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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
OCTOBER 31, 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
(State or other jurisdiction 
of incorporation or organization)
    
    95-2088894
(I.R.S. Employer
Identification No.)
 
 
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



COMARCO, INC. AND SUBSIDIARIES
 QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2010
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS (Unaudited)Condensed Consolidated Balance Sheets as of October 31, 2010 and January 31, 2010
    
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended October 31, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
October 31, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
    
    
    16ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    25ITEM 4. CONTROLS AND PROCEDURES
    
    
    26PART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    27ITEM 1A. RISK FACTORS
    
    
    27ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    27ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    27ITEM 4. REMOVED AND RESERVED
    
    
    27ITEM 5. OTHER INFORMATION
    
    
    27ITEM 6. EXHIBITS
    
    
    27SIGNATURES
    
    
    29EX-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)
 October 31,
    
    
    January 31,2010
    
    
    2010    (A)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    5,308
    
    
    $
    10,127Accounts receivable due from customers, net of reserves of
$3 and $122
    
    
    7,729
    
    
    
    10,655Accounts receivable due from suppliers, net of reserves
of $42 and $14
    
    
    1,303
    
    
    
    834Inventory, net of reserves of $1,196 and $1,650
    
    
    1,936
    
    
    
    935Other current assets
    
    
    443
    
    
    
    280Total current assets
    
    
    16,719
    
    
    
    22,831Property and equipment, net
    
    
    835
    
    
    
    1,072Total assets
    
    $
    17,554
    
    
    $
    23,903LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    6,186
    
    
    $
    1,134Accrued liabilities
    
    
    3,282
    
    
    
    12,212Line of credit
    
    
    1,000
    
    
    
    1,000Total current liabilities
    
    
    10,468
    
    
    
    14,346Tax liability
    
    
    
    
    
    
    33Deferred rent, net of current portion
    
    
    
    
    
    
    63Total liabilities
    
    
    10,468
    
    
    
    14,442Commitments and ContingenciesStockholders Equity:Preferred stock, no par value, 10,000,000 shares authorized;
no shares issued or outstanding at October 31, 2010 and
January 31, 2010, respectively
    
    
    
    
    
    
    Common stock, $0.10 par value, 50,625,000 shares
authorized; 7,343,869 shares issued and outstanding at
October 31, 2010 and 7,326,569 issued and outstanding at
January 31, 2010, respectively
    
    
    733
    
    
    
    733Additional paid-in capital
    
    
    15,215
    
    
    
    14,967Accumulated deficit
    
    
    (8,862
    )
    
    
    (6,239
    )Total stockholders equity
    
    
    7,086
    
    
    
    9,461Total liabilities and stockholders equity
    
    $
    17,554
    
    
    $
    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 Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    5,484
    
    
    $
    7,550
    
    
    $
    25,781
    
    
    $
    17,152Cost of revenue
    
    
    4,765
    
    
    
    5,762
    
    
    
    21,322
    
    
    
    13,761Gross profit
    
    
    719
    
    
    
    1,788
    
    
    
    4,459
    
    
    
    3,391Selling, general, and administrative expenses
    
    
    1,302
    
    
    
    1,243
    
    
    
    3,919
    
    
    
    4,525Engineering and support expenses
    
    
    775
    
    
    
    1,017
    
    
    
    2,563
    
    
    
    2,8602,077
    
    
    
    2,260
    
    
    
    6,482
    
    
    
    7,385Operating loss
    
    
    (1,358
    )
    
    
    (472
    )
    
    
    (2,023
    )
    
    
    (3,994
    )Other income (loss), net
    
    
    (32
    )
    
    
    (5
    )
    
    
    (74
    )
    
    
    3Loss from continuing operations before
income taxes
    
    
    (1,390
    )
    
    
    (477
    )
    
    
    (2,097
    )
    
    
    (3,991
    )Income tax benefit
    
    
    75
    
    
    
    59
    
    
    
    75
    
    
    
    59Net loss from continuing operations
    
    
    (1,315
    )
    
    
    (418
    )
    
    
    (2,022
    )
    
    
    (3,932
    )Income (loss) from discontinued operations,
net of income taxes
    
    
    
    
    
