Company’s discretion, subject to certain conditions provided for in the Stock Purchase Agreement. See Note 10 to the Company’s condensed consolidated financial statements contained elsewhere in this report for additional information regarding the Stock Purchase Agreement, and certain related agreements.On July 24, 2012 the Company entered a Settlement Agreement with EDAC Power Electronics, Co. Ltd. (“EDAC”) ending the litigation among the parties. As a direct result of the settlement, the Company discharged $1.4 million in net liabilities due to EDAC.· We are focused on preserving our cash balances by monitoring expenses, identifying cost savings, and investing only in those development programs and products that we believe have the highest probability of contributing to our profitability. Additionally, for the first three quarters of fiscal 2013 a significant portion of our cash used in operations reported as part of our net loss relates to funding the litigation described in Note 12 of Part I, Item 1 of this report. Revenue for the second quarter of fiscal 2013 decreased to $1.7 million compared to $1.9 million for the second quarter of fiscal 2012. The decrease is primarily attributable to our previously described exit from the Dell business during the prior quarter.We are focused on preserving our cash balances by monitoring expenses, identifying cost savings, and investing only in those development programs and products that we believe have the highest probability of contributing to our profitability.· On July 28, 2012, the Company’s Board of Directors appointed Mr. Louis Silverman to the board and as Chairman of the Board. · On July 27, 2012, the Company entered into a Senior Secured Six Month Term Loan Agreement (the “Loan Agreement”) with Broadwood Partners, L.P. (“Broadwood”), a partnership managed by Broadwood Capital, Inc., the general partner of Broadwood. Broadwood is a significant shareholder of the Company. Pursuant to the Loan Agreement, on July 27, 2012, Broadwood made a $2,000,000 senior secured six month loan (the “Loan”) to the Company. The Loan bears interest at 5% per annum, ranks senior in right of payment to all other indebtedness of the Company, is secured by a first priority security interest in all of the assets of Comarco and CWT, and is due and payable in full on January 28, 2013. See Note 10 to the Company’s condensed consolidated financial statements contained elsewhere in this report for additional information regarding the Loan Agreement, the Loan and certain related agreements. · Concurrent with the execution of the Loan Agreement, the Company and Broadwood entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”). The Stock Purchase Agreement provides for the purchase by Broadwood of up to $3.0 million worth of the Company’s common stock, at a price of up to $1.00 per share, at the Company’s discretion, subject to certain conditions provided for in the Stock Purchase Agreement. See Note 10 to the Company’s condensed consolidated financial statements contained elsewhere in this report for additional information regarding the Stock Purchase Agreement and certain related agreements. · As previously reported, on July 24, 2012, the Company entered a Settlement Agreement with EDAC Power Electronics, Co. Ltd. (“EDAC”) ending the litigation among the parties. As a direct result of the settlement, the Company discharged $1.4 million in net liabilities due to EDAC. principallyalmost entirely driven by sales of our products to Lenovo (accounting for 98% of our total revenue for the nine months ended October 31, 2012), and we continue to focus a significant percentage of our time and resources on providing outstanding products and service to Lenovo, our valued principal customer.ChargeSource®ChargeSource®. This product line is currently available exclusively on our retail websitewww.chargesource.com.We anticipate analyzing and testing additional marketing and sales avenues for our ChargeSource product line during the balance of calendar 2012 and into 2013. There can be no assurances, however, regarding the success of these efforts.this same period,the third quarter of fiscal 2013, we expect to engageengaged a team of experienced marketing professionals to assist us with development of our ChargeSource marketing and branding strategy as well as our marketing/sales strategy implementation and execution. Our goal is to leveragedetermine the best strategies for leveraging what we