Transactions and other information related to restricted stock units (“RSU’s”) granted under these plans for the threesix months ended April 30,July 31, 2013 are summarized below:

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

The RSU’s canceled or expired in the table above represent the difference between the number of shares awarded and the number issued because the recipient elected a net award to cover personal income taxes.

As of July 31, 2013, the stock awards outstanding have no aggregate intrinsic value, based on a closing market price of $0.19 per share on July 31, 2013. The following table summarizes information about the Company’s stock awards (consisting of stock options and RSU’s) outstanding at April 30,July 31, 2013:

At April 30,July 31, 2013, shares available for future grants under the Plans were 455,224.

4.             Loss5.             Earnings (Loss) Per Share

The Company calculates basic lossearnings (loss) per share by dividing net lossincome (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share reflects the effects of potentially dilutive securities. Since the Company incurred a net loss for each of the three and six months ended April 30,July 31, 2013 and the six months ended July 31, 2012, basic and diluted net loss per share for both suchthose periods were the same because the inclusion of 1,068,826 and of 847,151 potentially dilutive securitiespotential common shares related to outstanding stock awards respectively,in the calculation would have been antidilutive.

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Potential common shares of 768,826 relating to outstanding stock awards to directors and employees have been excluded from diluted weighted average common shares for the three and six months ended July 31, 2013, as the effect would have been antidilutive. Additionally, for the three and six months ended April 30,July 31, 2013 the 1,704,546 outstanding warrants issued to Broadwood and the 6,000,000 potential shares issuable to Elkhorn upon debt conversion, would have been anti-dilutive. Similarly, potential common shares of 330,000 relating to outstanding stock awards to directors and employees have been excluded from diluted weighted average common shares for the six months ended July 31, 2012, as the effect would have been antidilutive.

The following table presents reconciliations of the numerators and denominators of 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):

5.6.             Customer and Supplier Concentrations

Substantially all of the Company’s revenue is derived from a single customer, Lenovo.As discussed in Note 2 above, Lenovo has notified us of their intention to cease offering Comarco’s product to its customers. We currently estimate that we will ship the approximately 25,000 remaining units to Lenovo during our third fiscal quarter, after which we do not expect to receive any further orders or revenue from Lenovo. The loss of lenovo wouldLenovo will have a material adverse impact on our future revenues and results of operations.

The customers providing 10 percent or more of the Company’s revenuesrevenue for either quarter ended April 30, 2013 or 2012any of the periods presented below are listed below (in thousands).here:

The Company’s revenues by geographic area, as determined by the “ship to” address, consisted of the following (in thousands):

The customers comprising 10 percent or more of the Company’s gross accounts receivable due from customers at either April 30, 2012July 31, 2013 or January 31, 20122013 are listed below (in thousands).:

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

The suppliers comprising 10 percent or more of the Company’s gross accounts receivable due from suppliers at either April 30,July 31, 2013 or January 31, 2013 are listed below (in thousands).

The decrease in the receivables due from Power Systems Technologies, Inc. (“Power,” formerly Flextronics Electronics) is driven an increased frequency in payment which has caused a drop in the receivable balance as of July 31, 2013.

Zheng Ge Electrical Co., Ltd. (“Zheng Ge”) was a tip supplier forone of our prior product offerings (referred to as the Bronx product,product), which was subject to a recall announced in Aprilduring 2010. We previously sourced some of the component parts that Zheng Ge used in the manufacture of the tips. We ceased paying Zheng Ge during the course of the product recall while we investigated the manufacturing defect which ultimately caused the recall and, likewise, Zheng Ge ceased paying us.

We expect to fully collect the accounts receivable balances as of April 30,July 31, 2013 due from Power in the normal course of business. Additionally, weand expect to offset the receivables due from Zheng Ge from amounts owed, which are included in accrued liabilities in our 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”).

The supplierscompanies comprising 10 percent or more of the Company’sour gross accounts payable at either April 30,July 31, 2013 or January 31, 2013 are listed below (in thousands)thousands, except percentages).