    
    (9
    )
    
    
    (601
    )
    
    
    3Net loss
    
    $
    (1,315
    )
    
    $
    (427
    )
    
    $
    (2,623
    )
    
    $
    (3,929
    )Basic and diluted loss per share:Net loss from continuing operations
    
    $
    (0.18
    )
    
    $
    (0.06
    )
    
    $
    (0.28
    )
    
    $
    (0.54
    )Net loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.08
    )
    
    
    $
    (0.18
    )
    
    $
    (0.06
    )
    
    $
    (0.36
    )
    
    $
    (0.54
    )Weighted average common shares outstanding:Basic
    
    
    7,331
    
    
    
    7,327
    
    
    
    7,328
    
    
    
    7,327Diluted
    
    
    7,331
    
    
    
    7,327
    
    
    
    7,328
    
    
    
    7,327Common shares outstanding
    
    
    7,344
    
    
    
    7,327
    
    
    
    7,344
    
    
    
    7,327
  4




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COMARCO, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (In thousands)
 Nine Months EndedOctober 31,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (2,623
    )
    
    $
    (3,929
    )Loss (income) from discontinued operations
    
    $
    601
    
    
    $
    (3
    )Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:Depreciation
    
    
    575
    
    
    
    582Loss on sale/retirement of property and equipment
    
    
    1
    
    
    
    6Loan origination fees
    
    
    69
    
    
    
    43Stock based compensation expense
    
    
    248
    
    
    
    198Recovery from doubtful accounts receivable
    
    
    (91
    )
    
    
    Provision for obsolete inventory
    
    
    (454
    )
    
    
    (28
    )Changes in operating assets and liabilities:Accounts receivable due from customers
    
    
    3,045
    
    
    
    (3,700
    )Accounts receivable due from suppliers
    
    
    (497
    )
    
    
    (479
    )Inventory
    
    
    (547
    )
    
    
    792Other assets
    
    
    (163
    )
    
    
    532Accounts payable
    
    
    5,052
    
    
    
    1,089Deferred rent
    
    
    (63
    )
    
    
    (88
    )Tax liability
    
    
    (33
    )
    
    
    (53
    )Accrued liabilities
    
    
    (8,930
    )
    
    
    1,116Net cash used in operating activities of continuing operations
    
    
    (3,810
    )
    
    
    (3,922
    )Net cash provided by (used in) operating activities of discontinued operations
    
    
    (601
    )
    
    
    3Net cash used in operating activities
    
    
    (4,411
    )
    
    
    (3,919
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (339
    )
    
    
    (515
    )Decrease in restricted cash
    
    
    
    
    
    
    77Net cash used in investing activities
    
    
    (339
    )
    
    
    (438
    )CASH FLOWS FROM FINANCING ACTIVITIES:Line of credit
    
    
    
    
    
    
    1,000Loan origination fees
    
    
    (69
    )
    
    
    (43
    )Net cash (used in) provided by financing activities
    
    
    (69
    )
    
    
    957Net decrease in cash and cash equivalents
    
    
    (4,819
    )
    
    
    (3,400
    )Cash and cash equivalents, beginning of period
    
    
    10,127
    
    
    
    14,144Cash and cash equivalents, end of period
    
    $
    5,308
    
    
    $
    10,744Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    42
    
    
    $
    17Cash paid for income taxes, net of refunds
    
    $
    
    
    
    $
    
  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:
 ® ®
    6




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   Basis of Presentation:
  Cash and Cash Equivalents
  Accounts Receivable due from Suppliers
  Principles of Consolidation:
  Use of Estimates:
  7




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
    Reclassifications:
  Fair Value of Financial Instruments:
  3. Discontinued Operations
 Call Box
  8




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Wireless Test Solutions
    Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Income (loss) from discontinued operations:Gain on sale, net of taxes of $0
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Income (loss) from discontinued
operations, before taxes
    
    
    
    
    
    
    (9
    )
    
    
    (601
    )
    
    
    28Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total income (loss) from discontinued
operations
    
    $
    
    
    
    $
    (9
    )
    
    $
    (601
    )
    
