MACROSOLVE, INC.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
Certain statements in Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate,” or “believe.” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight including changes in the trends of the mobile computing industry, formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers should carefully review the risk factors and related notes included under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on March 13, 2012.
Business Overview
MacroSolve, Inc. (“MacroSolve,” “we,” “us,” or the “Company”) is an Oklahoma corporation formed on January 17, 1997, under the laws of the State of Oklahoma. We are focused on intellectual property licensing and enforcement of our patent in the mobile app market development space. We also offer consulting services related to mobile app development, marketing and financing of mobile app businesses. Our principal executive offices are located at 1717 South Boulder, Tulsa, Oklahoma 74119.
Since March 2011, we have been protecting our intellectual property rights against entities we have identified as potentially infringing our rights. In October 2010, we 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. To date, complaints have been filed against 71 defendants and we are continuously identifying potential infringers with numerous potential infringers identified as of the date of this report. Out of these lawsuits, we have received 38 settlements in the form of non-exclusive, perpetual paid-up licenses for licensed products or for royalties based on a percentage of revenue.
Recent Transactions
On July 31, 2012 (the “Closing Date”), the Company entered into an asset purchase agreement (the “Purchase Agreement”) with DecisionPoint Systems, Inc. (the “Buyer”). Pursuant to the Purchase Agreement, effective on the Closing Date, the Company sold substantially all of the assets relating to its Illume Mobile business, for a purchase price of $1,000,000, of which $250,000 was paid in cash and $750,000 was paid in the form of 617,284 shares of the Buyer’s common stock (valued at $1.215 per share based on the 20 day volume weighted average price). The Company has the right to receive an earn-out payment from the Buyer (the “Earn-Out Payment”) of up to $500,000 (of which 50% will be paid in cash, and 50% will be paid in shares of common stock of the Buyer, valued at the last closing price of the Buyer’s common stock on the one year anniversary of the Closing Date), within 30 days of the one year anniversary of the Closing Date, which will be determined as follows:
(a) If Net Revenue (as defined in the Purchase Agreement) attributable to the assets purchased under the Purchase Agreement, during the one year period commencing on the Closing Date) is $1,500,000 or less, the Earn-Out Payment will be $0;
(b) If Net Revenue is greater than $1,500,000 but less than $2,000,000, the Earn-Out Payment will be $100,000;
(c) If Net Revenue is at least $2,000,000 but less than $3,000,000, the Earn-Out Payment will be equal to the sum of (i) $100,000 plus (ii) 40% of the amount that the Net Revenue amount exceeds $2,000,000; and
(d) If Net Revenue is $3,000,000 or more, the Earn-Out Payment will be $500,000.
In connection with the Purchase Agreement, on the Closing Date, the Company and the Buyer entered into a patent license agreement (the “License Agreement”), pursuant to which the Company granted the Buyer a non-exclusive license under a patent held by the Company pertaining to information collection using mobile computers (the “Licensed Patent”) to make, have made, sell, offer for sale or import any product or service which in the absence of the License Agreement would infringe at least one claim of the Licensed Patent (including specifically the Company’s ReForm™ Development Platform) in and into the United States and to practice the Licensed Methods (as defined in the License Agreement), in the United States, during the term of the Licensed Patent. The Buyer agreed to pay the Company a licensing fee/royalty payment of (i) 7.5% of Net Revenues (as defined in the License Agreement) received from the sale of Software Products (as defined in the License Agreement) and/or Licensed Methods, and (ii) 5% of Net Revenues from the sale of Custom Development Services (as defined in the License Agreement). The Company also granted the Buyer an option to purchase a non-exclusive perpetual license under the Licensed Patent at a purchase price of $500,000.
In connection with the Purchase Agreement, on the Closing Date, the Company and the Buyer entered into a non-competition and non-solicitation agreement (the “Non-Competition Agreement”). Pursuant to the Non-Competition Agreement, for a period of three years commencing on the Closing Date, the Company agreed not to engage in activities in the United States and Canada competitive with the products sold by the Company’s Illume Mobile business as of July 31, 2012, and the Buyer agreed not to engage in activities in the United States and Canada competitive with the products sold by the Company (not related to the assets sold pursuant to the Purchase Agreement). The Company also agreed, for a period of three years, commencing on the Closing Date, not to solicit or hire (unless such employee has been terminated by the Buyer) employees of the Buyer, and the Buyer agreed, for a period of three years commencing on the Closing Date, not to solicit employees of the Company (except as contemplated by the Purchase Agreement).
Accordingly, all operating results disclosed in this quarterly report only include the results from continuing operations, and exclude the results for the Illume Mobile business, which are presented as discontinued operations.
