UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2011
Commission File No. 333-150332
MACROSOLVE, INC.
(Exact name of registrant as specified in its charter)
| Oklahoma | 73-1518725 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1717 South Boulder Ave. Suite 700 Tulsa, Oklahoma | 74119 (918) 280-8693 |
| (Address of principal executive office) | (Zip Code) (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yeso Nox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yeso Nox
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company x |
| (Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox
The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2011, based on the closing sales price of the Common Stock as quoted on the Pink Sheets was $7,126,726. For purposes of this computation, all officers, directors, and 5 percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such directors, officers, or 5 percent beneficial owners are, in fact, affiliates of the registrant.
As of March 2, 2012, there were 127,721,364 shares of registrant’s common stock outstanding.
TABLE OF CONTENTS
| | | | | PAGE | |
| PART I | |
| | | | |
| Item 1. | | Business | | 4 | |
| Item 1A. | | Risk Factors | | 7 | |
| Item 1B. | | Unresolved Staff Comments | | 16 | |
| Item 2. | | Properties | | 16 | |
| Item 3. | | Legal Proceedings | | 16 | |
| Item 4. | | Mine Safety Disclosures | | 17 | |
| | | | | | |
| PART II | |
| | | | |
| Item 5. | | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | | 18 | |
| Item 6. | | Selected Financial Data | | 19 | |
| Item 7. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 19 | |
| Item 7A. | | Quantitative and Qualitative Disclosures about Market Risk | | 24 | |
| Item 8. | | Financial Statements and Supplementary Data | | F1- F33 | |
| Item 9. | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | | 24 | |
| Item 9A | | Controls and Procedures | | 25 | |
| Item 9B. | | Other Information | | 25 | |
| | | | | | |
| PART III | |
| | | | |
| Item 10. | | Directors, Executive Officers and Corporate Governance | | 26 | |
| Item 11. | | Executive Compensation | | 30 | |
| Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | 35 | |
| Item 13. | | Certain Relationships and Related Transactions, and Director Independence | | 36 | |
| Item 14. | | Principal Accounting Fees and Services | | 38 | |
| | | | | | |
| PART IV | |
| | | | |
| Item 15. | | Exhibits, Financial Statement Schedules | | 39 | |
| | | | | | |
| | | Signatures | | 41 | |
Cautionary Note Regarding Forward Looking Statements
This Annual Report on Form 10-K (the “Annual Report”) contains ‘‘forward-looking statements’’ that represent our beliefs, projections and predictions about future events. All statements other than statements of historical fact are ‘‘forward-looking statements’’, including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as ‘‘may’’, ‘‘will’’, ‘‘should’’, ‘‘could’’, ‘‘would’’, ‘‘predicts’’, ‘‘potential’’, ‘‘continue’’, ‘‘expects’’, ‘‘anticipates’’, ‘‘future’’, ‘‘intends’’, ‘‘plans’’, ‘‘believes’’, ‘‘estimates’’ and similar expressions, as well as statements in the future tense, identify forward-looking statements.
These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business. Furthermore, industry forecasts are likely to be inaccurate, especially over long periods of time and in relatively new and rapidly developing industries such as mobile solutions for businesses. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:
| | • | competition in the market for mobile computing products and services; |
| | • | our ability to develop brand awareness and industry reputation; |
| | • | our ability to adapt to rapid evolution in technology and industry standards; |
| | • | our ability to attract and retain management and skilled personnel; |
| | • | our growth and marketing strategies; |
| | • | anticipated trends in our business; |
| | • | our future results of operations; |
| | • | our lack of profitable operations in recent periods; |
| | • | our liquidity and ability to finance our development activities; |
| | • | our ability to successfully and economically develop new products; |
| | • | market conditions in the mobile solutions for business industry; |
| | • | the impact of government regulation; |
| | • | estimates regarding future net revenues from capitalized development costs and the present value thereof; |
| | • | emerging viable and sustainable markets for wireless and mobile computing services; |
| | • | significant errors or security flaws in our products and services; |
| | • | insufficient protection for our intellectual property; |
| | • | Our ability to enforce our intellectual property; |
| | • | claims of infringement on third party intellectual property; |
| | • | pricing pressures in the mobile software and technology market |
| | • | our financial position, business strategy and other plans and objectives for future operations; |
| | • | economic conditions in the U.S. and worldwide; |
| | • | access to significant additional capital to implement growth plans; and |
| | • | the ability of our management team to execute its plans to meet its goals |
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings ‘‘Risk factors’’, ‘‘Management’s discussion and analysis of financial condition and results of operations’’, ‘‘Business’’ and elsewhere in this report.
PART I
Item 1. Business
Organization
MacroSolve, Inc. (“MacroSolve,” “Illume Mobile,” “we,” “us,” or the “Company”) is an Oklahoma corporation formed on January 17, 1997, under the laws of the State of Oklahoma and does business as Illume Mobile, its go-to-market brand. MacroSolve is leading developer and marketer of mobile technologies, apps, and solutions. A mobile solution is typically the combination of mobile handheld devices, wireless connectivity, and software that streamlines business operations resulting in improved efficiencies and cost savings. Leveraging its intellectual property portfolio, MacroSolve generates revenues through licensing; development and sales of its patented technologies including the IllumeSentral™ rapid mobile app development platform and its apps including SaleSentral™, ServiceSentral™, BrandSentral™ and GuardianSentral™; as well as development of customized mobile business apps.
Illume Mobile provides mobile business apps, as well as licensing its core patented technology to companies across the mobile ecosystem. Illume Mobile is our go-to-market brand and maintains a dedicated staff of sales, product development and support for the IllumeSentral rapid mobile app development platform, formerly branded as ReForm XT™, and its apps. Illume Mobile provides solution management, product development, project management, quality assurance and support services to address the needs of a client base seeking to use mobility to improve their process efficiencies and modify software applications so that they can be used in a mobile environment.
The Company’s principal executive offices are located at 1717 South Boulder, Tulsa, Oklahoma 74119. Currently, the Company has ongoing projects across the United States, operates two websites - ‘www.macrosolve.com’ and ‘www.illumemobile.com’ and maintains multiple social media profiles.
Overview
Market Opportunities
According to Research2Guidance, the market for mobile application development services, including application creation, management, distribution and extension services, reached $20.5 billion in 2011 and will grow in value to $100 billion in 2015.
By 2015, mobile application development projects targeting smartphones and tablets will outnumber native PC projects by a ratio of 4-to-1, according to Gartner, Inc., an information technology research and advisory firm, with smartphones and tablets expected to represent more than 90% of the new net growth in device adoption in the next four years. In contrast, app development projects targeting PCs is anticipated to be on par with mobile development in 2012. Future adoption is believed to triple between the fourth quarter of 2011 and the first quarter of 2014, according to Gartner, and will result in the vast majority of client-side applications being mobile-only or mobile-first for these devices.
U.S. smartphone penetration is nearly at the halfway mark as of January 2012, according to the latest Nielsen data. The 48% of American adults with smartphones is up from 44% in the third quarter of 2011. It likely reflects a bump from the record 37 million iPhones that Apple sold worldwide in the fourth quarter.
According to the latest market study by ABI Research, users of enterprise B2E (business-to-employee) and B2C (business to customer) smartphone and media tablet mobile applications (apps) are forecast to grow at a compound annual growth rate of nearly 90 percent -- and exceed 830 million active worldwide users by 2016.
Driven by the now nearly ubiquitous presence of mobile devices including smart phones and tablets, consumers and businesses alike are demanding mobile apps that suit the increasing preference of mobile devices over PCs.
A plethora of portable wireless devices lend themselves to the use of mobile apps versus traditional websites for information exchange. Mobile apps are filling the need for immediate, easy to access, personalized information for consumers and businesses. A growing number of businesses need to create and manage mobile apps in order to cater to their customers, across nearly all industries and geographies.
With a long history of innovation in the wireless marketplace, MacroSolve is ideally positioned to capture a portion of this critical multi–billion dollar global market.
Recent Developments
Since March 2011, the Company has been protecting its intellectual property rights against entities it has identified as potentially infringing the Company’s rights. In October 2010, the Company received U.S. patent #7,822,816, which addresses mobile information collection systems across all wireless networks, smart phones, tablets, and rugged mobile devices, regardless of carrier and manufacturer, and is currently utilized in MacroSolve’s IllumeSentral™ rapid mobile app development platform formerly branded as ReFormXT. To date, complaints have been filed against 59 defendants and the Company is continuously identifying potential infringers with more than 250 potential infringers identified as of the date of this report. Out of these lawsuits, the Company has received fourteen settlements in the form of non-exclusive, perpetual paid-up licenses for licensed products resulting in revenues of over one million dollars in 2011, which represented approximately 63% of total revenue in 2011. The Company’s objective in these enforcement actions is not to monopolize or prevent other companies from competing; it is to get a return on its investment in the intellectual property.
Our latest technology and services capabilities generate a growing base of intellectual property, contract and an increasing amount of annuity based revenue. Under our trade name, Illume Mobile, we offer customized mobile applications as well as productized apps. The custom mobile apps provide specific solution to a company’s specific need and are completed with our in house development staff. Productized apps provide businesses a quicker, faster solution to their needs and generally do not require further developer time to provide. Both types of solution are pointed at providing a company a branded app that is usually available to its customers or a productivity app that is usually available to its employees to improve their productivity. The Small Business and Entrepreneurship Council, in a research paper called “Saving Time and Money with Mobile Apps”, states that small businesses that use mobile apps to help manage their operations are saving more than 370 million of their own hours and over 725 million employee hours annually.
Traditionally, our customers rely on us to define, design, develop and support the best combinations of technologies in a market that is very technologically dynamic. We assist software and web-based application companies by modifying their software product offerings so that they can be used by a mobile end-user who typically has a Smartphone or a similar cellular device. Many of these customers rely on our technology and marketing expertise. We also serve enterprises that find it difficult to identify a mobile software product which addresses their specific need to streamline operational processes, and do not have the competency in house. The Company began capitalizing development costs in 2011 for three products. In 2011, the Company invested $69,003 in an iPad product called SaleSentral™, $40,374 in an iPhone product called GuardianSentral™, and $18,701 in an iPad product called SiteSurvey ™. Ongoing investment in these products is expected in 2012.
Growth Strategies
Illume Mobile will leverage the combination of a dynamically growing market, a legacy of mobile app expertise, and a team of professionals. Providing a combination of branded and productivity apps offered as productized or custom will allow Illume Mobile to solve the app needs of many businesses. In addition to our direct sales resources, we have distribution agreements with the Click Here division of The Richards Group, Donald Trump Jr. and vertical resellers. Our proposition to customers is that Illume Mobile provides:
| · | Our People – US-based development staff with experience in the latest technologies; iOS, Android, Ruby on Rails, HTML5, Hybrid Apps. On-shore staff augmentation capability when rapid scale is needed. |
| · | Our Platform – Proprietary, custom-designed platforms are built on a solid service oriented architecture allowing rapid creation and deployment of apps. Also custom and 3rd party service integration. |
| · | Our Process – Agile product development provides flexibility not available in other processes. Agile promotes teamwork, collaboration, and process adaptability throughout the life-cycle of the project. |
| · | Our Intellectual Property – Patent addresses mobile information distribution and collection systems across all wireless networks, smartphones, tablets, and rugged mobile devices, regardless of carrier and manufacturer. |
| · | Our Portfolio – Focus on business process solutions, from sales force and field service productivity to powerful marketing and promotion tools. |
Our Portfolio of Mobile Applications
SaleSentral & ServiceSentral
SaleSentral™ and ServiceSentral™ are iPad and Android app platforms that allow organizations to improve sales processes and increase sales productivity as well as providing the same for remote field employees. It is comprised of two components: a mobile app and an online admin interface. The mobile app enables teams to be more productive by quickly and efficiently accessing information when and where they need it, as well as staying connected with the back office. With the web component, non-technical administrators can easily add, update, delete and modify the information and collateral so the remote employee has that latest information they need.