    $
    28
   4. Stock-Based Compensation
   9




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Total compensation expense
    
    $
    104
    
    
    $
    68
    
    
    $
    248
    
    
    $
    198Less: Amounts reflected in discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense from continuing
operations
    
    $
    104
    
    
    $
    68
    
    
    $
    248
    
    
    $
    198Impact on basic and diluted earnings per share
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.03
   Weighted average risk-free interest rate
    
    
    0.98
    %Expected life (in years)
    
    
    3.2Expected stock volatility
    
    
    62.2
    %Dividend yield
    
    NoneExpected forfeitures
    
    
    10.6
    %
  10




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
    Outstanding AwardsWeighted-AverageNumber of Shares
    
    
    Exercise PriceBalance, January 31, 2010
    
    
    1,157,704
    
    
    $
    3.85Awards granted
    
    
    90,000
    
    
    
    2.32Awards canceled or expired
    
    
    (76,000
    )
    
    
    18.24Awards exercised
    
    
    
    
    
    
    Balance, October 31, 2010
    
    
    1,171,704
    
    
    $
    2.79
  Awards Outstanding
    
    
    Awards ExercisableWeighted-Avg.Range of
    
    
    
    
    
    Remaining
    
    
    Weighted-Avg.
    
    
    Number
    
    
    Weighted-Avg.Exercise Prices
    
    Number Outstanding
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$      1.09 to 4.90
    
    
    957,704
    
    
    
    6.69
    
    
    $
    1.44
    
    
    
    162,576
    
    
    $
    1.906.19 to 9.89
    
    
    144,000
    
    
    
    3.96
    
    
    
    7.63
    
    
    
    140,250
    
    
    
    7.6710.43 to 11.60
    
    
    60,000
    
    
    
    4.46
    
    
    
    10.72
    
    
    
    60,000
    
    
    
    10.7215.07
    
    
    10,000
    
    
    
    0.67
    
    
    
    15.07
    
    
    
    10,000
    
    
    
    15.071,171,704
    
    
    6.19 years
    
    
    
    2.79
    
    
    
    372,826
    
    
    
    5.84
  11




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 5. Recent Accounting Pronouncements
  6. Earnings (Loss) Per Share
   7. Customer and Supplier Concentrations
  Three Months Ended October 31,2010
    
    
    2009(In thousands)Total revenue
    
    $
    5,484
    
    
    
    100
    %
    
    $
    7,550
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    $
    3,154
    
    
    
    58
    %
    
    $
    6,471
    
    
    
    86
    %Lenovo Information Products Co., Ltd.
    
    
    2,109
    
    
    
    38
    %
    
    
    956
    
    
    
    13
    %$
    5,263
    
    
    
    96
    %
    
    $
    7,427
    
    
    
    99
    %
 Nine Months Ended October 31,2010
    
    
    2009(In thousands)Total revenue
    
    $
    25,781
    
    
    
    100
    %
    
    $
    17,152
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    $
    18,808
    
    
    
    73
    %
    
    $
    12,235
    
    
    
    71
    %Lenovo Information Products Co., Ltd.
    
    
    6,360
    
    
    
    25
    %
    
    
    4,719
    
    
    
    28
    %$
    25,168
    
    
    
    98
    %
    
    $
    16,954
    
    
    
    99
    %
  12




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  October 31, 2010
    
    
    January 31, 2010Total gross accounts receivable due
from customers
    
    $
    7,732
    
    
    
    100
    %
    
    $
    10,777
    
    
    
    100
    %Customer concentration:Targus Group International, Inc.
    
    
    5,212
    
    
    
    67
    %
    
    
    7,917
    
    
    
    73
    %Lenovo Information Products Co., Ltd.
    