Chicony was the manufacturer of the Bronx product, which was subject to a recall during 2010 and we are currently in litigation with Chicony (see Note 10)11). We have made no payments to Chiconythis supplier during either fiscal 2014 or fiscal 2013. The outcome of such litigation is not determinable at this time and we do not know whether or not we will be obligated to pay this liability. If we prevail in this case, based upon our causes of action, it is likely we will be relieved of this liability.

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

There is no assurance, however, as to the outcome of this litigation (see Note 11)

Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”) iswas our former legal counsel for the Kensington litigation as well as other patent and intellectual property matters (See Note 10)11). We have made no payments to Pillsbury during fiscal 2014.

A significant portion of our inventory purchases is derived from a limited number of contract manufacturers (“CM’s”) and other suppliers. The loss of one or more of our significant CM’s or suppliers could materially adversely affect our operations. For the three and six months ended April 30,July 31, 2013 two suppliers accounted for approximately $0.4 million or 42four of our CM’s provided an aggregate of 80 and 66 percent, respectively, of the total product costs of $1.0 million recorded in cost of revenue.costs. For the three and six months ended April 30,July 31, 2012 three suppliers accounted for approximately $654,000 or 44of our CM’s provided an aggregate of 61 and 49 percent, respectively, of total product costs. During fiscal 2013, we began procuring all of the totalcomponents included in the bill of materials for the product costs of $1.5 million recorded in cost of revenue.we sell to Lenovo. Prior to fiscal 2013, we procured the finished good directly from Power and they were responsible for procuring the components.

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6.7.             Inventory

Inventory, net of reserves, consists of the following (in thousands):

As of April 30,July 31, 2013 and January 31, 2013, approximately $596,000$780,000 and $720,000 of total gross inventory, respectively, was located at our corporate headquarters. The remaining balance is currently located at various contract manufacturer locations in the United States and Asia and at variousa third party inventory warehouseswarehouse for our customer, Lenovo.

7.8.             Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

At April 30,July 31, 2013, approximately $1.5$0.8 million or 8472 percent of total uninvoiced materials and services of $1.8$1.1 million, included in accrued liabilities, were payable to Power, Shenzhen Teamspower Electronics Company and Zheng Ge. At January 31, 2013, approximately $1.1 million or 85 percent of total uninvoiced materials and services of $1.3 million, included in accrued liabilities, were payable to Power and Zheng Ge. We ceased paying Zheng Ge during the course of the Bronx product recall.recall (see Note 6).

8.9.             Loan & Related Agreements

As previously reported, on February 11, 2013, the Company and Elkhorn Partners Limited Partnership (“Elkhorn”), entered into a Secured Loan Agreement (the “Elkhorn Loan Agreement”) and a Stock Purchase Agreement (the “Elkhorn SPA”), and certain related agreements, which are described below (collectively, the “Elkhorn Agreements”). Pursuant to those Agreements, Elkhorn has made a $1.5 million senior secured loan to the Company with a maturity date of November 30, 2014 and has purchased a total of 6,250,000 shares of the Company’s common stock at a cash purchase price of $0.16 per share, generating an additional $1.0 million of cash for the Company. The average of the closing prices of the Company’s common stock in the over-the-counter market for the five trading days immediately preceding February 11, 2013 was $0.14 per share and, for the 29 trading days that began on January 2, 2013 and ended on February 8, 2013, was $0.158 per share. On February 11, 2013, the Company 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 the Broadwood Loan.

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Secured Loan Agreement with Elkhorn Partners.

The Elkhorn Loan, which is evidenced by a promissory note (the “Elkhorn Note”), issued by the Company to Elkhorn, bears interest at 7% for the first 12 months of the Loan, increasing to 8.5% thereafter and continuing until the Loan is paid in full. The Loan matures on November 30, 2014 (the “Maturity Date”); however, the Company has the right, at its option, to prepay the Elkhorn Loan, in whole or in part, without penalty or premium.