BrandSentral™ & DineSentral
BrandSentral™ and DineSentral™ are marketing and promotion tools providing a custom, concept-branded mobile application for iPhone and Android phones and tablets, which customers can download and use for free. BrandSentral and DineSentral place a business’s product showroom at their customers’ fingertips. It enables the creation and sharing of promotions, special events, contact information, maps or other information intended to drive greater sales. BrandSentral and DineSentral can also be used to gather market intelligence by providing a way for a business’s customers to quickly and easily provide feedback and opinions.
OpSentral
OpSentral™ is an iPad and Android app platform that allows organizations to improve decision support processes and improve decision-making speed and effectiveness. Built specifically for management, OpSentral provides a dashboard providing the user with near real time performance, activity or other business metrics. This allows decision makers to stay abreast of latest events and measure trends, whether across an organization or within a subset of a specific business process.
GuardianSentral
GuardianSentral™ is a smartphone application that allows an authorized and registered user to initiate contact with campus police or corporate security when the user is in a dangerous or potentially dangerous situation. The user downloads the app for free and creates a personal profile that includes name, cell phone number and a pass-code, which is all maintained in the monitoring database at the campus police or corporate security office. When the user is in a potentially dangerous situation, they can activate the app and contact the appropriate security group. GuardianSentral is designed with three levels of protection (Check In, Follow Me, Danger/Emergency), depending on the level of concern of the user.
Custom Development
Illume Mobile provides customization of our products when a business has a specific need, a unique business problem or an idea they choose to pursue.
Competition
Our market contains few substantial barriers to entry. We believe we will face additional competition from existing competitors and new market entrants in the future. We are subject to current and potential competition with respect to our custom development services by less expensive development resources overseas. In addition, we are subject to current and potential competition with respect to our mobile app platforms from app development companies, advertising agencies and a company’s in house IT resources.
Customers and Suppliers
For the year ended December 31, 2011, MacroSolve had one professional services customer that constituted more than ten percent of the overall revenues, which was Navigation Solutions of Plano, Texas (17%). Revenues from this customer are expected to significantly decrease in 2012 as the customer’s product the Company assisted with is mature and not longer under maintenance. We do not rely on any single supplier.
Intellectual Property
The Company reviews each of its intellectual properties and makes a determination as to the best means to protect such property, by trademark, by copyright, by patent, by trade secret, or otherwise. The Corporation believes that it has taken appropriate steps to protect its intellectual properties, depending on its evaluation of the factors unique to each such property, but cannot guarantee that this is the case. The United States Patent and Trademark Office has issued U.S. Patent No. 7,822,816 to our company. The patent, a significant intellectual property asset, further advances our position as a leader in the mobile solutions market. We are immediately pursuing the monetization of this patent and its other IP assets and are currently in discussions with several companies in the mobile communications market. The patent addresses mobile information collection systems across all wireless networks, smart phones, tablets, and rugged mobile devices, regardless of carrier and manufacturer, and is currently utilized in our ReForm XT™ rapid mobile app development platform.
In September 2011, the Company filed a continuation of U.S. Patent No. 7,822,816 which is assigned number 12/910,706.
The Company currently has no registered trademarks but is evaluating filing for trademark protection on its branded products in 2012.
The Company has intellectual property that relates to extending applications to multiple handsets operating on multiple wireless networks which it handles as a trade secret and which it considers to be valuable.
Government Regulation
Our principal products and services do not require any government approval. We do not anticipate that existing or probable governmental regulations, including environmental laws, will have any effect on our business.
Employees
The Company has forty-one (41) full-time employees that include executive management, account, administration, sales (including channel management), client services, technology development and implementation. We have no labor union contracts and believe relations with our employees are satisfactory.
Item 1A. Risk Factors
You should carefully consider the risks described below as well as other information provided to you in this document, including information in the section of this document entitled “Information Regarding Forward Looking Statements.” The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or that the Company currently believes are immaterial may also impair the Company’s business operations. If any of the following risks actually occur, the Company’s business, financial condition or results of operations could be materially adversely affected, the value of the Company’s Common Stock could decline, and you may lose all or part of your investment.
Risks Relating to Our Business and Industry
We have a history of losses which may continue and which may negatively impact our ability to achieve our business objectives.
We incurred net losses of $2,534,444 and $1,923,543 for the years ended December 31, 2011 and 2010, respectively. In addition, at December 31, 2011, we had an accumulated deficit of $12,674,194. Since our inception, we have experienced negative cash flow from operations and expect to experience significant negative cash flow from operations in the future. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the establishment of a business enterprise. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether we will be able to continue expansion of our revenue. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on us.
We received a modified report from our independent registered public accounting firm with an emphasis of matter paragraph for the year ended December 31, 2011 with respect to our ability to continue as a going concern. The existence of such a report may adversely affect our stock price and our ability to raise capital. There is no assurance that we will not receive a similar emphasis of matter paragraph for our year ended December 31, 2012.
In their report dated March 9, 2012, our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern as we have incurred operating losses the last two years and have a substantial accumulated deficit. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loans and grants from various financial institutions where possible. Our continued net operating losses increase the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.
If we are unable to obtain additional funding, our business operations will be harmed and if we do obtain additional financing our then existing shareholders may suffer substantial dilution.
We require additional funds to sustain our operations and institute our business plan. We anticipate that we will require up to approximately $1.5 million for our anticipated operations for the next twelve months to effectively support the operations and to otherwise implement our overall business strategy. Even if we do receive additional financing, it may not be sufficient to sustain or expand our development operations or continue our business operations.
We do not have any contracts or commitments for additional funding, and there can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our development plans or cease our business operations. Any additional equity financing may involve substantial dilution to our then existing shareholders.
We face intense competition in the market for mobile computing products and services, which could reduce our market share and revenue.
Our market contains few substantial barriers to entry. We believe we will face additional competition from existing competitors and new market entrants in the future. We are subject to current and potential competition with respect to our mobile application development and maintenance services by less expensive development resources overseas. In addition, we are subject to current and potential competition with respect to our mobile app platforms from various U.S. companies.
In addition to the direct competition noted above, we face indirect competition from existing and potential customers that may provide internally developed solutions for each of our products or services. As a result, we must educate prospective customers as to the advantage of our products compared to internally developed solutions.
Many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater brand recognition and more established relationships in the industry than we do. Our larger competitors may be able to provide customers with additional benefits in connection with their products, services, and costs, including reduced communications costs. As a result, these companies may be able to price their products and services more competitively than we can and respond more quickly to new or emerging technologies and changes in customer requirements. If we are unable to compete successfully against our current or future competitors, we may lose market share, and our business and prospects would suffer.
Consolidation in the wireless industry may strengthen our competitors’ position in our market. Consolidation of our competitors has occurred, and we expect it to continue to occur in the foreseeable future. Acquisitions may further strengthen our competitors’ financial, technical and marketing resources.
We may not be able to continue to monetize our intellectual property.
In October 2010, the Company received Patent #7,822,816 (the “816 patent”) which addresses mobile information collection systems across all wireless networks, smart phones, tablets, and rugged mobile devices, regardless of carrier and manufacturer, and is currently utilized in MacroSolve’s IllumeSentral™ rapid mobile app development platform formerly branded as ReFormXT. Efforts to monetize the 816 patent were initiated in March 2011 and the efforts continue to this date. Although the Company did not enter into settlement discussions over most of the lawsuits filed until the second half of 2011, over $1 million in licensing revenues were generated in the year ended December 31, 2011, which represented 63% of the Company’s revenues. If the Company is not able to continue to enforce and monetize this patent, it will have an adverse effect on its revenue, income and future growth plans.
Insufficient protection for our intellectual property rights may have a material adverse effect on our results of operations or our ability to compete.
We attempt to protect our intellectual property rights in the United States and in selected foreign countries through a combination of reliance on intellectual property laws (including copyright, patent, trademark and trade secret laws) and registrations of selected patent, trademark and copyright rights in selected jurisdictions, as well as licensing and other agreements preventing the unauthorized disclosure and use of our intellectual property. We cannot assure you that these protections will be adequate to prevent third parties from copying or reverse engineering our products, from engaging in other unauthorized use of our technology, or from independently developing and marketing products or services that are substantially equivalent to or superior to our own. Moreover, third parties may be able to successfully challenge, oppose, invalidate or circumvent our patents, trademarks, copyrights and trade secret rights. We may elect or be unable to obtain or maintain certain protections for certain of our intellectual property in certain jurisdictions, and our intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States because of the differences in foreign laws concerning intellectual property rights. Lack of protection of certain intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition. Moreover, monitoring and protecting our intellectual property rights is difficult and costly. From time to time, we may be required to initiate litigation or other action to enforce our intellectual property rights or to establish their validity. Such action could result in substantial cost and diversion of resources and management attention and we cannot assure you that any such action will be successful.
If we fail to protect our intellectual property rights, our ability to pursue the development of our technologies and products would be negatively affected.
Our success will depend in part on our ability to obtain patents and maintain adequate protection of our technologies and products. If we do not adequately protect our intellectual property, competitors may be able to use our technologies to produce and market products or services in direct competition with us and erode our competitive advantage. Some foreign countries lack rules and methods for defending intellectual property rights and do not protect proprietary rights to the same extent as the United States. Many companies have had difficulty protecting their proprietary rights in these foreign countries. We may not be able to prevent misappropriation of our proprietary rights.
We have received, and are currently seeking, patent protection for mobile information collection systems across all wireless networks, smart phones, tablets, and rugged mobile devices. However, the patent process is subject to numerous risks and uncertainties, and there can be no assurance that we will be successful in protecting our products by obtaining and defending patents. These risks and uncertainties include the following: patents that may be issued or licensed may be challenged, invalidated, or circumvented, or otherwise may not provide any competitive advantage; our competitors, many of which have substantially greater resources than us and many of which have made significant investments in competing technologies, may seek, or may already have obtained, patents that will limit, interfere with, or eliminate our ability to make, use, and sell our potential products either in the United States or in international markets; there may be significant pressure on the United States government and other international governmental bodies to limit the scope of patent protection both inside and outside the United States for technologies that prove successful as a matter of public policy regarding security concerns; countries other than the United States may have less restrictive patent laws than those upheld by United States courts, allowing foreign competitors the ability to exploit these laws to create, develop, and market competing products.
Moreover, any patents issued to us may not provide us with meaningful protection, or others may challenge, circumvent or narrow our patents. Third parties may also independently develop products similar to our products, duplicate our unpatented products or design around any patents on products we develop. Additionally, extensive time is required for development and testing of a potential product.
In addition, the United States Patent and Trademark Office (the "PTO") and patent offices in other jurisdictions have often required that patent applications concerning software inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application, thereby limiting the scope of protection against competitive challenges. Thus, even if we or our licensors are able to obtain patents, the patents may be substantially narrower than anticipated.