believe to be ChargeSource’s superior design and patent protected technologies to the advantage of both consumers andour shareholders. Our strategy development and executionOnce finalized, our selected strategies will take into account oursize, assets, core strengths, and will recognize the need to judiciously manage our resources while concurrently testingfocusing on a smallfinite number of high probability sales strategies.strategies with the highest possible likelihood of success. We are confident that our products can compete very effectively in the marketplace from a technology and value perspective. Our challenge is to ensure that awareness of our products is growing.for our company based upon royalties paid to us by others for the use of some or all of our patents in third party products. We have also focusedbelieve that a small portionfavorable outcome in the Kensington matter described in Note 12 of our researchPart I, Item 1 of this report, would likely ensure such a revenue stream. Such a favorable outcome cannot be guaranteed and development work aroundbased upon the useexisting trial date of our patent portfolio toward creating additional products and revenue streams.increaseddecreased our retained earningsaccumulated deficit by $1.4 million based on the elimination of net liabilities. A positive outcome in our ongoing litigation with Chicony and Kensington, described in Note 12 of Part I, Item 1 of this Form 10-Q,report, if such an outcome were realized, could not only increasereduce our retained earnings,accumulated deficit, but could also provide us with a cash infusion.Form 10-Q,report, there have been no significant changes during the three and sixnine months ended JulyOctober 31, 2012 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the fiscal year ended January 31, 2012. Three Months Ended
July 31, Six Months Ended
July 31, Year over Year
% Change 2012 2011 2012 2011 Three
Months Six
Months $ 1,681 $ 1,926 $ 3,883 $ 4,876 (13 %) (20 %) $ 207 $ (1,895 ) $ (504 ) $ (3,169 ) $ 151 $ (1,910 ) $ (561 ) $ (3,173 ) 2012 2011 2012 2011 $ 1,135 $ 2,252 $ 5,018 $ 7,128 (50 %) (30 %) $ (1,337 ) $ (734 ) $ (1,841 ) $ (3,903 ) Net loss from continuing operations $ (2,244 ) $ (760 ) $ (2,805 ) $ (3,933 ) Three Months Ended
July 31, Six Months Ended
July 31, Year over Year
% Change 2012 2011 2012 2011 Three
Months Six
Months $ 4 $ 303 $ 45 $ 1,715 (99 %) (97 %) 3 4 8 14 (25 %) (43 %) 1,674 1,619 3,830 3,147 3 % 22 % $ 1,681 $ 1,926 $ 3,883 $ 4,876 2012 2011 2012 2011 Revenue: $ 11 $ 362 $ 57 $ 2,078 (97 %) (97 %) 5 22 13 35 (77 %) (63 %) 1,119 1,868 4,948 5,015 (40 %) (1 %) $ 1,135 $ 2,252 $ 5,018 $ 7,128 Three Months Ended
July 31, Six Months Ended
July 31, Year over Year
% Change 2012 2011 2012 2011 Three
Months Six
Months % of
Revenue % of
Revenue % of
Revenue % of
Revenue 15 1 % 314 16 % 67 2 % 685 14 % (95 %) (90 %) 1,657 99 % 1,593 83 % 3,793 97 % 2,947 61 % 4 % 29 % — — — — — — 1,174 24 % — (100 %) 9 — 19 1 % 23 1 % 70 1 % (58 %) (67 %) $ 1,681 100 % $ 1,926 100 % $ 3,883 100 % $ 4,876 100 % (13 %) (20 %) 2012 2011 2012 2011 Three Months % of Revenue % of Revenue % of Revenue % of Revenue Revenue: $ — — $ 376 17 % $ 67 1 % $ 1,061 15 % (100 %) (94 %) 1,119 99 % 1,826 81 % 4,913 98 % 4,773 67 % (39 %) 3 % Targus — — — — — — 1,174 16 % — (100 %) 16 1 % 50 2 % 38 1 % 120 2 % (68 %) (68 %) $ 1,135 100 % $ 2,252 100 % $ 5,018 100 % $ 7,128 100 % (50 %) (30 %) sixnine months ended JulyOctober 31, 2012 decreased by $0.2$1.1 million, or 1350 percent, and $1.0$2.1 million, or 2030 percent, respectively, compared to the corresponding periods of fiscal 2012. Revenue from product sales to Lenovo increased during the three and six months ended July 31, 2012, compared to the corresponding periods of the prior fiscal year, due in part to filling a backlog created by a supply chain disruption that occurred in the fourth quarter of fiscal 2012. Revenue from shipments to Dell decreased $0.3 million or 95 percent and $0.6 million or 90 percent, respectively, during the three and six months ended July 31, 2012. As previously discussed, we decidedelected to exit the Dell business due to low sales volumes and thin product margins. Revenue from shipments to Dell decreased $0.4 million or 100 percent and $1.0 million or 94 percent, respectively, during the three and nine months ended October 31, 2012. We completed the wind down of our Dell business relationship in May 2012. In March 2009,Additionally, revenue to