##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended APRIL 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _______________ to _______________
 Commission file number 0-5449
 COMARCO, INC.
  
 California
    
    95-2088894(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 
 
 
  þ o
  o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ  o þ




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##### 



COMARCO, INC. AND SUBSIDIARIES
 QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED APRIL 30, 2010
 TABLE OF CONTENTS
  
 PagePART I  FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTS (Unaudited)Condensed Consolidated Balance Sheets as of April 30, 2010 and January 31, 2010
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    15ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    23ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    24PART II  OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    25ITEM 1A.
    
    RISK FACTORS
    
    
    25ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    26ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    26ITEM 4.
    
    REMOVED AND RESERVED
    
    
    26ITEM 5.
    
    OTHER INFORMATION
    
    
    26ITEM 6.
    
    EXHIBITS
    
    
    27SIGNATURES
    
    
    28EX-10.3EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
 April 30,
    
    
    January 31,2010
    
    
    2010 (A)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    8,984
    
    
    $
    10,127Accounts receivable due from customers and suppliers, net of
reserves of $153 and $136
    
    
    11,372
    
    
    
    11,489Inventory, net of reserves of $1,617 and $1,650
    
    
    1,180
    
    
    
    935Other current assets
    
    
    527
    
    
    
    280Total current assets
    
    
    22,063
    
    
    
    22,831Property and equipment, net
    
    
    950
    
    
    
    1,072Total assets
    
    $
    23,013
    
    
    $
    23,903LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,641
    
    
    $
    1,134Accrued liabilities
    
    
    11,525
    
    
    
    12,212Line of credit
    
    
    1,000
    
    
    
    1,000Total current liabilities
    
    
    14,166
    
    
    
    14,346Tax liability
    
    
    33
    
    
    
    33Deferred rent, net of current portion
    
    
    32
    
    
    
    63Total liabilities
    
    $
    14,231
    
    
    $
    14,442Commitments and ContingenciesStockholders Equity:Preferred stock, no par value, 10,000,000 shares authorized;
no shares issued or outstanding at April 30, 2010 and
January 31, 2010, respectively
    
    
    
    
    
    
    Common stock, $0.10 par value, 50,625,000 shares
authorized; 7,326,569 shares issued and outstanding at
April 30, 2010 and January 31, 2010, respectively
    
    
    733
    
    
    
    733Additional paid-in capital
    
    
    15,022
    
    
    
    14,967Accumulated deficit
    
    
    (6,973
    )
    
    
    (6,239
    )Total stockholders equity
    
    
    8,782
    
    
    
    9,461Total liabilities and stockholders equity
    
    $
    23,013
    
    
    $
    23,903
 
 (A)
    
    Derived from the audited consolidated financial statements as of January 31,
2010.  3




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COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
 Three Months EndedApril 30,2010
    
    
    2009Revenue
    
    $
    7,514
    
    
    $
    2,022Cost of revenue
    
    
    5,912
    
    
    
    2,336Gross profit (loss)
    
    
    1,602
    
    
    
    (314
    )Selling, general, and administrative expenses
    
    
    1,407
    
    
    
    1,686Engineering and support expenses
    
    
    902
    
    
    
    8702,309
    
    
    
    2,556Operating loss
    
    
    (707
    )
    
    
    (2,870
    )Other expense, net
    
    
    (19
    )
    
    
    (10
    )Loss from continuing operations before income taxes
    
    
    (726
    )
    
    
    (2,880
    )Income tax benefit
    
    
    
    
    
    
    Net loss from continuing operations
    
    
    (726
    )
    
    
    (2,880
    )Income (loss) from discontinued operations, net of income taxes
    
    
    (8
    )
    
    
    39Net loss
    
    $
    (734
    )
    
    $
    (2,841
    )Basic and diluted loss per share:Net loss from continuing operations
    
    $
    (0.10
    )
    
    $
    (0.39
    )Net income (loss) from discontinued operations
    
    
    
    
    
    
    $
    (0.10
    )
    
    $
    (0.39
    )Weighted average common shares outstanding:Basic
    
    
    7,327
    
    
    