Our success depends on our patents, patent applications that may be licensed exclusively to us and other patents to which we may obtain assignment or licenses. We may not be aware, however, of all patents, published applications or published literature that may affect our business either by blocking our ability to commercialize our products, by preventing the patentability of future products or services to us or our licensors, or by covering the same or similar technologies that may invalidate our patents, limit the scope of our future patent claims or adversely affect our ability to market our products and services.
In addition to patents, we rely on a combination of trade secrets, confidentiality, nondisclosure and other contractual provisions, and security measures to protect our confidential and proprietary information. These measures may not adequately protect our trade secrets or other proprietary information. If they do not adequately protect our rights, third parties could use our technology, and we could lose any competitive advantage we may have. In addition, others may independently develop similar proprietary information or techniques or otherwise gain access to our trade secrets, which could impair any competitive advantage we may have.
Patent protection and other intellectual property protection is crucial to the success of our business and prospects, and there is a substantial risk that such protections will prove inadequate.
We may be involved in lawsuits to protect or enforce our patents, which could be expensive and time consuming.
The software and telecom industries have been characterized by extensive litigation in recent years regarding patents and other intellectual property rights, and companies have employed intellectual property litigation to gain a competitive advantage. We may become subject to infringement claims or litigation arising out of patents and pending applications of our competitors, or additional interference proceedings declared by the PTO to determine the priority of inventions. The defense and prosecution of intellectual property suits, PTO proceedings, and related legal and administrative proceedings are costly and time-consuming to pursue, and their outcome is uncertain. Litigation may be necessary to enforce our issued patent, to protect our trade secrets and know-how, or to determine the enforceability, scope, and validity of the proprietary rights of others. An adverse determination in litigation or interference proceedings to which we may become a party could subject us to significant liabilities, require us to obtain licenses from third parties, or restrict or prevent us from selling our products in certain markets. Although patent and intellectual property disputes might be settled through licensing or similar arrangements, the costs associated with such arrangements may be substantial and could include our paying large fixed payments and ongoing royalties. Furthermore, the necessary licenses may not be available on satisfactory terms or at all.
Competitors may infringe our patents, and we may file infringement claims to counter infringement or unauthorized use. This can be expensive, particularly for a company of our size, and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover its technology. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly.
Also, a third party may assert that our patents are invalid and/or unenforceable. There are no unresolved communications, allegations, complaints or threats of litigation related to the possibility that our patents are invalid or unenforceable. Any litigation or claims against us, whether or not merited, may result in substantial costs, place a significant strain on our financial resources, divert the attention of management and harm our reputation. An adverse decision in litigation could result in inadequate protection for our products and/or reduce the value of any license agreements we have with third parties.
Interference proceedings brought before the U.S. Patent and Trademark Office may be necessary to determine priority of invention with respect to our patents or patent applications. During an interference proceeding, it may be determined that we do not have priority of invention for one or more aspects in our patents or patent applications and could result in the invalidation in part or whole of a patent or could put a patent application at risk of not issuing. Even if successful, an interference proceeding may result in substantial costs and distraction to our management.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or interference proceedings, there is a risk that some of our confidential information could be compromised by disclosure. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If investors perceive these results to be negative, the price of our common stock could be adversely affected.
Most sales with mobile carriers and enterprises have a long sales cycle process, which increases the cost of completing sales and renders completion of sales less predictable.
The sales cycle process with some customers could be long, making it difficult to predict the quarter in which we may recognize revenue from a sale, if at all. The general length of the sales cycle increases our costs and may cause license revenue and other operating results to vary significantly from period to period. Our products or services often are part of significant strategic decisions by our customers regarding their information systems. Accordingly, the decision to license our products or use our services typically requires significant pre-purchase evaluation. We spend substantial time providing information to prospective customers regarding the use and benefits of our products and services. During this evaluation period, we may expend significant funds in sales and marketing efforts. If anticipated sales from a specific customer for a particular quarter are not realized in that quarter, our operating results may be adversely affected.
Our market changes rapidly due to evolution in technology and industry standards. If we do not adapt to meet the sophisticated needs of our customers, our business and prospects will suffer.
The market for our products and services is characterized by rapidly changing technology, evolving industry standards and frequent new product and service introductions. Our future success will depend to a substantial degree on our ability to offer products and services that adapt to these changing markets, incorporate leading technology, address the increasingly sophisticated and varied needs of our current and prospective customers and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. Our rapidly evolving market makes it more likely that:
| | • | our technology or products may become obsolete upon the introduction of alternative technologies; |
| | • | we may not have sufficient resources to develop or acquire new technologies or to introduce new products or services capable of competing with future technologies or service offerings of other companies; and |
| | • | we may not have sufficient resources to develop or acquire new technologies or to introduce new products or services capable of competing with future technologies or service offerings of other companies. |
To the extent we determine that new technologies are required to remain competitive, the development, acquisition and implementation of these technologies is likely to continue to require significant capital investment by us. Moreover, we cannot be certain that we can develop, market and deliver new products and technology on a timely basis. Sufficient capital may not be available for this purpose in the future, and even if it is available, investments in new technologies may not result in commercially viable technological processes and there may not be commercial applications for such technologies. If we do not develop, acquire and introduce new products and services and achieve market acceptance in a timely manner, our business and prospects will suffer.
Our business and prospects depend, to a significant degree, on demand for wireless and other mobile computing devices.
The use of wireless and other mobile computing devices for retrieving, sharing and transferring information among businesses, consumers, suppliers and partners has begun to develop only in recent years. Our success will depend in large part on continued growth in the use of wireless and other mobile computing devices, including handheld computers, smart phones, pagers and other mobile devices. In addition, our markets face critical unresolved issues concerning the commercial use of wireless and other mobile computing devices, including security, reliability, cost, ease of access and use, quality of service, regulatory initiatives and necessary increases in bandwidth availability. Demand for, and market acceptance of, wireless and other mobile computing devices which require our products and services are subject to a high level of uncertainty and are dependent on a number of factors, including:
| | • | growth in sales of handheld devices, smart phones and other mobile computing devices; |
| | • | emergence of a viable and sustainable market for wireless and mobile computing services; |
| | • | our product and services differentiation and quality; |
| | • | the development of technologies that facilitate interactive communication between organizations; |
| | • | our distribution and pricing strategies as compared with those of our competitors; |
| | • | the growth in access to, and market acceptance of, new interactive technologies; |
| | • | the effectiveness of our marketing strategy and efforts; |
| | • | our industry reputation; and |
| | • | general industry and economic conditions such as slowdowns in the computer or software markets or the economy. |
If the market for wireless and other mobile computing devices as a commercial or business medium develops more slowly than expected, our business, results of operations and financial condition will be seriously harmed.
Even if the wireless and mobile computing services market does develop, our products and services may not achieve widespread market acceptance. If our target customers do not adopt, purchase and successfully deploy our other current and planned products and services, our revenue will not grow significantly and our business, results of operations and financial condition will be seriously harmed.
We might experience significant errors or security flaws in our products and services.
Despite testing prior to their release, software products may contain errors or security flaws, particularly when first introduced or when new versions are released. Errors in our software products could affect the ability of our products to work with other hardware or software products, could delay the development or release of new products or new versions of products and could adversely affect market acceptance of our products. If we experience errors or delays in releasing new products or new versions of products, we could lose revenues. Our customers rely on our products and services for critical parts of their businesses and they may have a greater sensitivity to product errors and security vulnerabilities than customers for software products generally. Software product errors and security flaws in our products or services could expose us to product liability, performance and/or warranty claims as well as harm our reputation, which could impact our future sales of products and services. The detection and correction of any security flaws can be time consuming and costly.
Pricing pressure in the mobile software and technology market could adversely affect our operating results.
Competition and industry consolidation in the mobile messaging market have resulted in pricing pressure, which we expect to continue in the future. This pricing pressure could cause large reductions in the selling price of our services. For example, consolidation in the wireless services industry could give our customers increased transaction volume leverage in pricing negotiations. Our competitors or our customers’ in-house solutions may also provide services at a lower cost, significantly increasing pricing pressures on us. While historically pricing pressure has been largely offset by volume increases and the introduction of new services, in the future we may not be able to offset the effects of any price reductions.
If we fail to maintain or expand our relationships with strategic partners and indirect distribution channels our revenues could decline.
Our development, marketing and distribution strategies depend in part on our ability to form strategic relationships with other technology companies. If these companies change their business focus, enter into strategic alliances with other companies or are acquired by our competitors or others, support for our products and services could be reduced or eliminated, which could have a material adverse effect on our business and financial condition.
Industry consolidation and other competitive pressures could affect prices or demand for our products and services, and our business may be adversely affected.
The IT industry and the market for our products and services are becoming increasingly competitive due to a variety of factors. There is also a growing trend toward consolidation in the software industry. Continued consolidation within the software industry could create opportunities for larger software companies, such as IBM, Microsoft and Oracle, to increase their market share through the acquisition of companies that dominate certain lucrative market niches or that have loyal installed customer bases. Continued consolidation activity could pose a significant competitive disadvantage to us.
The significant purchasing and market power of larger companies may also subject us to increased pricing pressures. Many of our competitors have greater financial, technical, sales and marketing resources, and a larger installed customer base than us. In addition, our competitors’ advertising and marketing efforts could overshadow our own and/or adversely influence customer perception of our products and services, and harm our business and prospects as a result. To remain competitive, we must develop and promote new products and solutions, enhance existing products and retain competitive pricing policies, all in a timely manner. Our failure to compete successfully with new or existing competitors in these and other areas could have a material adverse impact on our ability to generate new revenues or sustain existing revenue levels.
The ability to rapidly develop and bring to market advanced products and services that are successful is crucial to maintaining our competitive position.
Widespread use of the Internet and fast-growing market demand for mobile and wireless solutions may significantly alter the manner in which business is conducted in the future. In light of these developments, our ability to timely meet the demand for new or enhanced products and services to support wireless and mobile business operations at competitive prices could significantly impact our ability to generate future revenues. If the market for unwired solutions does not continue to develop as we anticipate, if our solutions and services do not successfully compete in the relevant markets, or our new products are not widely adopted and successful, our competitive position and our operating results could be adversely affected. While acquisition of certain competitors could enhance our position, we have no discussions in that regard at this time.
System failures, delays and other problems could harm our reputation and business, cause us to lose customers and expose us to customer liability.
The success of our products, specifically ReForm™, is highly dependent on its ability to provide reliable services to customers. These operations could be interrupted by any damage to or failure of our or our customers, or suppliers, computer software, hardware or networks, and our connections and outsourced service arrangements with third parties.
Anyware’s systems and operations are also vulnerable to damage or interruption from power loss, transmission cable cuts and other telecommunications failures, natural disasters, interruption of service due to potential facility migrations, computer viruses or software defects, physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events and errors by our employees or third-party service providers.
Because many of our services play a mission-critical role for our customers, any damage to or failure of the infrastructure we rely on, including that of our customers and vendors, could disrupt the operation of our network and the provision of our services, result in the loss of current and potential customers and expose us to potential customer liability.
Economic conditions in the U.S. and worldwide could adversely affect our revenues.