Lenovo decreased during the Company entered intothree months ended October 31, 2012 by $0.7, compared to the corresponding period of the prior fiscal year. The decrease was due, primarily, to a drop in Lenovo’s business customer demand for the quarter. At present, we have no way to know whether this decline in demand is unique to this quarter or part of a longer term trend. Finally, we received no revenue from Targus during the first three quarters of fiscal 2013 and do not expect any revenues from Targus in the future. As previously discussed, on January 25, 2011, we received written notification from Targus of its non-renewal of the Strategic Product Development and Supply Agreement with Targus Group, International, Inc. (“Targus”). The Company began shipments to Targus under that Agreement during the second quarter of fiscal 2010. However, on January 25, 2011, Targus notified the Company that it would not renew that Agreement. Consequently, revenue from the Targus relationship ceased during the second quarter of fiscal 2012.(in Three Months Ended
July 31, Six Months Ended
July 31, Year over Year
% Change 2012 2011 2012 2011 Three
Months Six
Months % of
Total % of
Total % of
Total % of
Total $ 1,157 (911 %) $ 1,187 53 % $ 2,649 152 % $ 2,667 53 % (3 %) 1 % — — — — — — 350 7 % — (100 %) (1,443 ) 1,136 % 383 17 % (1,443 ) (83 %) 383 8 % (477 %) (477 %) 222 (175 %) 608 27 % 464 27 % 1,031 21 % (63 %) (55 %) (63 ) 50 % 54 3 % 72 4 % 575 11 % (217 %) (87 %) $ (127 ) 100 % $ 2,232 100 % $ 1,742 100 % $ 5,006 100 % (106 %) (65 %) Three Months Ended
July 31, Six Months Ended
July 31, Year over Year
ppt Change 2012 2011 2012 2011 Three
Months Six
Months 108 % (16 %) 55 % (3 %) 124 58 2012 2011 2012 2011 Three Months % of Total % of Total % of Total % of Total Cost of revenue: $ 770 83 % $ 1,385 72 % $ 3,420 128 % $ 4,052 58 % (44 %) (16 %) — — (103 ) (5 %) — — 247 4 % (100 %) (100 %) — — — — (1,443 ) (54 %) 383 6 % — (477 %) 147 16 % 422 22 % 611 23 % 1,453 21 % (65 %) (58 %) 12 1 % 222 11 % 84 3 % 797 11 % (95 %) (89 %) $ 929 100 % $ 1,926 100 % $ 2,672 100 % $ 6,932 100 % (52 %) (62 %) 2012 2011 2012 2011 18 % 14 % 47 % 3 % 4 44 sixnine months ended JulyOctober 31, 2012 decreased by $2.4$1.0 million, or 10652 percent, and $3.2$4.3 million, or 6562 percent, respectively, compared to the corresponding periods of fiscal 2012. Although the product cost has changed slightly, theThe decrease in total cost of revenueproduct costs is primarily caused by other cost of revenue components. Although revenue decreased by $1.0 million, or 20 percent,attributable to the decreases in sales for the sixthree and nine months ended JulyOctober 31, 2012 compared to the correspondingcomparable prior year period, the product costs remained flat. This is due to the fact thatperiods. During the first quarter of fiscal 2012, included approximately $0.9 millionwe recorded an additional accrual of $350,000 for the recall of our Bronx product, however $103,000 of that amount was recovered in revenuethe third quarter due to a payment received from Targus for whichpursuant to a settlement agreement executed between Targus and us resolving all matters related to the corresponding product cost had been recordedrecall. No similar costs were incurred in prior periods.the comparable periods of the current fiscal year. During the three months ended July 31, 2012second quarter of fiscal 2013 we entered a Settlement Agreement with EDAC Power Electronics, Co. Ltd. (“EDAC”) ending the litigation among the parties. As a direct result of the settlement, the Company recoveredreversed previously incurred product and freight costs and reverseddischarged $1.4 million in net liabilities due to EDAC. DuringAdditionally, during the three months ended July 31, 2011second quarter of fiscal 2012 we accrued a charge of $380,000 relating to a settlement reached with a supplier relating primarily to inventory purchase commitments made to support the Targus business. During the six months ended July 31, 2011, we recorded an additional accrual of $350,000 for our product Recall. No similar costs were incurred in the comparable periods of the current fiscal year. sixnine months ended JulyOctober 31, 2012, our fixed supply chain overhead costs decreased by $0.4$0.3 million and $0.6$0.8 million or 6365 percent and 5558 percent, respectively, when compared to the fixed supply chain overhead costs in the comparable prior year periods. These decreases were the result of