    
    2,307
    
    
    
    30
    %
    
    
    2,730
    
    
    
    25
    %$
    7,519
    
    
    
    97
    %
    
    $
    10,647
    
    
    
    98
    %
    8. Inventory
  October 31,
    
    
    January 31,2010
    
    
    2010Raw materials
    
    $
    717
    
    
    $
    574Finished goods
    
    
    1,219
    
    
    
    361$
    1,936
    
    
    $
    935
  9. Warranty Arrangements
  13




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  As of And For theNine Months EndedOctober 31,2010
    
    
    2009Beginning balance
    
    $
    4,759
    
    
    $
    86Accruals for warranties issued during the period
    
    
    258
    
    
    
    172Utilization
    
    
    (4,790
    )
    
    
    (90
    )$
    227
    
    
    $
    168
  10. Loan Agreement
     14




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COMARCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  11. Commitments and Contingencies
 Purchase Commitments with Suppliers
  Executive Severance Commitments
  Letter of Credit
  Legal Contingencies
  15




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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
   ®
  16




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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. Currently, we
estimate that approximately 150,000 total units will be returned from the distribution
channel and approximately 5,000 units will be returned from consumers. 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. Although the Recall is ongoing, the Company believes that it has
substantially satisfied its material financial obligations with respect to this matter.
If the actual costs of the Recall exceed the Companys estimates for the cost of the
Recall, the Companys operations and financial condition might be materially adversely
affected.
 
    
    In an abundance of caution, during the latter 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 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
 17




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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 or which
exceed 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 third quarter of fiscal 2011 decreased to $5.5 million compared to
$7.6 million for the third quarter of fiscal 2010. The decrease is attributable to
decreased shipments to Targus. Approximately 58 percent of our revenue during the
third quarter of fiscal 2011 was from sales to Targus down from 79 percent in the
second quarter of fiscal 2011.
 Following the Recall, we began volume shipping our Manhattan ChargeSource® products to
Targus, under our Strategic Product Development and Supply Agreement (the Supply
Agreement). Sales of our Manhattan product to Targus accounted for revenue of $5.3
million, $10.0 million and $3.1 million for our first, second and third fiscal quarters
of fiscal 2011, respectively. We have shipped minimal quantities of our Manhattan
product during the fourth quarter of fiscal 2011 through December 15, 2010. The product
is not selling to retail customers at the rate Targus and the Company had contemplated.
Although we have a forecast of future orders from Targus, we currently do not have any
unfulfilled purchase orders for delivery of our Manhattan product to Targus. Our
reduced sales to Targus, if it persists, and if we are not able to replace these sales,
will adversely impact our revenue, business and results of operations. Our exclusive
Supply Agreement with Targus expires on May 4, 2011. No assurance can be given that
either we or Targus will continue our supply arrangement past May 4, 2011.
 
    
    Late in the third quarter of fiscal 2011, we took action to significantly reduce
expenses. These actions included a significant reduction in both personnel related and
other expenses across all departments. Although the third quarter does not reflect a
measurable reduction in expenses, we expect to recognize reductions in cost of revenue
and operating expenses starting in the fourth quarter of fiscal 2011.
 
    
    We continually negotiate with our contract manufacturers and key component suppliers
to reduce 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. In addition, we are in negotiations with our former supplier with
respect to the product which was the subject of the Recall and, in particular, whether
we should be liable for the products purchased from this supplier or whether the
supplier should reimburse us for expenses we incurred as a result of the Recall. We
are also addressing our inventory obligations with current suppliers that were made in
anticipation of sales to Targus which have not materialized. The dollar amounts
involved in relation to these issues are substantial and could adversely and materially
impact our future financial results.
  18




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##### Table of Contents



®
 Critical Accounting Policies
   Results of Operations  Continuing Operations
 Revenue  (in thousands except change)
 Three Months Ended
    
    
    Nine Months Ended
    
    
    Year over YearOctober 31,
    
    
    October 31,
    
    
    % Change2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    Three Months
    
    
    Nine MonthsRevenue
    
    $
    5,484
    
    
    $
    7,550
    
    
    $
    25,781
    
    
    $
    17,152
    
    
    
    (27
    %)
    
    
    50
    %Operating loss
    
    $
    (1,358
    )
    
    $
    (472
    )
    
    $
    (2,023
    )
    
    $
    (3,994
    )Net loss from
continuing
operations
    
    $
    (1,315
    )
    
    $
    (418
    )
    
    $
    (2,022
    )
    
    $
    (3,932
    )
 Revenue by Region  (in thousands except change)
 Three Months Ended
    