Our revenues and operating results depend on the overall demand for our products and services. If the U.S. and worldwide economies continue to weaken, either alone or in tandem with other factors beyond our control (including war, political unrest, shifts in market demand for our products, actions by competitors, etc.), we may not be able to maintain or expand our recent revenue growth.
We will need significant additional capital, which we may be unable to obtain.
Our capital requirements in connection with our ecommerce development activities and transition to commercial operations have been and will continue to be significant. We will require additional funds to develop direct Internet sales of products and services. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. There is no assurance additional funds will be available from any source; or, if available, such funds may not be on terms acceptable to the Company. In either of the aforementioned situations, the Company may not be able to fully implement its growth plans. Moreover, we will not receive any proceeds from the sale of stock by our selling stockholders, and thus this offering will not affect our ability to meet capital requirements.
We depend on key employees in a competitive market for skilled personnel.
The success of our business will continue to depend upon certain key technical and senior management personnel many of whom would be extremely difficult to replace. Competition for such personnel is intense, and we cannot be certain that we will be able to retain our existing key managerial, technical, or sales and marketing personnel. The loss of these officers and other or key employees in the future might adversely affect our business and impede the achievement of our business objectives. We believe our ability to achieve increased revenue and to develop successful new products and product enhancements will depend in part upon our ability to attract and retain highly skilled sales and marketing and qualified product development personnel. In addition, competition for employees in our industry and geographic location could be intense. We may not be able to continue to attract and retain skilled and experienced personnel on acceptable terms. Our ability to hire and retain such personnel will depend in part upon our ability to raise capital or achieve increased revenue levels to fund the costs associated with such personnel. Failure to attract and retain key personnel may adversely affect our business.
We had management changes beginning in August 2011. We cannot assure you that our new management has the ability to function as a team.
In August 2011 our Chief Executive Officer and President was replaced and the former President and CEO accepted the position of Executive Vice President. In November 2011, the Company hired a Chief Operations Officer, a newly created position. There can be no assurance that our new management team will function together successfully to implement our business strategy. Our performance is dependent on the services of our management as well as well as on our ability to recruit, retain and motive other key employees.
We may have to spend substantial funds on sales and marketing in the future.
To increase awareness for our new and existing products, technology and services, we may have to spend significantly more on sales and marketing in the future. We also plan to continue to leverage our relationships with industry leaders and to expand and diversify our sales and marketing initiatives to increase our sales to mobile carriers and enterprises. If our marketing strategy is unsuccessful, we may not be able to recover these expenses or even generate any revenue. We will be required to develop a marketing and sales campaign that will effectively demonstrate the advantages of our products, technology and services. We may also elect to enter into agreements or relationships with third parties regarding the promotion or marketing of our products, technology and services. We cannot be certain that we will be able to establish adequate sales and marketing capabilities, that we will be able to enter into marketing agreements or relationships with third parties on financially acceptable terms, or that any third parties with whom we enter into such arrangements will be successful in marketing and promoting the products, technology and services offered by us.
Risks Relating to our Common Stock and its Market Value
The price of our Common Stock may be volatile.
The trading price of our common stock may be highly volatile and could be subject to fluctuations in response to a number of factors beyond our control. Some of these factors are:
| | • | dilution caused by our issuance of additional shares of Common Stock and other forms of equity securities, which we expect to make in connection with future capital financings to fund our operations and growth, to attract and retain valuable personnel and in connection with future strategic partnerships with other companies; |
| | • | our results of operations and the performance of our competitors; |
| | • | the public’s reaction to our press releases, our other public announcements and our filings with the Securities and Exchange Commission; |
| | • | changes in earnings estimates or recommendations by research analysts who follow, or may follow, us or other companies in our industry; |
| | • | changes in general economic conditions; |
| | • | changes in the valuation of similarly situated companies, both in our industry and in other industries; |
| | • | actions of our historical equity investors, including sales of common stock by our directors and executive officers; |
| | • | actions by institutional investors trading in our stock; |
| | • | disruption of our operations; |
| | • | any major change in our management team; |
| | • | significant sales of our common stock; |
| | • | other developments affecting us, our industry or our competitors; and |
| | • | U.S. and international economic, legal and regulatory factors unrelated to our performance. |
These and other factors are largely beyond our control, and the impact of these risks, singly or in the aggregate, may result in material adverse changes to the market price of our Common Stock and/or our results of operations and financial condition.
Shareholders should be aware that, according to Commission Release No. 34-29093, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the future volatility of our share price.
There is a limited market for our common stock which may make it more difficult for you to dispose of your stock.
Our common stock has been quoted under the symbol “MCVE” on the Pink Sheets since February 23, 2011 and prior to that, on the OTC Bulletin Board since August 15, 2008. There is a limited trading market for our common stock. Furthermore, the trading in our common stock maybe highly volatile, as for example, for the year ended December 31, 2011, our stock traded less than 91,000 shares on average per day. During that same period, the smallest number of shares trade in one day was zero and the largest number of shares traded in one day was 1,942,400. Out of the 252 trading days in 2011, zero shares traded on 20 days. On the 232 days that trading occurred, 82 days traded 20,000 shares or less and only 47 days traded 100,000 shares or more. Accordingly, there can be no assurance as to the liquidity of any markets that may develop for our common stock, the ability of holders of our common stock to sell our common stock, or the prices at which holders may be able to sell our common stock.
In recent years the stock market has experienced significant price and volume fluctuations. These fluctuations may be unrelated to the operating performance of particular companies. These broad market fluctuations may cause declines in the market price of our common stock. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company or our performance, and those fluctuations could materially reduce our common stock price.
Legislative actions, higher insurance costs and potential new accounting pronouncements may impact our future financial position and results of operations.
There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting pronouncements or additional regulatory rulings that will have an impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as proposed legislative initiatives following the Enron bankruptcy are likely to increase general and administrative costs and expenses. In addition, insurers are likely to increase premiums as a result of high claims rates over the past several years, which we expect will increase our premiums for insurance policies. Further, there could be changes in certain accounting rules. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results.
Efforts to comply with recently enacted changes in securities laws and regulations will increase our costs and require additional management resources.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on their internal controls over financial reporting in their annual reports on Form 10-K. In addition, in the event we are no longer a smaller reporting company, the independent registered public accounting firm auditing our financial statements would be required to attest to the effectiveness of our internal controls over financial reporting. Such attestation requirement by our independent registered public accounting firm would not be applicable to us until the report for the year ended December 31, 2012 at the earliest, if at all. If we are unable to conclude that we have effective internal controls over financial reporting or if our independent registered public accounting firm is required to, but is unable to provide us with a report as to the effectiveness of our internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities.
We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the Board of Directors may consider relevant.
Our common stock is subject to the "penny stock" rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The SEC has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
| · | that a broker or dealer approve a person's account for transactions in penny stocks; and |
| · | the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
| · | obtain financial information and investment experience objectives of the person; and |
| · | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
| · | sets forth the basis on which the broker or dealer made the suitability determination; and |
| · | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We maintain our principal office at 1717 South Boulder, Tulsa, Oklahoma 74119. Our current office space consists of approximately 9,965 square feet. The lease expires in August 2013. The base rent is as follows:
| Lease Period | | Amount Per Month | |
| September 1, 2008 – February 29, 2011 | | $ | 11,833.44 | |
| March 1, 2011 – August 2013 | | $ | 12,248.65 | |
We believe that our existing facilities are suitable and adequate to meet our current business requirements.
Item 3. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are not currently aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
We are currently a party to eighteen legal proceedings we initiated in the United States District Court Eastern District of Texas against thirty-one alleged infringers of our United States Patent #7,822,816. In each action, we claimed that each of defendants, directly or through intermediaries, made, has made, used, imported, provided, supplied, distributed, sold, and/or offered for sale products and/or systems that infringed one or more claims of United States Patent #7,822,816. We asked the Court for relief, including permanent injunctions, damages and costs we incurred because of the infringing activities, including interest and attorney fees. Any resulting litigation, however, will be subject to inherent uncertainties and the favorable outcome of any litigation is inestimable.
A summary of the legal proceedings initiated in 2011 and 2012 by the Company and their status is as follows:
| Filing Date | | Defendant | | Case Number | | Status | | Date of Disposition (if any) |
| March 15, 2011 | | Blue Shoe Mobile Solutions, LLC | | 6:11-CV-101 | | (b) | | August 5, 2011 |
| March 15, 2011 | | Brazos Technology Corporation | | 6:11-CV-101 | | (b) | | November 10, 2011 |
| March 15, 2011 | | On The Spot Systems, Inc. | | 6:11-CV-101 | | (b) | | July 19, 2011 |
| March 15, 2011 | | Formstack, LLC | | 6:11-CV-101 | | (b) | | December 15, 2011 |
| April 26, 2011 | | Canvas Solutions, Inc. | | 6:11-CV-194 | | (b) | | October 3, 2011 |
| April 26, 2011 | | GeoAge, Inc. | | 6:11-CV-194 | | (a) | | June 30, 2011 |
| April 26, 2011 | | Kony Solutions, Inc. | | 6:11-CV-194 | | (b) | | September 14, 2011 |
| April 26, 2011 | | Widget Press, Inc. | | 6:11-CV-194 | | (a) | | July 6, 2011 |
| April 26, 2011 | | Pogo Corporation | | 6:11-CV-194 | | (a) | | June 30, 2011 |
| April 26, 2011 | | SWD Interactive, LLC | | 6:11-CV-194 | | (a) | | August 11, 2011 |
| June 8, 2011 | | Agilis Systems, LLC | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | Antenna Software, Inc. | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | Cengea Solutions, Inc. | | 6:11-CV-287 | | (b) | | August 31, 2011 |
| June 8, 2011 | | Data Systems International, Inc. | | 6:11-CV-287 | | (b) | | November 22, 2011 |
| June 8, 2011 | | Environmental Systems Research Institute, Inc. | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | Invensys Systems, Inc. (d/b/a Invensys Operations Management) | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | TrueContext Mobile Solutions Corporation | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | Spring Wireless USA, Inc. | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | Zerion Software, Inc. | | 6:11-CV-287 | | (b) | | December 30, 2011 |
| June 8, 2011 | | BizSpeed, Inc. | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | Syclo, LLC | | 6:11-CV-287 | | (b) | | October 31, 2011 |
| June 8, 2011 | | Xora, Inc. | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | Spira Data Corp. | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | Survey Analytics LLC | | 6:11-CV-287 | | (b) | | December 30, 2011 |
| June 8, 2011 | | The DataMax Software Group Inc. | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | Ventyx Inc. | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | Air2Web Inc. | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | General Data Company, Inc. | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | RealTime Results, LLC | | 6:11-CV-287 | | Open | | N/A |
| June 8, 2011 | | Millennium Information Technology, Inc. (d/b/a MIT Systems, Inc.) | | 6:11-CV-287 | | Open | | N/A |
| September 15, 2011 | | AT&T Inc. | | 6:11-CV-490 | | Open | | N/A |
| September 15, 2011 | | AT&T Mobility LLC | | 6:11-CV-490 | | (b) | | January 30, 2012 |
| September 15, 2011 | | SalesForce.com, Inc. | | 6:11-CV-490 | | (b) | | December 28, 2011 |
| September 15, 2011 | | Dell Inc dba Dell Services | | 6:11-CV-490 | | Open | | N/A |
| September 15, 2011 | | Groupon, Inc. | | 6:11-CV-490 | | Open | | N/A |
| September 15, 2011 | | Living Social, Inc. | | 6:11-CV-490 | | (b) | | December 29, 2011 |
| September 15, 2011 | | Citigroup Inc. | | 6:11-CV-490 | | Open | | N/A |
| October 3, 2011 | | Whoop, Inc. | | 6:11-CV-523 | | Open | | N/A |
| December 21, 2011 | | American Airlines, Inc. | | 6:11-CV-685 | | Open | | N/A |
| December 21, 2011 | | Avis Rent A Car System, LLC | | 6:11-CV-686 | | Open | | N/A |
| December 21, 2011 | | Continental Airlines, Inc. | | 6:11-CV-687 | | Open | | N/A |
| December 21, 2011 | | The Hertz Corporation | | 6:11-CV-688 | | Open | | N/A |
| December 21, 2011 | | Hipmunk, Inc. | | 6:11-CV-689 | | Open | | N/A |
| December 21, 2011 | | Hotels.com, L.P. | | 6:11-CV-690 | | Open | | N/A |
| December 21, 2011 | | Priceline.com Incorporated | | 6:11-CV-691 | | Open | | N/A |
| December 21, 2011 | | Southwest Airlines Co. | | 6:11-CV-692 | | Open | | N/A |
| December 21, 2011 | | Travelocity.com LP | | 6:11-CV-693 | | Open | | N/A |
| December 21, 2011 | | United Air Lines, Inc. | | 6:11-CV-694 | | Open | | N/A |
| January 30, 2012 | | Facebook, Inc. | | 6:12-CV-44 | | Open | | N/A |
| January 30, 2012 | | Hyatt Corporation | | 6:12-CV-45 | | Open | | N/A |
| January 30, 2012 | | newegg | | 6:12-CV-46 | | Open | | N/A |
| January 30, 2012 | | Wal-Mart Stores, Inc. | | 6:12-CV-47 | | Open | | N/A |
| January 30, 2012 | | YELP! INC. | | 6:12-CV-48 | | Open | | N/A |
| February 17, 2012 | | GEICO Insurance Agency, Inc. | | 6:12-CV-74 | | Open | | N/A |
| February 17, 2012 | | GEICO Casualty Company and Government Employees Insurance Company | | 6:12-CV-74 | | Open | | N/A |
| February 17, 2012 | | Marriott International, Inc. | | 6:12-CV-76 | | Open | | N/A |
| February 27, 2012 | | AOL INC. | | 6:12-CV-91 | | Open | | N/A |
| February 27, 2012 | | Inter-continental Hotels Corporation | | 6:12-CV-91 | | Open | | N/A |
| February 27, 2012 | | Six Continents Hotels, Inc. | | 6:12-CV-92 | | Open | | N/A |
__________
| (a) | Lawsuit dismissed without prejudice. |
| (b) | Lawsuit dismissed with prejudice pursuant to a settlement agreement. |
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
The Company’s common stock is quoted on the Pink Sheets under the ticker symbol MCVE. Prior to February 23, 2011, our common stock was quoted on the OTC Bulletin Board under the ticker symbol MCVE.