The Elkhorn Loan Agreement provides that if and to the extent the Company does not pay the Elkhorn Loan in full by its Maturity Date, 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, as provided in Article III of the Elkhorn Loan Agreement. This conversion feature creates a derivative liability that is described in Note 10.

The Elkhorn Loan Agreement contains customary representations and warranties of and affirmative and negative covenants on the part of the Company and CWT. The Agreement also provides that the Elkhorn Loan, together with accrued interest, will become immediately due and payable upon the occurrence of an Event of Default, which is defined in the Loan Agreement to include each of the following, among others: (i) a failure of the Company to pay the principal of or accrued interest on the Loan which continues unremedied for three calendar days (except that such grace period shall not apply to amounts due at the Maturity Date of the Loan), (ii) the Company or CWT commits a breach of any of their other material obligations under the Loan Agreement or under any of the Debt Related Agreements (described below) and the breach which remains uncured for a period ranging from 15 days to 30 days (depending on the nature of the breach) following receipt of notice of the breach from Elkhorn; (iii) any of the representations or warranties of the Company or CWT contained in the Loan Agreement prove to have been untrue or incorrect in any material respect, (iv) the Company or CWT fails to pay indebtedness, as such term is defined in the Elkhorn Loan Agreement, in the amount of $200,000 or more owed to any other creditor, (v) one or more judgments are entered against the Company or CWT in an aggregate amount of $200,000 or more, which are not satisfied, discharged, stayed or bonded against within the succeeding 30 days, and (vi) the filing by the Company of a voluntary petition in bankruptcy or the Company’s failure to obtain the dismissal, within 60 days, of an involuntary petition filed against it in bankruptcy, or a receiver or liquidator is appointed over, or an attachment is issued against a substantial part of the assets of the Company or CWT, which in either case remains undismissed for the succeeding thirty (30) days.

Upon the occurrence and during the continuance of an Event of Default, interest on the Loan will accrue at the lesser of (i) 15% per annum or (ii) the highest rate permitted by applicable law.

Debt Related Agreements. In connection with the Elkhorn Loan Agreement, the Company and CWT entered into a Security Agreement and the Company entered into a Pledge Agreement (collectively, the “Debt Related Agreements”) with Elkhorn to secure the payment and performance by the Company and CWT of their respective obligations under the Loan Agreement and the Debt Related Agreements. Set forth below is a summary of those Agreements.

Security Agreement. As security for the performance of their respective obligations under the Elkhorn Loan Agreement and the Debt Related Agreements, the Company and CWT have entered into a security agreement (the “Security Agreement”) granting Elkhorn a first priority perfected security interest in all of their assets, including their intellectual property rights. The Security Agreement provides that, on the occurrence and during the continuance of an Event of Default, whether by the Company or CWT, Elkhorn will become entitled to take possession of and to sell the assets of the Company and CWT to the extent necessary to recover the amounts due Elkhorn under the Loan Agreement and any other amounts that may be due and payable to Elkhorn under any of the Debt Related Agreements.

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Pledge Agreement. As additional security for the payment and performance of its obligations under the Elkhorn Loan Agreement, the Company has entered into a Pledge Agreement (the “Pledge Agreement”) pursuant to which it has pledged and will deliver possession to Elkhorn of all of CWT’s outstanding shares. The Pledge Agreement provides, among other things, that upon the occurrence and during the continuance of an Event of Default, Elkhorn will become entitled to transfer the CWT shares into its name, to vote those shares and, subject to applicable securities laws, to sell those shares in order to recover amounts owed to it by the Company.