    
    Nine Months Ended
    
    
    Year over YearOctober 31,
    
    
    October 31,
    
    
    % Change2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    Three Months
    
    
    Nine MonthsRevenue:North America
    
    $
    3,163
    
    
    $
    6,198
    
    
    $
    19,092
    
    
    $
    12,018
    
    
    
    (49
    %)
    
    
    59
    %Europe
    
    
    12
    
    
    
    172
    
    
    
    85
    
    
    
    250
    
    
    
    (93
    %)
    
    
    (66
    %)Asia
    
    
    2,309
    
    
    
    1,180
    
    
    
    6,604
    
    
    
    4,884
    
    
    
    96
    %
    
    
    35
    %$
    5,484
    
    
    $
    7,550
    
    
    $
    25,781
    
    
    $
    17,152
 19




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##### Table of Contents



Revenue by Customer  (in thousands except change)
 Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,
    
    
    Year over Year2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    % Change% of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    Three Months

    
    
    Nine MonthsRevenue:Lenovo
    
    
    2,109
    
    
    
    38
    %
    
    
    956
    
    
    
    13
    %
    
    
    6,360
    
    
    
    25
    %
    
    
    4,719
    
    
    
    28
    %
    
    
    121
    %
    
    
    35
    %Targus
    
    
    3,154
    
    
    
    58
    %
    
    
    6,471
    
    
    
    86
    %
    
    
    18,808
    
    
    
    73
    %
    
    
    12,235
    
    
    
    71
    %
    
    
    (51
    %)
    
    
    54
    %Other
    
    
    221
    
    
    
    4
    %
    
    
    123
    
    
    
    1
    %
    
    
    613
    
    
    
    2
    %
    
    
    198
    
    
    
    1
    %
    
    
    80
    %
    
    
    210
    %$
    5,484
    
    
    
    100
    %
    
    $
    7,550
    
    
    
    100
    %
    
    $
    25,781
    
    
    
    100
    %
    
    $
    17,152
    
    
    
    100
    %
    
    
    (27
    %)
    
    
    50
    %
  Cost of Revenue and Gross Margin  (in thousands except margin and change)
 Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,
    
    
    Year over Year2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    

% Change% of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of Total
    
    
    
    
    
    
    % of Total
    
    
    Three Months

    
    
    Nine MonthsCost of revenue:Product cost
    
    $
    3,941
    
    
    
    83
    %
    
    $
    5,140
    
    
    
    89
    %
    
    $
    17,945
    
    
    
    84
    %
    
    $
    11,778
    
    
    
    86
    %
    
    
    (23
    %)
    
    
    52
    %Fixed supply
chain overhead
    
    
    799
    
    
    
    17
    %
    
    
    578
    
    
    
    10
    %
    
    
    2,537
    
    
    
    12
    %
    
    
    1,741
    
    
    
    13
    %
    
    
    38
    %
    
    
    46
    %Inventory reserve
and scrap charges
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    (1
    %)
    
    
    101
    
    
    
    
    
    
    
    150
    
    
    
    1
    %
    
    
    100
    %
    
    
    (33
    %)Freight,
expedite, and
other charges
    
    
    25
    
    
    
    
    
    
    
    89
    
    
    
    2
    %
    
    
    739
    
    
    
    4
    %
    
    
    92
    
    
    
    
    
    
    
    (72
    %)
    
    
    703
    %$
    4,765
    
    
    
    100
    %
    
    $
    5,762
    
    
    
    100
    %
    
    $
    21,322
    
    
    
    100
    %
    
    $
    13,761
    
    
    
    100
    %
    
    
    (17
    %)
    
    
    55
    %
 Three Months Ended
    
    
    Nine Months Ended
    
    
    Year over YearOctober 31,
    
    
    October 31,
    
    
    ppt Change2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    Three Months
    
    
    Nine MonthsGross margin
    
    
    13
    %
    
    
    24
    %
    
    
    17
    %
    
    
    20
    %
    
    
    (11
    )
    
    
    (3
    )
  20




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##### Table of Contents



Operating Costs and Expenses  (in thousands except change)
 Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    Year over Year % Change% of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    
    
    
    
    % of Revenue
    
    
    Three Months
    
    
    Nine MonthsOperating expenses:SG&A expenses,
excluding
corporate
overhead
    
    $
    363
    
    
    