The following sets forth the range of the closing bid prices for our common stock for the quarters in the period starting January 1, 2010 through December 31, 2011. Such prices represent inter-dealer quotations, do not represent actual transactions, and do not include retail mark-ups, markdowns or commissions. Such prices were determined from information provided by a majority of the market makers for the Company’s common stock.
| | |
| | | 2011 | | | 2010 | |
| | | Sales Price | | | Sales Price | |
| | | High | | | Low | | | High | | | Low | |
| Quarter Ended | | | | | | | | | | | | |
| March 31 | | $ | 0.26 | | | $ | 0.18 | | | $ | 0.05 | | | $ | 0.02 | |
| June 30 | | | 0.24 | | | | 0.09 | | | | 0.05 | | | | 0.02 | |
| September 30 | | | 0.18 | | | | 0.10 | | | | 0.05 | | | | 0.02 | |
| December 31 | | | 0.17 | | | | 0.03 | | | | 0.36 | | | | 0.02 | |
Holders
As of March 2, 2011, there were approximately 798 stockholders of record of the Company’s Common Stock.
Dividends
We have not declared any common stock dividends to date. We have no present intention of paying any cash dividends on our common stock in the foreseeable future, as we intend to use earnings, if any, to generate growth. The payment by us of dividends, if any, in the future, rests within the discretion of our Board of Directors and will depend, among other things, upon our earnings, our capital requirements and our financial condition, as well as other relevant factors. There are no material restrictions in our certificate of incorporation or bylaws that restrict us from declaring dividends.
Equity Compensation Plan Information
| Equity Compensation Plan Information | |
| Plan category | | Number of securities to be issued upon exercise of outstanding options (a) | | | Weighted-average exercise price of outstanding options (b) | | | Securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |
| Equity compensation plans approved by security holders | | | 11,829,507 | | | $ | 0.52 | | | | 5,631,569 | |
| Equity compensation plans not approved by security holders | | | - | | | | - | | | | 5,255,782 | |
| Total | | | 11,829,507 | | | $ | 0.52 | | | | 10,887,351 | |
Item 6. Selected Financial Data.
Not required under Regulation S-K for “smaller reporting companies.”
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our historical financial statements and the notes to those statements that appear elsewhere in this report. Certain statements in the discussion contain forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Item 1A. Risk Factors.” and elsewhere in this report.
Business Overview
For this information please see Part 1, Item 1 “Business.”
Results of Operations
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 (all references are to fiscal years).
Total Net Sales: Total Net Sales increased $1,048,000 or 164% to $1,686,000 in 2011 from $638,000 for 2010. Sources of revenue were derived from our IP licensing, software products, services and hardware sales. Licensing revenues represented the majority of the net sales with an increase of $1,179,000, or 1871%, for the period to $1,242,000 from $63,000 for the same period in 2010, which increase is primarily attributable to the monetization of the Company’s intellectual property. Services revenue showed a decrease of $53,000, or 11% in 2011 to $443,000 from $496,000 for the same period in 2010. This was primarily due to a reduction in work under contract from a single legacy professional services customer; that customer’s maintenance and support agreement decreased from $25,000 per month to $10,000 per month in January 2011 or a reduction of $180,000 total maintenance revenue in 2011 compared to 2010. The decrease was offset in 2011 by revenues generated by custom mobile app development and mobile platforms. The Company discontinued hardware sales due to low profit margins after the first half of 2010 when it recognized $78,000 revenues. Hardware sales totaling $78,000 in 2010 were primarily attributable to digiTicket, a division which was sold to private investors in February 2010.
Cost of Sales and Gross Profit: Cost of sales for 2011 increased $510,000, or 160%, from $319,000 in 2010 to $829,000 in 2011. Legal fees associated with licenses sold pursuant intellectual property monetization were $424,000, or 51%, of the 2011 cost of sales. The resulting gross profit for 2011 of $857,000 was up $538,000, or 169%, over the gross profit for 2010 of $319,000. Gross profit margins were 51% and 50% for 2011 and 2010, respectively.
Operating, Selling, General and Administrative Expenses: Operating expenses include direct division operating expenses, marketing and sales expenses, general and administrative expenses and depreciation and amortization expenses Operating expenses increased by $1,127,000, or 56%, in 2011 to $3,123,000 from $1,996,000 in 2010. Depreciation and amortization expense decreased in 2011 by $6,000 from $249,000 in 2010 to $243,000. Public relations and investor relations services increased in 2011 by $548,000, or 460%, to $667,000 from $119,000 in 2010 and were paid in 2011 using restricted stock valued at $509,000 and $158,000 in cash compared to the use of $23,000 in restricted stock and $96,000 in cash in 2010. The Company incurred $185,000 in corporation promotion costs in 2011, primarily due to $166,000 in accrued expenses related to a corporate branding and marketing initiative which began in June 2011. Occupancy expenses were $76,000 lower in 2010 due to shared occupancy expenses with digiTicket, a division which was sold to private investors in February 2010 but continued sharing office facilities until August 2010. The Company grew from 17 employees at the end of 2010 to 35 employees at the end of 2011 resulting in $199,000 in additional salaries and benefits.
Loss from Operations: Loss from operations for 2011 of $2,266,000 was up $589,000 or 35% from the loss from operations in 2010 of $1,677,000 primarily due to increased public relations and investor relations services of $548,000, of which $509,000 was paid in stock in lieu of cash.
Other Income and Expense: Total other expenses of $268,000 in 2011 were $21,000 or 9% more than the total of $247,000 in 2010. This increase is due to increase in interest expense offset by a decrease in stock based compensation. Stock-based compensation expense, within other expenses, was $98,000 for the year ended December 31, 2011 as compared to $108,000 for the year ended December 31, 2010, a decrease of $10,000. Interest expense increased $32,000, or 23% in 2011 to $171,000 from $139,000 in 2010. In 2011, interest expense consisted of $24,000 paid in cash, primarily to a financial institution, and $147,000 in accrued interest on the 2010 and 2011 Debenture financing. The accrued interest may be settled in common stock or from patent recoveries.
Net Loss: Net loss of $2,534,000 in 2011 was $610,000 or 32% greater than the net loss in 2010 of $1,924,000 as a result of the increases in non-cash expenses, including public relations and investors relations expenditures paid in stock, accrued corporate promotions costs and accrued interest on 2010 and 2011 Debentures.
There was no provision for income taxes for the fiscal years ended 2011 and 2010 due to a valuation allowance of $2.0 million recorded for the years ended December 31, 2011 and 2010, respectively, on the total tax provision as we believed that it is more likely than not that the asset will not be utilized during the next year.
Liquidity and Capital Resources
As of December 31, 2011, the Company had total current assets of $801,721 and total current liabilities of $932,125 for a working capital deficit of $130,404. As of December 31, 2011, the Company had cash and cash equivalents of $273,132 and an accumulated deficit of $12,674,194 since operations commenced in 1997. It is the Company’s intention to raise additional working capital from licensing revenues and the sale of equity or debt securities.
As a result of the above and a net loss of $2,534,444 in 2011, the Company's independent registered public accounting firm's audit report for the year ended December 31, 2011, included herein, contains a qualified opinion and an explanatory paragraph regarding the Company's ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company continues as a going concern and contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The ability of the Company to continue as a going concern on a long-term basis will be dependent upon its ability to create and market innovative products and services and sustain adequate working capital to finance its operations.
We finance our operations primarily through operating revenues, proceeds from bank loans, shareholder loans and sales of equity and debt securities to accredited investors.
2010 Debenture Financing
In November 2010, the Company sold Convertible Debentures Series 2010 (the “2010 Debentures”) for gross proceeds of $925,000, which were used for general corporate purposes. The 2010 Debentures accrue interest at 2.0% per annum with interest paid at maturity on December 31, 2015. The 2010 Debentures may not be prepaid before the maturity date. Repayment of the 2010 Debentures may be made in cash or shares of Common Stock at the option of the Company.