Elkhorn Stock Purchase Agreement

Concurrently with the Company’s entry into the Loan Agreement, the Company and Elkhorn entered into the Elkhorn SPA. Pursuant to that Agreement, the Company sold 6,250,000 shares of its common stock to Elkhorn at a price of $0.16 per share, resulting in an aggregate purchase price of $1.0 million. As noted above, that purchase price compares to an average per share closing price for Comarco’s shares of $0.14 during the five trading days immediately preceding the sale of the shares to Elkhorn, and an average per share closing price of $0.158 for the 29 trading days that that began on January 1, 2013 and ended on February 8, 2013.

The purchase price of $0.16 per share paid by Elkhorn for those shares was determined by arms-length negotiations between Elkhorn and the members of a special committee of the Company’s Board of Directors, comprised of three of the directors who have no affiliation with Elkhorn and no financial interest, other than their interests solely as shareholders of the Company, in either the loan or share transactions with Elkhorn. That per share purchase price was determined based on a number of factors, including the Company’s inability, notwithstanding its best efforts, to raise additional capital from other prospective institutional investors during the six month term of the Broadwood Loan and the recent trading prices of the Company’s shares in the over-the-counter market.

Senior Secured Six Month Term Loan Agreement with Broadwood Partners L.P. (“Broadwood”)

The Company entered into a Senior Secured Six Month Term Loan Agreement dated July 27, 2012 (the “Loan Agreement”) with Broadwood, a significant shareholder of the Company.

Pursuant to that Agreement, Broadwood made a $2,000,000 senior secured six month loan (the “Loan”) to the Company and to CWT, as co-borrower. The loan bore interest at 5% per annum, ranked senior in right of payment to all other indebtedness of the Company and was due and payable in full on January 28, 2013. The Company originally intended to repay the Loan and accrued interest from the $3.0 million in proceeds that was expected to be received from Broadwood in the fourth quarter of fiscal 2013, pursuant to the Broadwood Stock Purchase Agreement (“Broadwood SPA”). As consideration for the Loan and Broadwood’s entry into the SPA, on July 27, 2012 the Company issued stock purchase warrants (the “Warrants”) to Broadwood entitling it to purchase up to a total of 1,704,546 shares of the Company’s common stock (the “Warrant Shares”), at a price of $1.00 per Warrant Share, at any time through July 2020.

On January 28, 2013, the maturity date of the loan, the Company was informed by Broadwood, 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 Broadwood SPA had not been satisfied and, as a result, Broadwood would not consummate that purchase and, therefore, the Company would have to repay the loan in cash. The Company’s position is 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 Company common stock, at the price of $1.00 per share, constituted a material breach by Broadwood of its obligations under the Broadwood SPA. As a result, as of the date of filing this report, the Company has not issued any of the 1,000,000 Additional Warrant Shares to Broadwood and each party has reserved its rights under and with respect to the Broadwood SPA and the Broadwood Warrants.

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

During the first quarter of fiscal 2014, the Company repaid the amounts outstanding under the Broadwood Loan Agreement in full from the Elkhorn proceeds described above.

9.10.          Fair Value Measurements

We follow FASB ASC 820, "Fair Value Measurements and 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.

ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories. We measure the fair value of applicable financial and non-financial assets based on the following fair value hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.

The fair value of our recorded derivative liabilities is determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.

The hierarchy noted above requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. There were no transfers between Level 1, Level 2 and/or Level 3 during fiscal 2014. Our fair value measurements at the April 30,July 31, 2013 reporting date are classified based on the valuation technique level noted in the table below (in thousands):

The following outlines the significant weighted average assumptions used to estimate the fair value information presented, in connection with our outstanding and contingent warrants issued to Broadwood as described in Note 89 utilizing the Monte Carlo simulation model:

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

The following outlines the significant weighted average assumptions used to estimate the fair value information presented in connection with the derivative liabilities associated with our Elkhorn Loan as described in Note 89 utilizing the Monte Carlo simulation model:

The table below sets forth a summary of changes in the fair value of our Level 3 financial instruments since January 31, 2013 (in thousands):