    7,327Diluted
    
    
    7,327
    
    
    
    7,327Common shares outstanding
    
    
    7,327
    
    
    
    7,327
  4




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COMARCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 Three Months EndedApril 30,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss from continuing operations
    
    $
    (726
    )
    
    $
    (2,880
    )Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:Depreciation
    
    
    193
    
    
    
    199Loss on sale/retirement of property and equipment
    
    
    
    
    
    
    6Stock based compensation expense
    
    
    55
    
    
    
    66Loan origination fees
    
    
    14
    
    
    
    43Provision for doubtful accounts
    
    
    17
    
    
    
    Provision for obsolete inventory
    
    
    (33
    )
    
    
    16Changes in operating assets and liabilities:Accounts receivable due from customers and suppliers
    
    
    100
    
    
    
    1,900Inventory
    
    
    (212
    )
    
    
    528Other assets
    
    
    (205
    )
    
    
    277Accounts payable
    
    
    507
    
    
    
    (455
    )Deferred rent
    
    
    (31
    )
    
    
    (29
    )Accrued liabilities
    
    
    (687
    )
    
    
    (1,236
    )Net cash used in continuing operating activities
    
    
    (1,008
    )
    
    
    (1,565
    )Net cash provided by (used in) discontinued operating activities
    
    
    (8
    )
    
    
    39Net cash used in operating activities
    
    
    (1,016
    )
    
    
    (1,526
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (71
    )
    
    
    (58
    )Net cash used in continuing investing activities
    
    
    (71
    )
    
    
    (58
    )CASH FLOWS FROM FINANCING ACTIVITIES:Loan origination fees
    
    
    (56
    )
    
    
    (43
    )Net cash used in financing activities
    
    
    (56
    )
    
    
    (43
    )Net decrease in cash and cash equivalents
    
    
    (1,143
    )
    
    
    (1,627
    )Cash and cash equivalents, beginning of period
    
    
    10,127
    
    
    
    14,144Cash and cash equivalents, end of period
    
    $
    8,984
    
    
    $
    12,517Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    14
    
    
    $
    Cash paid for income taxes
    
    $
    2
    
    
    $
    14
  5




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1. Organization
  2. Summary of Significant Accounting Policies
 Future Operations, Liquidity and Capital Resources:
   Basis of Presentation:
  6




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
 Cash and Cash Equivalents
  Principles of Consolidation:
  Use of Estimates:
    Reclassifications:
  Fair Value of Financial Instruments:
  7




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
  3. Stock-Based Compensation
    Three Months EndedApril 30,2010
    
    
    2009Total stock-based compensation expense
    
    $
    55
    
    
    $
    66Less: Amounts reflected in discontinued operations
    
    
    
    
    
    
    Compensation expense from continuing operations
    
    $
    55
    
    
    $
    66Impact on basic and diluted earnings per share
    
    
    0.01
    
    
    
    0.01
     8




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
    Outstanding AwardsNumber of
    
    Weighted-AverageShares
    
    Exercise PriceBalance, January 31, 2010
    
    
    1,157,704
    
    
    $
    3.85Options granted
    
    
    
    
    
    
    Options canceled or expired
    
    
    (31,500
    )
    
    
    23.67Options exercised
    
    
    
    
    
    
    Balance, April 30, 2010
    
    
    1,126,204
    
    
    $
    3.29
  Awards Outstanding
    
    Awards ExercisableWeighted-Avg.Range of
    
    Number
    
    Remaining
    
    Weighted-Avg.
    