continued cost cutting relating to personnel and other expenses. The inventory and reserve charges for the three and nine months ended October 31, 2012 relate primarily to slow-moving inventory, which amounts are within management’s expectations. During the first quarter of fiscal 2012 we incurred scrap charges of $0.5 million relating to Manhattan product components that we procured from a supplier during the first quarter of fiscal 2012. The Manhattan product was previously sold to Targus and we have scrappedreserved for those components that could only be used in that product. We did not incur any similar charges duringDuring the comparable periodsthird quarter of fiscal 2013. Three Months Ended
July 31, Six Months Ended
July 31, Year over Year
% Change 2012 2011 2012 2011 Three
Months Six
Months % of
Revenue % of
Revenue % of
Revenue % of
Revenue $ 45 2 % $ 289 15 % $ 110 3 % $ 462 9 % (84 %) (76 %) 852 51 % 825 43 % 1,291 33 % 1,603 33 % 3 % (19 %) 703 42 % 475 25 % 1,244 32 % 974 20 % 48 % 28 % $ 1,600 95 % $ 1,589 83 % $ 2,645 68 % $ 3,039 62 % 1 % (13 %) 2012 2011 2012 2011 Three Months Operating expenses: SG&A expenses, excluding corporate overhead $ 80 7 % $ 140 6 % $ 190 4 % $ 602 8 % (43 %) (68 %) 823 73 % 423 19 % 2,113 42 % 2,026 28 % 95 % 4 % Engineering and support expenses 640 56 % 497 22 % 1,884 38 % 1,471 21 % 29 % 28 % $ 1,543 136 % $ 1,060 47 % $ 4,187 84 % $ 4,099 57 % 46 % 2 % sixnine months ended JulyOctober 31, 2012 decreased $0.2 million,$60,000 or 8443 percent and $0.4 million or 7668 percent, respectively, compared to the corresponding periods of fiscal 2012. In the prior fiscal year, through August 2011, we had an executive serving in the sales and marketing capacity. We currently have no employees in our sales and marketing departments, but instead utilize various consultants who are focused on digital media and search engine optimization to assist us with generation of sales on our retail websitewww.chargesource.com, which was launched in the fourth quarter of fiscal 2012. Additionally, in the third quarter of fiscal 2013 we engaged a marketing firm to address marketing and branding strategies of our ChargeSource product portfolio.remained flatincreased by $0.4 million and decreased $0.3by $0.1 million for the three and sixnine months ended JulyOctober 31, 2012, respectively, when compared to the corresponding periods of the prior fiscal year. The decreasesincreases in the current year relatesrelate primarily to a reductionan increase in legal fees and other costs relating to public company matters, partially offset by increased legal fees relatingexpenses related to the Chicony litigation.sixnine months ended JulyOctober 31, 2012 increased $0.2by $0.1 million or 4829 percent and $0.3by $0.4 million or 28 percent respectively. The increase in the current yearrespectively, due primarily relates to increased legal fees relating to the Kensington litigation and other patent infringement matters. These increases account for $0.4The legal fees increased $0.1 million and $0.6$0.7 million for the three and sixnine months ended JulyOctober 31, 2012, respectively, compared to the legal fees incurred in the comparable periods of the prior fiscal year. Offsetting these increase areThe increased legal fees for the nine months ended October 31, 2012 were partially, but not entirely, offset by decreases in the current fiscal year personnel costs, rent and occupancy costs and testing and certification fees, which variesvary with the timing of new product development.Other Income (loss),Other income (loss),anyinterest income, earned on invested cash balances.if any. For the three and six months ended JulyOctober 31, 2012, and 2011, interest income was negligible. Loanwe incurred approximately $0.5 million in amortization of the loan discount. Additionally, for the nine months ended October 31, 2012, loan fees totaling $55,000 related to our Loan Agreement with Broadwood were expensed as incurred. For the three and nine months ended October 31, 2011, interest income totaled $0 and $2,000, respectively. Interest expense and loan fee expenses related to our prior credit facility withprevious Silicon Valley Bank (“SVB”) credit facility totaled $13,000$26,000 and $38,000$65,000 for the three and sixnine months ended JulyOctober 31, 2011. first quarter of fiscal 2012, we received a payment of $34,000, representing the final payment related to our investment in SwissQual, which was sold in fiscal 2006.During the third and fourth quarter of fiscal 2013, we expect to incur interest expense related to our Loan Agreement with Broadwood of approximately $25,000 per quarter.