10.11.          Commitments and Contingencies

Purchase Commitments with Suppliers

WeThe Company generally issueissues purchase orders to ourits suppliers with delivery dates from four to six weeks from the purchase order date. In addition, wethe Company regularly provideprovides significant suppliers with rolling six-month forecasts of material and finished goods requirements for planning and long-lead time parts procurement purposes only. We areThe Company is committed to accepting delivery of materials pursuant to ourits purchase orders subject to various contract provisions that allow usit to delay receipt of such order or allow usit to cancel orders beyond certain agreed lead times. Such cancellations may or may not include cancellation costs payable by us.the Company. In the past, we havethe Company has been required to take delivery of materials from ourits suppliers that were in excess of ourits requirements and we havethe Company has previously recognized charges and expenses related to such excess material. In the third quarter of fiscal 2014, we began the process of cancelling purchase orders beyond the forecasted unit volume contained in Lenovo’s rolling forecast upon the receipt of their notification that it will cease purchasing our product (see Note 2).

If we arethe Company is unable to adequately manage ourits suppliers and adjustcancel such commitments for changes in demand, webased upon Lenovo’s notification, it may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on ourthe Company’s business, consolidated results of operations, and financial position. Our fixed purchase commitments at June 3, 2013 totaled approximately $1.1 million.

Executive Severance CommitmentsAgreements

We haveThe Company has severance compensation agreements with certain of our key executives. These agreements require usthe Company to pay these executives, in the event of a terminationcertain terminations of employment following a change of control of the Company, or other circumstances,up to the amount of their then current annual base salary and the amount ofequal to any bonus amountwhich the executive would have achievedearned for the year in which the termination occurs plus the acceleration of unvested options. We have not recorded any liability in the consolidated financial statements for these agreements.

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Although the contemplated sale of shares of common stock and the issuance of the Warrants and possible issuance of the Additional Warrant Shares by the Company to Broadwood (See(see Note 8)9) could result in a change of 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 of control occurs as a result of the sale of shares and the issuance of Warrants and Additional Warrants to Broadwood.

COMARCO, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Additionally, as a result of the Company’s sale of the 6,250,000 shares of common stock to Elkhorn during the first quarter of fiscal 2014 (see Note 8)9), Elkhorn’s beneficial ownership of the Company has increased from approximately 9% to approximately 49% of the Company’s outstanding voting stock, making Elkhorn the Company’s largest shareholder and resulting in a change of control of 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 as a result of the change in Elkhorn’s beneficial ownership of the Company.

Letter of Credit

During the first quarter of fiscal 2010, the Company obtained a $77,000 letter of credit from Silicon 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.

Legal Proceedings and Contingencies

On April 26, 2011, Chicony, the contract manufacturer of the Bronx product that was the subject of a product recall in 2010, filed a complaint against us for breach of contract, seeking payment of $1.2 million for the alleged non-payment by us of amounts alleged by Chicony to be due it for products purchased from it by the Company.  We denied liability and filed a cross-complaint on May 13, 2011 seeking the recovery of damages of $4.9 million caused by Chicony's failure to adhere to our technical specifications when manufacturing the Bronx product, which we believe resulted in the recall of the product. On May 23, 2012, Chicony filed its First Amended Complaint increasing the payment it is seeking from $1.2 million to $1.7 million based on alleged component parts it purchased for the Bronx product, but was unable to use in any other products thereafter.On April 16, 2013, the court approved our first-amended cross-complaint, which adds intentional interference to our complaint and increases the damages we seek to at least $15.0 million. The trial date is currently set for October, 2013. In an effort to resolve this litigation before the previous trial date of April, 2013, we sent Chicony a settlement offer, which has since lapsed. During the fourth quarter of fiscal 2013, we received reimbursement of previously incurred legal fees in the amount of $0.4 million from our insurance carrier under a reservation of rights.

Subsequent to the end of the second quarter, on August 26, 2013, we entered into an agreement with our insurance carrier and received a one-time, lump-sum payment in exchange for a mutual release and the assumption of sole financial responsibility for any expenses related to this matter subsequent to August 31, 2013. 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.