    Number
    
    Weighted-Avg.Exercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$1.09 to 4.90
    
    
    867,704
    
    
    
    7.8
    
    
    $
    1.35
    
    
    
    143,826
    
    
    $
    1.586.19 to 9.89
    
    
    166,000
    
    
    
    4.6
    
    
    
    7.77
    
    
    
    158,500
    
    
    
    7.8410.43 to 11.60
    
    
    60,000
    
    
    
    5.0
    
    
    
    10.72
    
    
    
    52,500
    
    
    
    10.7615.07 to 20.04
    
    
    32,500
    
    
    
    0.5
    
    
    
    18.51
    
    
    
    32,500
    
    
    
    18.511,126,204
    
    
    7.0 years
    
    
    3.29
    
    
    
    387,326
    
    
    
    6.81
  4. Recent Accounting Pronouncements
  9




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
 5. Discontinued Operations
 Call Box
  Wireless Test Solutions
    Three Months Ended April 30,2010
    
    
    2009Revenues
    
    $
    
    
    
    $
    Income from discontinued operations:Gain on sale, net of taxes of $0
    
    $
    
    
    
    $
    43Loss from discontinued operations, before taxes
    
    
    (8
    )
    
    
    Income tax expense
    
    
    
    
    
    
    Total income (loss) from discontinued operations
    
    $
    (8
    )
    
    $
    43
  6. Loss Per Share
  10




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
 7. Customer and Supplier Concentrations
  Three Months Ended April 30,2010
    
    
    2009Total revenue
    
    $
    7,514
    
    
    
    100
    %
    
    $
    2,022
    
    
    
    100
    %Customer concentration:Lenovo Information Products Co., Ltd.
    
    $
    1,805
    
    
    
    24
    %
    
    $
    2,006
    
    
    
    99
    %Targus Group International, Inc.
    
    
    5,638
    
    
    
    75
    %
    
    
    
    
    
    
    $
    7,443
    
    
    
    99
    %
    
    $
    2,006
    
    
    
    99
    %
  Three Months EndedApril 30,2010
    
    
    2009North America
    
    $
    5,597
    
    
    $
    41Europe
    
    
    55
    
    
    
    9Asia
    
    
    1,862
    
    
    
    1,972$
    7,514
    
    
    $
    2,022
  April 30, 2010
    
    
    January 31, 2010Total gross accounts receivable due
from customers and suppliers
    
    $
    11,525
    
    
    
    100
    %
    
    $
    11,625
    
    
    
    100
    %Customer concentration:Eurostyle Corporation
    
    $
    1,485
    
    
    
    13
    %
    
    $
    
    
    
    
    Lenovo Information Products Co., Ltd.
    
    
    1,836
    
    
    
    16
    %
    
    
    2,730
    
    
    
    24
    %Targus Group International, Inc.
    
    
    7,643
    
    
    
    66
    %
    
    
    7,917
    
    
    
    68
    %$
    10,964
    
    
    
    95
    %
    
    $
    10,647
    
    
    
    92
    %
   11




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
     8. Inventory
  April 30,
    
    
    January 31,2010
    
    
    2010Raw materials
    
    $
    202
    
    
    $
    574Finished goods
    
    
    978
    
    
    
    361$
    1,180
    
    
    $
    935
  9. Warranty Arrangements
  12




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
 April 30,2010
    
    
    2009Beginning balance
    
    $
    4,759
    
    
    $
    86Accruals for warranties issued during the period
    
    
    105
    
    
    
    20Utilization
    
    
    (433
    )
    
    
    (36
    )$
    4,431
    
    
    $
    70
  10. Loan Agreement
    11. Commitments and Contingencies
 Purchase Commitments with Suppliers
  13




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
  Executive Severance Commitments
  Letter of Credit
  Legal Contingencies
   14




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis should be read in conjunction with our unaudited
interim condensed consolidated financial statements and the related notes and other financial
information appearing elsewhere in this quarterly report on Form 10-Q .
 Forward-Looking Statements
   ®
  15




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Basis of Presentation
  Executive Summary
   