The 2010 Debentures may be converted into shares of Common Stock at the option of the holder. Upon conversion, the holder will be entitled to receive the number of shares of Common Stock that equal to two hundred percent (200%) of the face amount of the Debentures, together with accrued but unpaid interest, divided by the conversion price, which is the weighted average price for the five-day trading period before the notice of conversion. On July 1, 2011, two investors converted an aggregate of $50,000 in 2010 Debentures into 757,576 shares of restricted common stock. On October 20, 2011, one investor converted $100,000 in 2010 Debentures for 1,546,627 shares of restricted common stock. As of March 8, 2012, there is $50,000 principal amount of 2010 Debentures outstanding that are convertible into approximately 1,000,000 shares of common stock
The 2010 Debenture investors also received common stock purchase warrants, designated by the Company as Class B Warrants, which expire on December 31, 2015. As of March 8, 2012, there were Class B Warrants outstanding to purchase an aggregate of 343,591 shares of common stock at exercise prices ranging between $0.2618 and $0.3276.
2011 Debenture Financing
Between April and June 2011, the Company sold Convertible Debentures Series 2011 (the “2011 Class A Debentures”) with Class A Warrants for gross proceeds of $950,000 and the conversion of $725,000 of 2010 Debentures into 2011 Debentures. Between September and October 2011, the Company sold Convertible Debentures Series 2011 (the “2011 Class B Debentures” and together with the 2011 Class A Debentures, the “2011 Debentures”) with Class B Warrants for gross proceeds of $700,000 and the conversion of $25,000 in accrued compensation.
The 2011 Debentures, which mature on December 31, 2016, earn interest at an annual rate of 12%, which will be paid quarterly exclusively from the Debenture Account. Principal on the 2011 Debentures will be paid quarterly as the Debenture Account permits. A Debenture Account has been established with a financial institution for the deposit of 25% of the net funds the Company receives from licensing its intellectual property. As of March 8, 2012, the Debenture Account has a balance of $63,000.
The 2011 Class A Debentures may be converted into shares of Common Stock at the option of the holder. Upon conversion, the holder will be entitled to receive the number of shares of Common Stock that equal to two hundred percent (200%) of the face amount of the 2011 Class A Debentures, together with accrued and unpaid interest, divided by the conversion price, which is the weighted average price for the five-day trading period preceding the 2011 Class A Debenture investment. Any 2011 Class A Debentures that are outstanding on the maturity date that have not been repaid from the Debenture Account will be repaid by the issuance of shares of Common Stock at the conversion price. As of March 8, 2012, there is $1,675,000 principal amount of 2011 Class A Debentures outstanding that are convertible into approximately 18,475,827 shares of common stock.
The 2011 Class A Debenture investors also received common stock purchase warrants, designated by the Company as Class A Warrants, which expire on December 31, 2016. As of March 8, 2012, there were Class A Warrants outstanding to purchase an aggregate of 18,475,827 shares of common stock at exercise prices ranging between $0.063 and $0.109.
The 2011 Class B Debentures may be converted into shares of Common Stock at the option of the holder. Upon conversion, the holder will be entitled to receive the number of shares of Common Stock that equal to two hundred percent (200%) of the face amount of the 2011 Class B Debentures, together with accrued and unpaid interest, divided by the conversion price, which is the weighted average price for the five-day trading period preceding the 2011 Class B Debenture investment, however the conversion price shall not be less than ten cents per share at any time and the conversion price shall not be more than ten cents per share for investments made prior to October 1, 2011. Any 2011 Class B Debentures that are outstanding on the maturity date that have not been repaid from the Debenture Account will be repaid by the issuance of shares of Common Stock at the conversion price. As of March 8, 2012, there is $896,161 principal amount of 2011 Class B Debentures outstanding that are convertible into approximately 17,923,227 shares of common stock.
The investors in 2011 Class B Debentures also received common stock purchase warrants, designated by the Company as Class B Warrants, which expire on December 31, 2016. As of March 8, 2012, there were Class B Warrants outstanding to purchase an aggregate of 8,961,614 shares of common stock at exercise prices of $0.10.
2012 Debenture Financing
On February 17, 2012, the Company issued (i) convertible debentures in the aggregate principal amount of $500,000 (the “2012 Debentures”) and (ii) Series C warrants (the “2012 Warrants”) to purchase shares of Common Stock to certain investors (the “2012 Investors”) for aggregate cash proceeds of $180,000 and the exchange of $320,000 in previously issued promissory notes. There were four Investors, who are all directors of the Company.
The 2012 Debentures accrue interest at an annual rate of 8%, which will be paid quarterly exclusively from the Debenture Account. Principal on the 2012 Debentures will be paid quarterly, on a pro rata basis with all 2012 Debentures, as the Debenture Account permits, but only after all accrued interest has been paid. The Debenture Account is a bank account established with a financial institution for the deposit of 25% of any funds the Company receives from any judgment or settlement in any patent infringement cases involving United States Patent Number 7,822,816.
The 2012 Debentures mature on December 31, 2019, to the extent not previously repaid. Any 2012 Debentures that are outstanding on the maturity date that have not been repaid from the Debenture Account will be repaid by the issuance of such number of shares of Common Stock equal to the outstanding principal and/or accrued interest divided by the volume weighted average price per share of the Company’s Common Stock for the three trading days prior to the maturity date (the “2012 Conversion Price”).
The 2012 Investors have the right, at any time after December 31, 2017, to require the 2012 Debentures to be repaid in full by cash from the Debenture Account, and to the extent such cash is not available, by shares of Common Stock at the 2012 Conversion Price. The Company has the right, at any time after December 31, 2018, to require the 2012 Debentures to be repaid in full by cash, shares of Common Stock at the 2012 Conversion Price, or a combination of cash and shares of Common Stock.
The 2012 Warrants are exercisable at an exercise price of $0.10 per share until the earlier of December 31, 2019 or when the Investor no longer holds any 2012 Debentures. The 2012 Warrants are also exercisable on a cashless basis at any time. The number of shares of Common Stock issuable upon exercise of the 2012 Warrants is equal to 50% of the then outstanding principal amount of the 2012 Debenture held by such 2012 Investor divided by the 2012 Conversion Price.
Other
During the third quarter of 2011, the Company borrowed an additional $100,000 on its $200,000 line of credit agreement with a financial institution which was guaranteed by two directors. The line of credit agreement, which bears interest at the greater of 6% or prime rate plus 1.0% (4.25% at December 31, 2011), was to mature on September 30, 2011. The line of credit agreement was renewed through September 30, 2012 with a $100,000 credit limit. The renewed line bears interest at the greater of 5.75% or prime rate plus 1.0% (4.25% at December 31, 2011). One of the guarantors invested $100,000 in the 2011 Debentures and did not renew his guarantee of the renewal line so that investment was used to retire outstanding principal on the line.
In April 2011, the Company placed $50,000 in promissory notes with a shareholder who is a qualified investor. The notes were unsecured and provided for accrued interest of prime plus 3% (6.25% as of September 30, 2011) payable on maturity at September 30, 2011. On September 8, 2011, the Company placed an additional $54,000 promissory note with the same shareholder. That note was secured by the unencumbered 75% of license fees on licensed products secondary to the security interest of a financial institution and provided for accrued interest at 12% payable on maturity at September 30, 2011. Accrued interest of $1,178 at September 30, 2011 was paid on October 20, 2011. On October 1, 2011, the Company combined the shareholder loans into one promissory note for $104,000, which matures on December 31, 2012 and carries the same terms as the September 8, 2011 note. The Company has agreed to apply ten percent (10%) of the net proceeds from license fees on licensed products to the reduction of principal.
The Company lacks growth capital and anticipates that approximately $1.5 million in additional investment capital will be required during the next 12 months to sustain its current operations and business plan. The funds are expected to be raised from operating revenues, intellectual property license fees, exercise of warrants held by current investors, and the sale of equity and/or debt securities. There is no assurance that capital in any form will be available to us and, if available, on terms and conditions that are acceptable. If we are unable to obtain sufficient funds, we will not be able to implement our growth strategy.
To lower our required cash expenditures for the calendar year 2011, the Company issued 17,467,516 shares of common stock in the to vendors and 3,924,685 shares of common stock to directors and employees for compensation for services.
Sources and Uses of Cash
| | | Years Ended Dec 31, | |
| | | 2011 | | 2010 | |
| | | | | | |
| Cash flows (used in) operating activities | | $ | (1,364,509 | ) | | $ | (1,474,540 | ) |
| Cash flows (used in) provided by investing activities | | | (613,101 | ) | | | 10,758 | |
| Cash flows provided by financing activities | | | 2,063,717 | | | | 1,599,687 | |
| Net increase in cash and cash equivalents | | $ | 86,107 | | | $ | 135,905 | |
Operating Activities:
Net cash outflow from operating activities during the year ended December 31, 2011 was $1,365,000 which was a decrease in use of cash of $111,000 from $1,475,000 net cash outflow from operating activities during the year ended December 31, 2010. Less cash was used in operating activities as a result of issuing common stock, in lieu of cash, for advisory services.
Investing Activities:
Net cash used in investing activities during the year ended December 31, 2011 was $613,000, which was an increase of $624,000 from $11,000 net cash provided by investing activities during the year ended December 31, 2010. The increase is primarily due to $211,000 increase in investment in capitalized software development costs and the $417,000 net proceeds received in 2010 from the sale of digiTicket.
The Company invested $578,244 in ReFormXT capitalized development costs from 2005 through 2008 and commenced amortizing the product over a 36 month period in December 2008 which concluded in December 2011 with $578,244 and $393,527 accumulated amortization as of December 31, 2011 and 2010 respectively. The Company netted the fully amortized costs in December 2011. The Company invested $84,944 in ReFormXT iPhone capitalized development costs between December 2008 and October 2009. The iPhone capitalized costs are being amortized over a 36 month period commencing November 2010 with $33,034 in accumulated amortization as of December 31, 2011. The Company invested $232,302 and $217,228 in 2011 and 2010 for Insight Powered by ReFormXT product capitalized development and expects to continue investing in these products in 2012. The ReFormXT for Blackberry and Android costs are being capitalized separately with ongoing investment expected in 2012. The Company invested $32,283 and $91,183 in 2011 and 2010 for capitalized development costs for the Blackberry platform and invested $165,144 in 2011 for capitalized development costs for the Android platform. ReFormXT and Powered by ReFormXT products, rebranded as IllumeSentral in Q4 2011, have contributed less than 6% of annual revenue in 2011.
The Company began investing in an e-Marketplace Growth Strategy, code named MoBiz, in November 2008 and continued developing the strategy through 2010, capitalizing a total of $337,059. MoBiz is centered on the aggregation of all mobile software, hardware, accessories and services in cooperation with our partners, and marketing those using new web-based methods. Due to the general downturn in the national economy, the partner companies involved in developing MoBiz became unable to help finance its completion. Consequently, the Company chose to temporarily cease continued development 2010 while it focused on launching the Illume Mobile Division. The technology underlying MoBiz has been usable in other projects during 2011 and the Company is evaluating ways to monetize the strategy in 2012.
Financing Activities:
Net cash provided by financing activities was $2,064,000 in 2011 compared with $1,600,000 for the same period in 2010, an increase of $464,000. Cash provided by financing activities in 2011 was primarily from $1,525,000 net proceeds from sales of convertible debentures and $340,000 net proceeds from short term shareholder loans.
Since our inception, we have experienced negative cash flow from operations and expect to experience significant negative cash flow from operations in the future. We require substantial working capital to fund our business. If we raise additional funds through the issuance of equity, equity-related or convertible debt securities, these securities may have rights, preferences or privileges senior to those of the rights of holders of our common stock and they may experience additional dilution. We cannot predict whether additional financing will be available to us on favorable terms when required, or at all. The issuance of additional common stock by our management may have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock, including investors in this offering. Historically, we have financed our cash needs by private placements of our securities. We have registered the privately issued securities for resale. We intend to finance future cash needs primarily through equity offerings but may fund those needs through debt offerings. There is no assurance that we will be able to obtain financing on terms consistent with our past financings or satisfactory to use.