$25,000. Additionally, during the third and fourth quarter of fiscal 2013 we expect to amortize the loan discount using the effective interest method, and consequently incur other non-cash expenses of approximately $0.5$0.9 million.and $0.9 million, respectively.Expensesixnine months of fiscal 2013, the adjusted net deferred tax assets remain fully reserved as of JulyOctober 31, 2012.–- Wireless Test Solutions (“WTS”)The fiscal 2012 year to daterelates toduring the nine months ended October 31, 2012 as a result of a sales tax audit performed by the California State Board of Equalization during the second quarter of fiscal 2012.2012, which resulted in a tax assessment in connection with our sale of WTS. The expensed amount represents the portion of the tax assessment that iswas required to be bornepaid by Comarco for the sale of the WTS business to Ascom and weComarco. We do not expect to incur any future costs related to the sale of the WTS business.JulyOctober 31, 2012 increased $0.7decreased $0.3 million to $1.6$0.6 million as compared to $0.9 million at January 31, 2012. That increase was attributable to the Broadwood Loan that we obtained on July 27, 2012. The following table is a summary of our Condensed Consolidated Statementscondensed consolidated statements of Cash Flows. Six Months Ended July 31, 2012 2011 (in thousands) $ (1,249 ) $ (3,724 ) (40 ) (48 ) 2,000 (1,053 ) Nine Months Ended October 31, 2012 2011 (in thousands) Cash provided by (used in): $ (2,296 ) $ (4,871 ) $ (52 ) $ (162 ) $ 2,000 $ (1,053 ) operating activitiesoperation was $1.2$2.3 million for the sixnine months ended JulyOctober 31, 2012 and was driven by our net loss from continuing operations of $0.6$2.8 million offset by non-cash amortization of the Broadwood loan discount of $0.5 million, an increase in the fair value of derivative liabilities of $0.4 million and stock-based compensation expense of $0.1 million. Additionally, we had a non-cash settlement with EDAC crediting our cost of revenue in the second quarteramount of fiscal 2013 we entered a Settlement Agreement with EDAC Power Electronics, Co. Ltd. (“EDAC”) ending the litigation among the parties. As a direct result of the settlement, the Company reversed $1.4 million in net liabilities relating to inventory due to EDAC, which represents a non-cash gain included in our net loss from continuing operations. Our combined receivables increasedand total receivable increases of $0.8 million, offset by $1.1increases totaling $1.8 million for the six months ended July 31, 2012. Offsetting these uses of cash, on a combined basis ourin accounts payable and accrued liabilities, excluding the EDAC settlement described above, increased by $1.8 million.$3.7$4.9 million for the sixnine months ended JulyOctober 31, 2011 and was driven by our net loss from continuing operations of $3.2$3.9 million offset by non-cash depreciation and stock-based compensation expense of $0.5 million. On a combined basis, our accounts payable and accrued liabilities decreased $2.0$2.9 million during the sixnine months ended JulyOctober 31, 2011. Offsetting these uses of cash, we collected a net $1.5$1.2 million in accounts receivable.sixnine months ended JulyOctober 31, 2012, we purchased $62,000 of property and equipment, primarily tooling and equipment used for the manufacture of our ChargeSource® products, and we reduced our cash collateralized for credit card chargebacks associated with our internet website by $10,000.$40,000 and $48,000, respectively,$71,000 of property and equipment, which was primarily tooling and equipment used for the manufacture of our ChargeSource®ChargeSource® products.other loss,interest expense, net in our condensed consolidated statement of operations for the three and sixnine months ended JulyOctober 31, 2012.