    
    On April 30, 2010, the United States Consumer Product Safety Commission (CPSC)
announced a product safety recall (the Recall) concerning approximately 500,000 units
of our ChargeSource 90-watt universal AC power adapter sold to our distributer, Targus
Group International, Inc. (Targus) from June 2009 through March 2010. We estimate
that approximately 400,000 of the affected units are in the hands of consumers and the
remaining affected units are currently in the distribution channel. We have
established a recall website and hotline to enable consumers to determine if they have
a unit subject to the Recall. We have established a process to replace and repair the
affected units. Due to the Recall, we accrued a $4.0 million charge to cost of
revenue in the fourth quarter of fiscal 2010 as an estimate of the cost to replace the
affected units and $0.6 million related to selling, general and administrative costs
expected to be incurred related to the Recall. Actual amounts may differ materially
from our current estimates based on many factors, including the number of qualifying
90-watt universal power adapters returned to Comarco by Targus and their customers,
primarily consumer electronics retailers and end-user consumers in connection with the
Recall. Also, the estimate is based on Comarcos assessment of Targus and Comarcos
respective obligations regarding returned product. As of the filing date of this
report, Targus and Comarco have not reached full agreement with respect to such matters
and adverse developments with respect to such matters could materially increase the
costs of the Recall to Comarco.Comarcos revenue for the three months ended April 30, 2010, from the sale of its legacy
or Bronx product significantly declined from prior periods. As Comarco continues to
transition from Bronx sales to sales of its new Slim and Light or Manhattan product,
Comarco anticipates that future revenue from the Bronx product will be modest.In an abundance of caution, during the later part of the first quarter of fiscal 2011,
Comarco ceased production of its Manhattan product to allow it time to verify that the
product did not contain defects similar to the one which caused the Recall. Comarco
successfully completed its verification process and resumed manufacturing and volume
shipping Manhattan units late in the first quarter. As a result of the temporary
cessation of manufacturing of Manhattan products and the significant decline in Bronx
sales which occurred during the first quarter of fiscal 2011, Comarcos sales to Targus
for the three months ended April 30, 2010 were adversely affected. On a sequential
basis, sales to Targus for the
three months ended April 30, 2010 decreased $1.0 million to $5.6 million compared to
$6.6 million for the three months ended January 31, 2010.
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As a result of the Recall, many important factors, risks and uncertainties may cause us
to incur costs in excess of the reserves we established as a result of the Recall, and
in addition, may negatively impact our business and results of operations, including,
but not limited to: the assumptions underlying our estimates concerning the costs and
expenses that we expect to incur as a result of the Recall may turn out to be incorrect
and we may incur costs and expenses beyond such estimates; the possibility that costs
and expenses may result from litigation, arbitration or other adverse proceedings
related to the Recall; the risk that demand or orders for our products may be adversely
impacted by the Recall; the risk that our key customers may cancel orders, change order
quantities or delay order delivery dates as a result of the Recall or otherwise;
reputational harm which may result from the Recall; the fact that we rely on a limited
number of contract manufacturers and component suppliers and delays or disruptions in
their production of our products or in the components that go into such products would
adversely impact our results of operations and financial condition; and other factors,
including factors outside of our control.
    
    On June 30, 2009, we announced that we were selected by Dell Inc. to provide an
innovative 90 watt DC adapter for use in automobiles and airplanes. We began shipping
this product in the latter part of May 2010.
    
    Revenue for the first quarter of fiscal 2011 increased to $7.5 million compared to
$2.0 million for the first quarter of fiscal 2010. The increase is attributable to
shipments to Targus under the Strategic Product Development and Supply Agreement (the
Targus Agreement). Approximately 75 percent of our revenue during the first quarter
of fiscal 2011 was from sales to Targus and we expect that Targus will continue to
represent a large percentage of our future revenue. Any adverse change in our
relationship with Targus, as a result of the Recall or any other reason, or significant
reduction, cancellation or delay in purchases by Targus or our other key customers,
would adversely impact our revenues, business and results of operations.
    
    We have a history of net operating losses and our future is dependent upon our
ability to return to, and sustain, overall profitability. To accomplish this, the
Company must increase the sales volumes of its current and newly designed ChargeSource®
products. Further, the Company continually negotiates with its contract manufacturers
and other suppliers in its efforts to reduce its unit costs. Although certain cost
reductions have been achieved, the Company continues to vigilantly compare component
prices and availability among approved vendors in its efforts to achieve profitability
objectives, as the pricing, availability and sourcing of components remain challenging
as can be the case with many technology products. If we fail to achieve cost
reductions and higher sales volumes for our products, we may not achieve or sustain
profitability and our results of operations and prospects would be adversely impacted.
    