On September 1, 2011, subsequent to receiving an infringement notification from us, 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 made and/or sold by Kensington. On February 29, 2012, we denied these claims and filed a cross-complaint alleging infringement by Kensington of each of these five patents. Efforts to resolve the dispute, by court ordered mediation, have been unsuccessful. Currently, theThe trial date is currently set for January,July, 2014. A number of these patents are currently the subject of re-examination proceedings initiated by Kensington or other third parties. 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. Conversely, should we prevail the Company may be awarded a royalty which would generate license revenue to the Company in the future.

On March 6, 2012, we filed a lawsuit against EDAC Power Electronics Co. Ltd (“EDAC”) for breach of contract seeking payment of $2.5 million for the failure to deliver goods ordered by us in the time, place, manner and price indicated by each purchase order. As previously reported, the parties entered into a Settlement Agreement on July 24, 2012, ending the litigation between the parties. The settlement involved no cash payments by either of the parties, but allowed us to recover 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.

In addition to the pending matters described above, we are, from time to time, involved in various legal proceedings incidental to the conduct of our business. We are unable to predict the ultimate outcome of these matters.

12. Subsequent Events

Management has evaluated events subsequent to July 31, 2013 through the date that the accompanying condensed consolidated financial statements were filed with the SEC for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

As previously announced in a Form 8-K filed with the SEC on August 22, 2013, Lenovo notified us of their intention to cease offering our Constellation product, the power adapter Comarco designed and developedfor Lenovo, to its corporate clients. We currently estimate that we will ship the approximately 25,000 remaining units to Lenovo during our third fiscal quarter. As a result of this decision by Lenovo, we anticipate that we will generate no or de minimus revenue subsequent to the delivery of these final unit sales. We have begun reducing and/or eliminating certain operating expenses to minimize future losses and cash burn. Additionally, we have begun the process of cancelling purchase orders beyond the forecasted unit volume contained in Lenovo’s rolling forecast upon the receipt of their notification. If we are unable to cancel such commitments based upon Lenovo’s notification, we may incur additional inventory expenses related to excess and obsolete inventory. As of the date of this filing we are unable to determine the amount, if any, of such excess and obsolete inventory.

As previously announced in a Form 8-K filed with the SEC on August 30, 2013, on August 26, 2013, we entered into an agreement (the “Agreement”) with our insurance carrier concerning their obligation to insure us in connection with our ongoing Chicony litigation.

In October 2012, our insurance carrier agreed to defend certain claims brought against us by Chicony, but did not agree to prosecute or pay for any claims we brought against Chicony. As a result, the defense of claims brought against us by Chicony have been handled by counsel appointed by our insurance carrier at their cost, with any claims we brought against Chicony handled by counsel appointed by us at our cost.

In July 2013, in response to our stated desire to have counsel appointed by us representing our consolidated interests across the entirety of our litigation with Chicony, we entered into discussions with our insurance carrier and subsequently entered into the Agreement as a means to achieve our desired representation goal.

Pursuant to the Agreement, our insurance carrier paid one hundred percent of our defense costs and fifty percent of our expert fees related to the Chicony litigation through August 31, 2013 and we received a one-time, lump-sum payment in exchange for a mutual release and the assumption of sole financial responsibility for any expenses related to our ongoing Chicony litigation subsequent to August 31, 2013.

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

Forward-Looking Statements

This report, including the following discussion and analysis, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.federal securities laws. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” 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 included in this report. Additionally, statements concerning future matters are forward-looking statements.

These forward-looking statements reflect current views about our plans, strategies, and prospects, but 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.