“Loan“SVB Agreement”) with Silicon Valley Bank (“SVB”).SVB. The LoanSVB Agreement was renewed on February 8, 2010 and again on February 9, 2011 and originally matured, on February 9, 2012, at which time, any outstanding principal balance was to be paid in full.LoanSVB Agreement and we incurred $53,000 in loan origination fees relating to its renewal. On September 15, 2011, we received a letter from SVB terminating the LoanSVB Agreement effective September 22, 2011.JulyOctober 31, 2012, we had negative working capital of approximately $2.0$4.2 million. During the third quarter of fiscal 2013 the Company’s cash balance declined by approximately $1.1 million. Approximately $0.6 million of the decline related to the ongoing litigation described in Note 12 and approximately $0.1 million related to legal expenses associated with the loan and related agreements described in Note 11 and other public company legal counsel. In order for us to continue our operations for the next twelve months and to be able to discharge our liabilities and commitments in the normal course of business, we mustit will be necessary for us to increase sales, reduceeffectively manage operating expenses, and potentially raise additional funds, through either debt and/or equity financing to meet our cash requirements during the next twelve months. No assurance can be given, however, that we will be successful in meeting those operating objectives or cash requirements.Concurrently •·Our continued relationship with our primary customer Lenovo (representing 98% of our total revenues for the nine months ended October 31, 2012); ChargeSource®ChargeSource® products generated from our recently launched websitewww.chargesource.com;The outcome of litigation with our contract manufacturer of the Bronx product, the subject of a product recall;Our ability to raise additional debt or equity financing; and· The cost and outcome of ongoing litigation with our contract manufacturer of the Bronx product, the subject of a product recall, and with Kensington, the maker of competitive power adapters; The ability of our contract manufacturers of our products to manufacture our products at the level currently anticipated, and the ability of our products to meet any required specifications.· Our ability to raise additional debt or equity financing; and · The ability of our contract manufacturers to manufacture our products at the level currently anticipated, and the ability of our products to meet any required specifications. We cannotHowever, there can be certainno assurance that anythe additional financing we will need will be available on terms acceptable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of opportunities, develop new products or sales avenues or otherwise respond to competitive pressures, and our operating results and financial condition could be adversely affected.affected and we may not be able to continue as a going concern. In fiscal 2012, we notified approximately 11 companies, including 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. We intend to aggressively protect our intellectual property and are vigorously pursuing all potential infringers. Our patent infringementenforcement efforts are ongoingcurrently focused primarily on the Kensington litigation and the outcomesoutcome of these efforts arethis litigation is not determinable.ITEM 4.CONTROLS AND PROCEDURESJulyOctober 31, 2012, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). “Internal control over financial reporting” includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and (3) JulyOctober 31, 2012, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Our management’s finding of ineffective internal control over financial reporting results primarily from a lack of sufficient accounting and information technology staff which results in a lack of segregation of duties necessary for an appropriate system of internal controls. While the lack of effective internal control over financial reporting during the fiscal quarter ended JulyOctober 31, 2012 did not result in any particular deficiency in our financial reporting for the fiscal quarter then ended, management believes that the lack of effectiveness of our internal control over financial reporting could result in a failure to provide reliable financial reporting in the future. In order to remedy our existing internal control deficiency, we will need raise additional capital or improve our working capital position to allow us to hire additional staff.JulyOctober 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.offor 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 caused by Chicony’sattributable to Chicony's failure to adhere to our technical specifications when manufacturing the Bronx product, which we believe resulted in the recall of the product. The trial date is currently set for March 11,April 8, 2013. The outcome of this matter is not determinable as of the date of the filing