    On February 9, 2010 we entered into an amendment to our Loan and Security Agreement
(as amended, the Loan Agreement) with Silicon Valley Bank (SVB). As of April 30,
2010 our quick ratio was 1.43 to 1.0, which was below the quick ratio of 1.5 to 1.0
required by the Loan Agreement for the month ended April 30, 2010. As a result, an
event of default has occurred under the Loan Agreement and on June 11, 2010, we and SVB
entered into a Forbearance to Loan and Security Agreement (the Forbearance).
Pursuant to the Forbearance, SVB agreed that, so long as no event of default under the
Loan Agreement exists other than our violation of the quick ratio covenant financial
covenant for the months of April and May of 2010, SVB shall not exercise its rights
against us until after July 15, 2010, the date at which the May 2010 quick ratio
calculation is due to be reported to SVB. Our management is scheduled to meet with
representatives of SVB after the date of this filing and prior to the end of June 2010
to discuss the possibility of obtaining a waiver with respect to this covenant default
and/or the possibility of amending or otherwise revising the covenant in the Loan
Agreement. There are no assurances that this meeting will result in our obtaining the
requested waiver or other amendment or revision to the Loan Agreement. See below for
further information.
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Critical Accounting Policies
   Results of Operations
  Revenue
 Three Months Ended April 30,2010
    
    
    2009(In thousands)% of
    
    
    
    
    
    
    % of
    
    
    2010 over 2009Revenue
    
    
    
    
    
    
    Revenue
    
    
    % ChangeRevenue
    
    $
    7,514
    
    
    
    100
    %
    
    $
    2,022
    
    
    
    100
    %
    
    
    272
    %Operating loss
    
    $
    (707
    )
    
    
    
    
    
    $
    (2,870
    )Loss from continuing operations
    
    $
    (726
    )
    
    
    
    
    
    $
    (2,880
    )
 Revenue by Geographic Region
 Three Months Ended April 30,
    
    
    2010 over 20092010
    
    
    2009
    
    
    % Change(In thousands)Revenue:North America
    
    $
    5,597
    
    
    $
    41
    
    
    
    13,551
    %Europe
    
    
    55
    
    
    
    9
    
    
    
    511
    %Asia
    
    
    1,862
    
    
    
    1,972
    
    
    
    (6
    %)$
    7,514
    
    
    $
    2,022
    
    
    
    272
    %
 18




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Revenue by Customer
 Three Months Ended April 30,
    
    
    2010 over 20092010
    
    
    2009
    
    
    % Change(In thousands)Revenue:Lenovo
    
    $
    1,805
    
    
    $
    2,006
    
    
    
    (10
    %)Targus
    
    
    5,638
    
    
    
    
    
    
    
    Other
    
    
    71
    
    
    
    16
    
    
    
    344
    %$
    7,514
    
    
    $
    2,022
    
    
    
    272
    %
 Revenue
  Cost of Revenue and Gross Margin
 Three Months Ended April 30,2010
    
    
    2009(In thousands)% of
    
    
    
    
    
    
    % of
    
    
    2010 over 2009Total
    
    
    
    
    
    
    Total
    
    
    % ChangeCost of revenue:Product costs
    
    $
    5,002
    
    
    
    85
    %
    
    $
    1,619
    
    
    
    69
    %
    
    
    209
    %Fixed supply chain overhead
    
    
    796
    
    
    
    13
    %
    
    
    605
    
    
    
    26
    %
    
    
    32
    %Inventory reserve and
scrap charges
    
    
    
    
    
    
    
    
    
    
    112
    
    
    
    5
    %
    
    
    (100
    %)Freight, expedite, and
other charges
    
    
    114
    
    
    
    2
    %
    
    
    
    
    
    
    
    
    
    
    100
    %$
    5,912
    
    
    
    100
    %
    
    $
    2,336
    
    
    
    100
    %
    
    
    153
    %
 Three Months Ended April 30,
    
    2010 over 20092010
    
    2009
    
    ppt ChangeGross margin
    
    
    21
    %
    
    
    (16
    %)
    