As of December 31, 2011, our common stock is the only class of stock outstanding and we have $2,687,500 in long-term debt that consists of convertible secured debentures and a note from the State of Oklahoma Technology Business Finance Program.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.
Critical Accounting Policies and Estimates
The Company’s accounting policies are more fully described in Note 1 of the Financial Statements. As disclosed in Note 1, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported n the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments.
Revenue Recognition:
Revenues from intellectual property licenses are recognized upon receipt. When intellectual property licenses are received under a contingent fee agreement with the law firm of Antonelli, Harrington & Thompson LLP, the applicable contingent legal expense is recorded as a cost of sale. In the event a non-exclusive intellectual property license is granted within the scope of a contracted project, ten percent (10%) of the contract amount is deemed to be payment for the license. Revenue from software product licensing is recognized ratably over the license period.
Solution services revenues consist primarily of professional services contracted to third party customers under contract for specific projects. Contracted projects that are fixed price are accounted for under the percentage-of-completion method of accounting. Revenue from contracted projects that are for provision of services is recognized at the time the service is provided. Revenue from setup fees, marketing and other services is recognized at the time the service is provided.
Software Development Costs:
The Company accounts for software development costs in accordance with ASC 985-10, “Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. Costs incurred prior to the establishment of technological feasibility are expensed as incurred as research and development costs. Costs incurred after establishing technological feasibility and before the product is released for sale to customers are capitalized. These costs are amortized over three years and are reviewed for impairment at each period end.
Stock-Based Compensation:
The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation-Compensation Costs”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. The Company issues Restricted Stock Awards which vest over six month in the case of salary differential awards and over three years in the case of bonus plans to employees. If the employee elects 83(b) tax treatment of the award, the fair market value is recognized as compensation in the month of the election.
Income Taxes:
The Company currently has substantial net operating loss carryforwards. The Company has recorded a 100% valuation allowance against net deferred tax assets due to uncertainty of their ultimate realization. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Recently Issued Accounting Pronouncements
In December 2012, the FASB issued Accounting Standards Update No. 2011-11, “Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. The Boards initially proposed a joint model describing when it is appropriate to offset financial assets and liabilities on the balance sheet that would have been close to the more restrictive IFRS approach, but instead decided to focus on developing common disclosure requirements. New disclosures are required to enable users of financial statements to understand significant quantitative differences in balance sheets prepared under US GAAP and IFRS related to the offsetting of financial instruments. The existing US GAAP guidance allowing balance sheet offsetting, including industry-specific guidance, remains unchanged. The Company does not offset financial instruments and therefore does not expect the adoption of ASU 2011-11 to have a material effect on our financial statements.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income”. In December 2012, the FASB issued Accounting Standards Update No. 2011-12 deferring the effective date of ASU 2011-05. ASU 2022-05 amends the guidance in ASC 220 “Comprehensive Income” by eliminating the option to present components of other comprehensive income (OCI) in the statement of stockholders’ equity. Instead, the new guidance now requires entities to present all non owner changes in stockholders’ equity either as a single continuous statement of comprehensive income or as two separate but consecutive statements. The Company does not have other comprehensive income and therefore does not expect the adoption of ASU 2011-05 to have a material effect on our financial statements.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement”. This guidance amends the application of the “highest and best use” concept to be used only in the measurement of fair value of nonfinancial assets, clarifies that the measurement of the fair value of equity-classified financial instruments should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity that manages a group of financial assets and liabilities on the basis of its net risk exposure can measure those financial instruments on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring fair value. The fair value disclosure requirements also were amended. The Company is in the process of evaluating the impact the amended guidance will have on its financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not required under Regulation S-K for “smaller reporting companies.”
Item 8. Financial Statements and Supplementary Data.
Our financial statements, together with the independent registered public accounting firm's report of Hood, Sutton, Robinson & Freeman CPAs, P.C., begin on page F-1, immediately after the signature page.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2011, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting.
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes. There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(c) Management’s report on internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2011.
This annual report does not include an attestation report by Hood Sutton Robinson & Freeman CPAs, P.C., our independent registered public accounting firm regarding internal control over financial reporting. As a smaller reporting company, our management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
Item 9B. Other Information.
None.
Item 10. Directors, Executive Officers, and Corporate Governance
The following table sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each, as of March 2, 2012. The board of directors elects our executive officers annually. A majority vote of the directors who are in office is required to fill vacancies. Each director is elected for the term of one year, and until his or her successor is elected and qualified, or until his or her earlier resignation or removal. All members of the Board of Directors listed below were elected at the Board of Directors Meeting on May 13, 2011, except Steve Signoff, who was appointed to the Board in August 2011.
| Name | | Age | | Position |
| Howard Janzen | | 58 | | Director and Chairman of the Board of Directors |
| James C. McGill | | 68 | | Vice Chairman of the Board of Directors |
| Steve Signoff | | 56 | | Chief Executive Officer, President, and Director |
| David L. Humphrey | | 56 | | Director |
| John Clerico | | 70 | | Director and Chairman of the Compensation Committee |
| Dr. Dale A. Schoenefeld | | 66 | | Director |
| David R. Lawson | | 60 | | Director and Chairman of the Audit Committee |
| Randy Ritter | | 52 | | Chief Operating Officer |
| Clint Parr | | 47 | | Executive Vice President |
| Kendall Carpenter | | 55 | | Vice President Finance and Administration, Chief Financial Officer, Secretary and Treasurer |
Executive Biographies:
Howard Janzen, Director and Chairman
Since October 2002, Mr. Janzen has served as President and Chief Executive Officer of Janzen Ventures, Inc., a private investment business venture. Since December 2008, Mr. Janzen has served as the Chairman of the Board of Sonus Networks, Inc., a market leader in next-generation IP-based network solutions, after initially joining the board in January 2006 as a director and is a member of the audit and corporate governance committees. Mr. Janzen is also a member of the Board of Directors, the Compensation Committee and the Corporate Governance Committee of Global Telecom & Technology, Inc.; and a member of the Board of Directors and Compensation Committee of Macrosolve, Inc. Mr. Janzen also serves as a member of the Board of Directors of two privately-held companies.
Mr. Janzen was the Chief Executive Officer of One Communications Corp., a supplier of integrated advanced telecommunications solutions to businesses, from March 2007 until its sale on April 1, 2011, and served on the Board of Directors of One Communications from June 2007 until the April 1, 2011 sale. He served as President of Sprint Business Solutions, the business unit serving Sprint Corporation’s business customer base with almost 10,000 employees and $12 billion in annual revenue from January 2004 to September 2005. From May 2003 to January 2004, he was President of Sprint Corporation’s Global Markets Group, responsible for Sprint Corporation’s long distance service for both consumer and business customers. From 1994 until October 2002, Mr. Janzen served as President and Chief Executive Officer, and Chairman from 2001, of Williams Communications Group, Inc., a high technology company, which filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in April 2002 and emerged from bankruptcy in October 2002 as WilTel Communications Group, Inc.
Janzen earned Bachelor of Science and Master of Science degrees in metallurgical engineering from The Colorado School of Mines and is a licensed Professional Engineer. He completed the Harvard Business School Program for Management Development. Janzen was named a Colorado School of Mines Distinguished Achievement Medalist and was inducted into the University of Tulsa, College of Engineering and Natural Sciences, Hall of Fame. Additionally, Mr. Janzen serves as a member on the Boards of Directors of the following non-profit organizations—Hillcrest Healthcare System, Morningside Foundation and Heart of America Boy Scout Council. He also serves on the Governor’s Science and Technology Council for the State of Oklahoma and is a Commissioner and Chairman of the Global Information Infrastructure Commission (GIIC).
James C. McGill, Vice Chairman of the Board of Directors
Jim McGill is an investor with background in a wide variety of organizations, public and private, for profit, and not for profit. Prior to joining the Company, Mr. McGill ran McGill Resources, Inc., a business consulting and investment firm with offices in Tulsa, Oklahoma and Sydney, Australia. From 1970 to 1986, Mr. McGill was Chairman and Chief Executive Officer of McGill Environmental Systems, Inc., a company that he founded. McGill Environmental Systems, Inc. was sold in 1986 to The IT Group and Mr. McGill served on the board of directors of The IT Group until 2003. Mr. McGill currently serves on the Board of ADDvantage Technologies Group, Inc., several private boards, and the Board of Trustees of the University of Tulsa. Mr. McGill has been a member of the Board of Directors of MacroSolve, Inc. since 1999.
Steve Signoff, President, Chief Executive Officer and Director
Steve Signoff joined the Board of Directors in August, 2011, bringing an extensive range of national and international experience in entrepreneurial, Fortune 1000 and Fortune 250 companies. He is a Cum Laude graduate of Avila University, earning a B.A. with a major in Finance and minor in Economics and advanced education at Harvard Law, Columbia University and the University of Michigan. He most recently was the CEO of Mobile USA followed by the role Chief Sales and Marketing Officer at One Communications. Signoff was Chairman and CEO of IDPSi, a caller identity service based in New York, which was successfully sold in 2009. A majority of his career was at Sprint where he served in executive roles leading marketing, strategy, business development, and international operations. He began his career at Owens/Corning Fiberglass. Board of Director assignments have included Intelig, a Brazilian telecom company and Barak, an Israel based telecom company and numerous non-profit organizations.
David L. Humphrey, Director
David Humphrey currently serves as the Chief Executive Officer of Impact Earth LLC. Impact Earth is an early stage company focused on the development of new drilling technology to be applied to the ground source heat pump market. Prior to joining Impact Earth, Mr. Humphrey was the CEO of TokenEx. TokenEx is an early stage company focused on tokenization as a service for the Payment Card Industry (PCI). Prior to joining TokenEx, Mr. Humphrey was Chief Operating Officer of Oklahoma Equity Partners, a venture capital fund from 2004 to 2010. Oklahoma Equity Partners focused exclusively on Oklahoma venture opportunities and Mr. Humphrey was responsible for all investment operations. Prior to joining Oklahoma Equity Partners, Mr. Humphrey served from 1997 to 2004 as a principal of Davis, Tuttle Venture Partners, one of Oklahoma’s largest and oldest venture capital firms. From 1995 to 1997, Mr. Humphrey was a senior business development coordinator at Texaco Natural Gas Liquids. During his two-year stay with Texaco, he led ten major acquisition and expansion projects. Prior to joining Texaco in 1996, Mr. Humphrey spent thirteen years with Koch Industries, Inc. serving in a variety of management and business development initiatives.
Mr. Humphrey earned his Bachelor of Science in Chemical Engineering from the University of Wisconsin and his Master of Business Administration from Texas A&M University. Mr. Humphrey joined the board of directors of MacroSolve, Inc. in 2004.