of this report.mademanufactured 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. Currently, the trial date is scheduled for April, 2014. This matter is ongoing and the outcome is not determinable.determinable as of the date of filing this report.AlthoughWe are unable to predict the outcome of legal proceedings is inherently uncertain, we believe that theultimate outcome of all such legal proceedings will not in the aggregate have a material adverse effect on its consolidated results of operations and financial position.matters.including those previouslywhich are disclosed under Part I.in Item 1A, entitled “Risk Factors” in Part I of our annual report on Form2012 10-K for the fiscal year ended January 31, 2012 as well as any amendments thereto or additions and changes thereto contained in this quarterly report on Form 10-Q for the quarter ended October 31, 2012. Additional information regarding some of those risks and any subsequent filingsuncertainties is contained in the notes to the condensed consolidated financial statements included elsewhere in this report and in Item 2, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I of this report. The risks and uncertainties disclosed in our 2012 10-K and in our quarterly reports on Form 10-Q. The disclosures in our annual report on Form 10-K, this quarterly report on Form 10-Q and our subsequent reports and filings are not necessarily a definitive listall of all factorsthe risks and uncertainties that may affect our business, financial condition and future results of operations. operations in the future.annual reportoperations and without it we will not be able to continue operations.Form 10-Kreasonable terms when we require it, if at all, the consequences could result in a material adverse effect on our business, operating results, financial condition and prospects. If we cannot raise operating capital, we may be forced to cease operations.fiscal year ended January 31, 2012.Exhibit Description 3.2Amended and Restated By-Laws, as amended through July 28, 2012, filed herewith 10.14Form of Comarco, Inc. Indemnification Agreement for Officers and Directors, filed herewith31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS* *XBRL Instance Document 101.SCH* *XBRL Taxonomy Extension Schema Document 101.CAL* *XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* *Linkbase Document101.LAB* *XBRL Taxonomy Extension Label Linkbase Document 101.PRE* *XBRL Taxonomy Extension Presentation Linkbase Document * *XBRL (Extension Business Reporting Language)The XBRL–related information is furnished and filed or a part of a registration statement or prospectusin Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 andor otherwise is not subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under these sections.the Securities Exchange Act of 1933 or the Securities Exchange Act of 1934.COMARCO, INC. COMARCO, INC.Date: SeptemberDecember 14, 2012 /s/ Thomas W. Lanni /s/ THOMAS W. LANNI Thomas W. Lanni President and Chief Executive Officer (Principal Executive Officer) Date: SeptemberDecember 14, 2012 /s/ Alisha K. Charlton /s/ ALISHA K. CHARLTON Alisha K. Charlton Vice President and Chief Accounting Officer (Principal Financial and Accounting Officer) Exhibit Description ExhibitDescription 3.2Amended and Restated By-Laws, as amended through July 28, 2012, filed herewith 10.14Form of Comarco, Inc. Indemnification Agreement for Officers and Directors, filed herewith31.1 Certification of PrincipalChief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 Certification of PrincipalChief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 Certification of PrincipalChief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2 Certification of PrincipalChief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101.INS* *XBRL Instance Document 101.SCH* *XBRL Taxonomy Extension Schema Document 101.CAL* *XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* *Linkbase Document101.LAB* *XBRL Taxonomy Extension Label Linkbase Document 101.PRE* *XBRL Taxonomy Extension Presentation Linkbase Document * *XBRL (Extension Business Reporting Language)The XBRL–related information is furnished and filed or a part of a registration statement or prospectusin Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 andor otherwise is not subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under these sections.the Securities Exchange Act of 1933 or the Securities Exchange Act of 1934.34