    
    37
  19




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##### Table of Contents



Operating Costs and Expenses
 Three Months Ended April 30,2010
    
    
    2009(in thousands)% of
    
    
    
    
    
    
    % of
    
    
    2010 over 2009Revenue
    
    
    
    
    
    
    Revenue
    
    
    % ChangeOperating expenses:Selling, general, and
administrative expenses,
excluding corporate overhead
    
    $
    404
    
    
    
    5
    %
    
    $
    815
    
    
    
    40
    %
    
    
    (50
    %)Corporate overhead
    
    
    1,003
    
    
    
    13
    %
    
    
    871
    
    
    
    43
    %
    
    
    15
    %Engineering and support expenses
    
    
    902
    
    
    
    12
    %
    
    
    870
    
    
    
    43
    %
    
    
    4
    %$
    2,309
    
    
    
    31
    %
    
    $
    2,556
    
    
    
    126
    %
    
    
    (10
    %)
    Other expense, net
  Income Tax Expense
  Discontinued Operations, net of income taxes
 Income from Discontinued Operations  Call Box
  20




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##### Table of Contents



Income (Loss) from Discontinued Operations  Wireless Test Solutions
(in thousands except change)
 Three Months Ended April 30,
    
    
    Year over Year2010
    
    
    2009
    
    
    % ChangeRevenues
    
    $
    
    
    
    $
    
    
    
    
    Income from discontinued operations:Gain on sale, net of income taxes of $0
    
    $
    
    
    
    $
    43
    
    
    
    (100
    %)Income (loss) from discontinued
operations, before taxes
    
    
    (8
    )
    
    
    
    
    
    
    Income tax expense
    
    
    
    
    
    
    
    
    
    
    Total income (loss) from discontinued operations
    
    $
    (8
    )
    
    $
    43
    
    
    
    (119
    %)
  Liquidity and Capital Resources
  Three Months Ended April 30,2010
    
    2009(in thousands)Cash used in:Operating activities
    
    $
    (1,016
    )
    
    $
    (1,526
    )Investing activities
    
    
    (71
    )
    
    
    (58
    )Financing activities
    
    
    (56
    )
    
    
    (43
    )
 Operating Activities
   Investing Activities
  Financing Activities
  21




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##### Table of Contents




    
    In the event that any of our significant customers cancel a significant amount of
orders or are unable to perform due to their inability to take delivery of the ordered
products and/or pay for such products in a timely manner, we would be required to
establish alternative distribution channels. Such significant change would negatively
impact our revenue, operating results, and cash
 flows.
    
    Should the actual Recall costs incurred exceed the amounts that have been accrued in
the fourth quarter of fiscal 2010, our operating results and cash flows would be
negatively impacted.
 22




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##### Table of Contents




    
    Should the contract manufacturers of our ChargeSource® products become unable to
manufacture our products at the levels currently anticipated, our operating results and
cash flows would be negatively impacted.
    
    The delay in development or release of our ChargeSource® products could negatively
impact our revenue, operating results and cash flows.
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Currency Risk
  Interest Rate Sensitivity
    23




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
  (1)
    
    pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the issuer;(2)
    
    provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the issuer are being made
only in accordance with authorizations of management and directors of the issuer; and(3)
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the issuers assets that could have a
material effect on the financial statements.
  24




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Mark Chapman (Chapman) vs. Comarco Wireless Technologies, Inc., Case No.
73-166-03168-09 02 FEZA-C, American Arbitration Association.
  
 ITEM 1A. RISK FACTORS
  We do not currently comply with the minimum stockholders equity requirements for continued listing
on the NASDAQ Global Market and there is no assurance that our shares will remain listed on such
market or other active trading market in the future. A delisting of our stock from the NASDAQ
Global Market or any other active trading market could adversely affect the price and liquidity of
our securities in the secondary market.
  25




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##### Table of Contents



As of April 30, 2010, our quick ratio fell below 1.5 to 1.0, resulting in a breach of the financial
covenants in the Loan Agreement. Our failure to comply with the covenants in the Loan Agreement
could result in a default under this agreement.
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. (REMOVED AND RESERVED)
  