Forward-looking statements in this report include those related to our objectives; our products and the availability of future products; our future strategies, sales, revenues, and costs; the timing of fulfillment ofability to cancel certain open purchase orders and completionthe orderly wind-down of projects; demand for our products;relationship with Lenovo; and the sufficiency of our cash and cash equivalent balances. Many risk factors and uncertainties may cause our actual financial results to differ materially from those discussed in any such forward-looking statements. Those risk factors and uncertainties include, but are not limited to: the risk that we will be unable to continue our business as a going concern if our internally generated cash flows are not sufficient to fund our operations and we are unable to obtain funds from external sources to make up the resulting cash shortfall; deterioration or loss of our relationship with Lenovo, our principal customer; the impact of general economic and retail uncertainty and perceived or actual weakeningLenovo’s notification of economic conditions on customers’ and prospective customers’ spending on our products; quarterly and seasonal fluctuations in our revenue or other operating results; fluctuations in the demand fortheir intention to cease offering our products to its corporate clients; costs and the fact that a significant portion of our revenue is derived from one customer, Lenovo, the loss of whom would materially and adversely affect our revenues and prevent us from funding our operationspotential adverse determinations in the future; unexpected difficulties and delays associated with our efforts to achieve higher sales volumes for our 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 customer 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 customer;pending litigation; 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.property. 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.

In addition to the risks, uncertainties, and other factors discussed above or elsewhere in this quarterly report, on Form 10-Q, the risks, uncertainties, and other factors that could cause or contribute to actual results differing materially from those expressed or implied in any forward-looking statements include, without limitation, those set forth under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2013,2012 filed with the Securities and Exchange Commission (the “SEC”) on April 30, 2013,SEC, those contained in the Company’s other filings with the SEC, and those set forth above. Readers of this report are urged to review the descriptions of those risks and uncertainties contained in those other reports.

Going Concern Qualification

The Company has experienced pre-tax losses from operations for the firstsix months ended July 31, 2013 and 2012 totaling $2.2 million and $559,000, respectively. During the third fiscal quarters of fiscal 2014 and fiscal 2013 totaling $634,000 and $712,000, respectively.quarter, the Company received notice from Lenovo that it intends to cease offering Comarco’s Constellation product to its corporate clients. The Company alsoestimates that it will ship the approximately 25,000 remaining units to Lenovo during our third fiscal quarter. The Company has negative working capital and uncertainties surrounding the Company’s future ability to generate revenue, obtain borrowings and raise additional capital. These factors, among others, raise substantial doubt about our ability to continue as a going concern.

Basis of Presentation

The financial informationcondensed consolidated results of our operations presented in this report isare not audited and isthose results are not necessarily indicative of our future consolidated financial position,the results to be expected for the entirety of operations,the fiscal year ending January 31, 2014 or cash flow.any other interim period during such year. Our fiscal year ends on January 31 and our fiscal quarters end on April 30, July 31, and October 31. Unless otherwise stated, all dates refer to our fiscal year and those fiscal periods.quarters.

Executive Summary

Comarco, Inc., through its wholly-owned subsidiary Comarco Wireless Technologies, Inc. (collectively, “we,” "us," "our," “Comarco,” or the “Company”), is a leading developer and designer of innovative technologies and intellectual property currently used inmobile power products. These standalone, multi-function mobile power adapters are used to simultaneously power and charge battery powered devices such as laptopnotebook computers, tablets, smartmobile phones, E-readers, iPads®, iPods®, and readers.many other portable, rechargeable consumer electronic devices. Our operations consist solely of the operations of Comarco Wireless Technologies, Inc. (“CWT”).

In addition to the risks, uncertainties and factors discussed elsewhere in this quarterly report on Form 10-Q and in the Company’s other filings with the SEC, management currently considers the following additional trends, events, and uncertainties to be important to understanding our results of operations for the quarter ended April 30,July 31, 2013:

Critical Accounting Policies

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

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Management believes there have been no significant changes during the three months ended April 30, 2013 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, 2013.

Results of Operations – Continuing Operations

The following tables set forth certain items as a percentage of revenue from our unaudited interim condensed consolidated statements of operationsRevenue
(in thousands except % change)

Revenue by Region
(in thousands except % change)