    7
    %
    
    $
    355
    
    
    
    5
    %
    
    $
    1,025
    
    
    
    4
    %
    
    $
    1,174
    
    
    
    7
    %
    
    
    2
    %
    
    
    (13
    %)Corporate overhead
    
    
    939
    
    
    
    17
    %
    
    
    881
    
    
    
    12
    %
    
    
    2,894
    
    
    
    11
    %
    
    
    2,838
    
    
    
    17
    %
    
    
    7
    %
    
    
    2
    %Engineering and
support expenses
    
    
    775
    
    
    
    14
    %
    
    
    1,024
    
    
    
    13
    %
    
    
    2,563
    
    
    
    10
    %
    
    
    3,373
    
    
    
    20
    %
    
    
    (24
    %)
    
    
    (24
    %)$
    2,077
    
    
    
    38
    %
    
    $
    2,260
    
    
    
    30
    %
    
    $
    6,482
    
    
    
    25
    %
    
    $
    7,385
    
    
    
    43
    %
    
    
    (8
    %)
    
    
    (12
    %)
    21




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##### Table of Contents



Other Income (loss), net
  Income Tax Benefit
   Discontinued Operations  Call Box
  Discontinued Operations  Wireless Test Solutions (WTS)
 Income (loss) from Discontinued Operations  (in thousands)
 Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Gain on sale,
net of income taxes
of $0
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Income (loss) from
discontinued
operations, before
taxes
    
    
    
    
    
    
    (9
    )
    
    
    (601
    )
    
    
    28Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from
discontinued
operations
    
    $
    
    
    
    $
    (9
    )
    
    $
    (601
    )
    
    $
    28
  22




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##### Table of Contents



Liquidity and Capital Resources
  Nine Months Ended October 31,2010
    
    
    2009(in thousands)Cash provided by (used in):Operating activities
    
    $
    (4,411
    )
    
    $
    (3,919
    )Investing activities
    
    
    (339
    )
    
    
    (438
    )Financing activities
    
    
    (69
    )
    
    
    957
 Operating Activities
   Investing Activities
 ®
  Financing Activities
    23




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##### Table of Contents




    
    Should the decline in sales to Targus persist and we are unable to replace these
sales.
 
    
    If we are not successful in reducing our inventory commitments resulting from
reduced Targus sales.
 
    
    Our inability to renew our existing Loan Agreement with SVB which currently expires
on February 10, 2011.
 
    
    Whether we incur costs and expenses as a result of the Recall in excess of the
reserves we established for the Recall, including as a result of reaching a full
agreement with Targus concerning the respective obligations of the parties regarding
returned product.
 
    
    Should the contract manufacturers of our ChargeSource® products become unable to
manufacture our products at the level currently anticipated, should our ChargeSource®
products fail to meet any required specifications, or should we encounter any
unexpected problems, difficulties or delays in the production of our ChargeSource®
products, our operating results and cash flows would be negatively impacted.
 
    
    The delay in development, delivery or release of our ChargeSource® products could
negatively impact our revenue, operating results and cash flows.
 24




---



##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Currency Risk
  Interest Rate Sensitivity
    25




---



##### 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.
  26




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  
 ITEM 1A.
    
    RISK FACTORS
  During the third quarter of fiscal 2011 the Company transferred the listing of its Common Stock
from the NASDAQ Global Market to the NASDAQ Capital Market, due to a deficiency with respect to
the minimum stockholders equity requirement.
  
 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
  
 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 Quarterly Report on Form 10-Q, filed on
September 14, 2009)
 27




---



##### Table of Contents



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)10.3
    
    Second Amendment to the Loan and Security Agreement, dated
as of August 13, 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 August 18, 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
 28




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##### Table of Contents



SIGNATURES
  COMARCO, INC.Date: December 15, 2010
    /s/ Samuel M. Inman, IIISamuel M. Inman, IIIPresident and Chief Executive OfficerDate: December 15, 2010
    /s/ Winston E. HickmanWinston E. HickmanVice President and Chief Financial Officer 29




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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)10.3
    
    Second Amendment to the Loan and Security Agreement, dated
as of August 13, 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 August 18, 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
 30