 ITEM 5. OTHER INFORMATION
  26




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##### Table of Contents



ITEM 6. EXHIBITS
 3.1
    
    Articles of Incorporation of Comarco, Inc., as amended (incorporated by
reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q, filed on
December 15, 2000)3.2
    
    Amended and Restated Bylaws of Comarco, Inc. (incorporated by
reference to Exhibit 3.2 to our Quartery Report on Form 10-Q, filed on
September 14, 2009)3.3
    
    Certificate of Determination of Series A Participating
Preferred Stock (incorporated by reference to Exhibit 99.2 to our Registration
Statement on Form 8-A, filed on February 6, 2003)10.1
    
    Loan and Security Agreement, dated as of February 12, 2009, by
and among Comarco, Inc., Comarco Wireless Technologies, Inc. and Silicon Valley
Bank (incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K, filed on February 18, 2009)10.2
    
    First Amendment to the Loan and Security Agreement, dated as of
February 9, 2010, by and among Comarco, Inc., Comarco Wireless Technologies,
Inc. and Silicon Valley Bank (incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K, filed on February 16, 2010)10.3
    
    Forbearance to Loan and Security Agreement dated as of June 11,
2010 by and among Comarco, Inc., Comarco Wireless Technologies, Inc. and
Silicon Valley Bank10.4*
    
    Comarco, Inc. Executive Incentive Bonus Plan (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K, filed March 25,
2010)10.5*
    
    Executed Employment Agreement dated May 1, 2010 between the
Company and Samuel M. Inman, III (incorporated by reference to Exhibit 10.12 to
our Annual Report on Form 10-K, filed May 3, 2010)10.6*
    
    Executed Employment Agreement dated May 1, 2010 between the
Company and Winston E. Hickman (incorporated by reference to Exhibit 10.13 to
our Annual Report on Form 10-K, filed May 3, 2010)31.1
    
    Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Management contract or executive compensation plan or arrangement. 27




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##### Table of Contents



SIGNATURES
  COMARCO, INC.Date: June 14, 2010
    /s/ SAMUEL M. INMAN, IIISamuel M. Inman, IIIPresident and Chief Executive Officer
(Principal Executive Officer), DirectorDate: June 14, 2010
    /s/ WINSTON E. HICKMANWinston E. HickmanVice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 28




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    Description3.1
    
    Articles of Incorporation of Comarco, Inc., as amended (incorporated by reference to
Exhibit 3.1 to our Quarterly Report on Form 10-Q, filed on December 15, 2000)3.2
    
    Amended and Restated Bylaws of Comarco, Inc. (incorporated by reference to Exhibit 3.2 to our
Quarterly Report on Form 10-Q, filed on September 14, 2009)3.3
    
    Certificate of Determination of Series A Participating Preferred Stock (incorporated by
reference to Exhibit 99.2 to our Registration Statement on Form 8-A, filed on February 6,
2003)10.1
    
    Loan and Security Agreement, dated as of February 12, 2009, by and among Comarco, Inc.,
Comarco Wireless Technologies, Inc. and Silicon Valley Bank (incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K, filed on February 18, 2009)10.2
    
    First Amendment to the Loan and Security Agreement, dated as of February 9, 2010, by and
among Comarco, Inc., Comarco Wireless Technologies, Inc. and Silicon Valley Bank (incorporated
by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on February 16, 2010)10.3
    
    Forbearance to Loan and Security Agreement dated as of June 11, 2010 by and among Comarco,
Inc., Comarco Wireless Technologies, Inc. and Silicon Valley Bank10.4*
    
    Comarco, Inc. Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K, filed March 25, 2010)10.5*
    
    Executed Employment Agreement dated May 1, 2010 between the Company and Samuel M. Inman, III
(incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K, filed May 3,
2010)10.6*
    
    Executed Employment Agreement dated May 1, 2010 between the Company and Winston E. Hickman
(incorporated by reference to Exhibit 10.13 to our Annual Report on Form 10-K, filed May 3,
2010)31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 
 *
    
    Management contract or executive compensation plan or arrangement. 29