John Clerico, Director and Chairman of the Compensation Committee
John Clerico is the former Chairman of the Board of Global Industries, Ltd., a leading offshore solutions provider of offshore construction, engineering, project management and support services, a position he has held from October 2008 until the company was sold in December 2011. He also served on their Board of Directors since January 2006 through December 2011. Mr. Clerico was also Chief Executive Office of Global Industries from October 2008 until March 2010. John Clerico is chairman and a registered financial adviser at ChartMark Investments, Inc., an independent investment advisory firm that manages equity funds for individuals and small pension funds. Mr. Clerico co-founded ChartMark in 2001, where his current focus is on day-to-day portfolio management and strategic direction of the firm. Prior to founding ChartMark, Mr. Clerico served in numerous senior management capacities including Executive Vice President, Chief Financial Officer and Director of Praxair, Inc., a Fortune 200 company. In addition to his financial responsibilities, Mr. Clerico managed Praxair’s business operations in Europe and South America. Prior experience includes CFO of Union Carbide Corporation, Conoco, Inc. and Phillips Petroleum Co. Mr. Clerico was named as one of four "Leading Corporate Treasurers" by Corporate Finance Magazine in 1995 and "CFO of the Year" by CFO Magazine in 1997 and Business Week in 1998. He serves on the Board of Directors of Community Health Systems and Educational Development Corp. Mr. Clerico is a 1964 graduate of Oklahoma State University. Mr. Clerico joined the Board of Directors of MacroSolve, Inc., in 2006.
Dr. Dale A. Schoenefeld, Director
Dr. Schoenefeld currently serves as Vice President for Information Services and CIO at the University of Tulsa including academic computing, administrative computing, networking services, computer system administration, and university libraries. Dr. Schoenefeld represents the University of Tulsa at OneNet, Oklahoma’s telecommunications and information network for education and government, and is a member of an Oklahoma statewide committee chaired by the Secretary of Science and Technology. Prior to becoming Vice President for Information Services, Dr. Schoenefeld served as Professor of Computer Science and Mathematics and Director of the Computer Resource Center at the University of Tulsa. He received his B.A.E. at Wayne State College and his M.S. and Ph.D. at the University of Iowa. His research expertise is in the area of combinatorial optimization and involves optimization techniques to the design and operation of telecommunication networks, often using evolutionary techniques. Dr. Schoenefeld joined the Board of Directors of MacroSolve, Inc. in 2004.
David R. Lawson, Director and Chairman of the Audit Committee
David Lawson is the former President and Chief Executive Officer of Capital One Auto Finance, Inc., a position he held from July 1998 until April 2008. He held similar positions at Summit Acceptance Corporation from March 1995 until July 1998, and was President and Chief Operating Officer of Western National Bancorp from September 1982 until December 1993. Since June, 2008, Mr. Lawson has served as Chairman of the Board of Trustees at the University of Tulsa. Mr. Lawson also sits on the boards of Heat Transfer Equipment Corp. and Pinnacle Packaging Company. He formerly served on the boards of Western Venture Capital, Summit Acceptance Corporation, Zag Inc., Valen Technology, Inc., Dealer Track, Ameriban, Inc., and Texas Capital Bancorporation. Mr. Lawson also serves on the board of the Alzheimer’s Association.
Mr. Lawson is a 1970 graduate of the University of Tulsa with a BS degree in Accounting. He joined the firm of Arthur Andersen & Company in May 1970, eventually reaching the level of Audit and Consulting Partner. In 1982 he left public accounting for the banking industry. Mr. Lawson joined the Board of Directors of MacroSolve, Inc. in November, 2010.
Randy Ritter, Chief Operating Officer
Randy Ritter joined the Company in November, 2011. Between November 2007 and October 2011, Mr. Ritter was employed by One Communications, a Boston-based leading competitive local exchange carrier that was acquired by EarthLink, Inc. in 2010, serving as Senior Vice President – Sales & Marketing. Between May 2006 and November 2007, Mr. Ritter served as an independent consultant. Between 1991 and May 2006, Mr. Ritter was employed by Sprint Nextel Corporation, including serving as Vice President – Product Marketing and Offer Development (2005 to May 2006), Vice President – Product Management and Development – Sprint and Assistant Vice President – International Marketing – Sprint. Previously, Mr. Ritter was an Audit Manager for General Dynamics in St. Louis, Missouri and Ernst & Whinney in Mobile, Alabama. Mr. Ritter holds a BS degree in Accounting from the University of South Alabama and is a certified public accountant (currently inactive).
Clint Parr, Executive Vice President
Clint Parr joined MacroSolve in 2002 as Vice President of Sales and Marketing. The Board of Directors promoted him to President in 2003 and to Chief Executive Officer in 2007. Mr. Parr resigned as Chief Executive Officer in August 2011, as a director in October 2011 and as President in November 2011, at which time Mr. Parr was appointed Executive Vice President. Mr. Parr is primarily responsible for strategic sales initiatives. He graduated from Baylor University in 1986 with a bachelor's degree in Entrepreneurship, and obtained an executive MBA in 2000 from The University of Tulsa. He brings a wealth of marketing experience from numerous companies, including the Williams Companies. Parr is a graduate of Leadership Oklahoma and Chairman of the Tulsa County Election Board.
Kendall W. Carpenter, CPA, CGMA, CMA, Vice President, Finance and Administration, Chief Financial Officer, Secretary and Treasurer
Kendall Carpenter joined the corporation in 2006 as Controller. She was promoted to Vice President and Chief Financial Officer in 2008. Ms. Carpenter’s previous experience includes Division Controller with Allied Waste Industries (AW) and over 10 years experience as top financial officer of an enterprise software company with an international customer base. Ms. Carpenter graduated with a Bachelor of Science degree in Accounting from Oklahoma State University and has earned the professional designations of Certified Public Accountant, Certified Global Management Accountant and Certified Management Accountant.
Director Qualifications
When considering whether directors and nominees have the experience, qualifications, attributes and skills, the Company and the Board focused primarily on the information discussed in each of the directors’ individual biographies set forth above. In particular, with regard to Mr. Janzen, who serves on the Compensation Committee, the Board considered his significant experience in telecommunications and mobile technology through is prior association with Sprint Business Solutions and Williams Communications Group and his former position CEO of One Communications. With regard to Mr. McGill, the Board considered his strong background in the mobile technology sector and significant expertise and background as a director of both private and publicly traded companies and his significant experience around patented technology. With regard to Mr. Signoff, the Board considered his deep understanding of the telecommunications and mobile technology sector and his leadership experience and general business acumen. With regard to Mr. Humphrey, who serves on the Audit Committee, the Board considered his extensive experience in venture capital transactions and mergers and acquisitions while at Oklahoma Equity Partners. With regard to Mr. Clerico, who chairs the Compensation Committee, the Board considered his executive management experience with several large public companies, the recognitions of his accomplishments as a chief financial officer and corporate treasurer, and his investment advisory experience. With regard to Dr. Schoenefeld, who serves on the Compensation Committee, the Board considered his broad perspective of computing technologies and telecommunications through his position as Chief Information Officer at the University of Tulsa. With regard to Mr. Lawson, Chairman of the Audit Committee, the Board considered his financial and executive expertise with Capital One and his many years of experience in banking as well as his years of experience as an audit partner with Arthur Andersen.
Family Relationships
None.
Board Independence
We are not required to have any independent members of the Board of Directors. The board of directors has determined that (i) Steve Signoff, has a relationship which, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and is not an “independent director” as defined in the Marketplace Rules of The NASDAQ Stock Market and (ii) Howard Janzen, James McGill, David Humphrey, John Clerico, Dale Schoenefeld and David Lawson are each an independent director as defined in the Marketplace Rules of The NASDAQ Stock Market.
Board Committees
We currently have two board committees, the audit and compensation committees. The board as a whole carries out the functions of the nominating committee, and such “independent director” determination has been made pursuant to the committee independence standards.
Audit Committee
The Board of Directors has adopted a written charter for the Audit Committee. Our Audit Committee is responsible for (1) the integrity of the financial reporting process, systems of internal controls and financial statements and reports of the Company; (2) the compliance by the Company with legal and regulatory requirements; (3) the appointment, compensation and oversight of the Company's independent auditor employed by the Company for the purpose of preparing or issuing an audit report or related work. The Audit Committee is comprised of Chairman David R. Lawson, David L. Humphrey, and James C. McGill.
Audit Committee Report
The Audit Committee has reviewed and discussed with management the Company’s audited financial statements for the year ended December 31, 2011. Based on the reviews and discussions referred to above, the Audit Committee has recommended to the Board of Directors that the financial statements referred to above be included in this Form 10-K.
Compensation Committee
Our Board of Directors has adopted a written charter setting forth the authority and responsibilities of the Compensation Committee. Our Compensation Committee has responsibility for assisting the Board of Directors in, among other things, evaluating and making recommendations regarding the compensation of our executive officers and directors, assuring that the executive officers are compensated effectively in a manner consistent with our stated compensation strategy, producing an annual report on executive compensation in accordance with the rules and regulations promulgated by the SEC, periodically evaluating the terms and administration of our incentive plans and benefit programs and monitoring of compliance with the legal prohibition on loans to our directors and executive officers. The Compensation Committee is comprised of Chairman John Clerico, Howard Janzen and Dr. Dale A. Schoenefeld.
Involvement in Certain Legal Proceedings
Except as disclosed above, our Directors and Executive Officers have not been involved in any of the following events during the past ten years:
| | 1. | any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; |
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| | 2. | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
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| | 3. | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; |
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| | 4. | being found by a court of competent jurisdiction in a civil action, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
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| | 5. | being subject of, or a party to, any federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
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| | 6. | being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Section 16(a) Beneficial Owner Reporting Compliance
Since we are governed under Section 15(d) of the Exchange Act, we are not required to file reports of executive officers and directors and persons who own more than 10% of a registered class of our equity securities pursuant to Section 16(a) of the Exchange Act.
Code of Ethics
The Company has adopted a code of business conduct and ethics that applies to all its directors, officers (including its chief executive officer, chief financial officer and any person performing similar functions) and employees. The Company has made its Code of Ethics available on its website at www.illumemobile.com/investors/.
Item 11. Executive Compensation.
The following table provides certain summary information concerning compensation awarded to, earned by or paid to the Company’s Chief Executive Officer, the two highest paid executive officers and up to two other highest paid individuals whose total annual salary and bonus exceeded $100,000 for fiscal years 2011 and 2010.
| Name and Principal Position | | Year | | Salary | | | Bonus | | | Option and Warrant Awards (5) | | | Non-Equity Incentive Plan Compen- sation | | | Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) | | | All other Compen- sation (6) | | | Total | |
| Steve Signoff, | | 2011 | | $ | 75,386 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 932 | | | $ | 76,318 | |
| Chief Executive Officer, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| President and Director (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Kendall Carpenter, VP Finance and | | 2011 | | $ | 114,750 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,648 | | | $ | 117,398 | |
Administration, Chief Financial Officer, | | 2010 | | $ | 114,750 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 3,180 | | | $ | 117,930 | |
| Secretary and Treasurer (2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Clint Parr, Executive Vice President | | 2011 | | $ | 148,750 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 3,459 | | | $ | 152,209 | |
| Former Chief Executive Officer, | | 2010 | | $ | 148,750 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 4,857 | | | $ | 153,607 | |
| President and Director (3) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Chris Kingham, Vice President (4) | | 2011 | | $ | 114,750 | | | $ | $0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,169 | | | $ | 116,919 | |
| | | 2010 | | $ | 114,750 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,069 | | | $ | 115,819 | |
MACROSOLVE, INC.