Results of Operations
Quarter Ended September 30, 2012 compared to Quarter Ended September 30, 2011 (all references are to the Quarter Ended September 30)
Net Revenues: Net revenues increased $127,000 or 29%, to $559,000 in the quarter ended September 30, 2012 from $432,000 for the same period in 2011. Sources of revenue were derived from our IP licensing and software products.
Cost of Revenues and Gross Profit: Cost of revenues for the quarter ended September 30, 2012 increased $86,000, or 49%, from $175,000 for the quarter ended September 30, 2011 to $261,000 in 2012. Costs include contingent legal fees and other costs associated with enforcing our intellectual property. The resulting gross profit for the quarter ended September 30, 2012 of $297,000 was up $40,000, or 16%, over the gross profit for the quarter ended September 30, 2011 of $257,000. Gross profit margins were 53% and 59% for the third quarters of 2012 and 2011, respectively.
Operating Expenses: Operating expenses primarily consist of general and administrative expenses and depreciation and amortization expenses. G&A expenses increased by $24,000 of 6%, to $422,000 in the quarter ended September 30, 2012 from $387,000 for the same period in 2011. Corporate branding and awareness expenses decreased $96,000. We wrote off as uncollectible $135,000 in note receivables from a former customer due to collection and legal costs, our change in business strategy and the unavailability of key personnel to substantiate damages. Financial advisory services paid in cash increased $32,000 as the result of payment of $55,000 to two former executives as partial consideration of their separation agreements offset by a $23,000 reduction in payments for investor relations. Non-cash financial advisory services decreased by $38,000 as stock compensation for services was fully amortized. The remaining $9,000 decrease is attributable to lower occupancy costs as a result of the sale of Illume Mobile assets and operations. We amortized $293,000 in MoBiz360 net capitalized development costs. In May 2012, MoBiz360, an incomplete prototype website marketplace, was conveyed to Clint Parr, our former president and CEO, as consideration for an equity interest in Mr. Parr’s new company. As of September 30, 2012, Mr. Parr’s company is still not operational. At such time as it becomes operational, we will record the value of our investment associated with the conveyance of MoBiz360. The ownership of Mr. Parr’s company will be determined by the carried value of MoBiz360 on our books divided by the value per unit of ownership in his company. If Mr. Parr’s company is a C corporation, the value per unit will be the price per common share. Depreciation and amortization expense unrelated to the MoBiz360 write down and attributable to assets retained for continuing operations was approximately $1,000 for the quarters ended September 30, 2012 and 2011.
Loss from Operations: Loss from operations for the quarter ended September 30, 2012 of $438,000 was up $275,000, or 169%, from the loss from operations in 2011 of $163,000, primarily due to the $293,000 amortization of MoBiz360 offset by cost savings related to the reduction in corporate overhead following the sale of Illume Mobile assets.
Other Income and Expense: Total other expenses of $42,000 in the third quarter of 2012 decreased $37,000, or 47%, over the total of $79,000 in 2011. This decrease is due to a $37,000 decrease in interest expense associated with 2011 debentures that were converted to stock in 2012.
Net Loss from Operations: Net loss of $481,000 as of September 30, 2012 was up $238,000, or 98%, from the net loss for the same quarter in 2011 of $243,000, primarily as a result of the factors described above.
Nine Months Ended September 30, 2012 compared to Nine Months Ended September 30, 2011 (all references are to the Nine Months Ended September 30)
Net Revenues: Net revenues from operations increased $1,213,000 or 158%, to $1,981,000 in the nine months ended September 30, 2012 from $768,000 for the same period in 2011. Sources of revenue were derived from our intellectual property licensing, software products, and services. Licensing revenues represented a significant increase in net revenues with an increase of $1,022,000 or 188%, for the period to $1,566,000 from $544,000 for the same period in 2011, which increase is primarily attributable to the licensing of our products and intellectual property. Services revenue increased $191,000, or 85%, in 2012 to $415,000 from $224,000 for the same period in 2011. This was primarily due revenues generated by custom mobile app development through July 31, 2012, when the Illume Mobile operating division was sold.
Cost of Revenues and Gross Profit: Cost of revenues for the nine months ended September 30, 2012 increased $539,000, or 151%, from $321,000 in the first nine months of 2011 to $860,000 in 2012. Legal costs associated with licenses sold were $618,000, or 52%, of the first nine months of 2012 cost of revenues. The resulting gross profit from operations for the nine months ended September 30, 2012 of $1,121,000 was up $674,000, or 151%, over the gross profit for the first nine months of 2011 of $447,000. Gross profit margins were 57% and 58% for the first nine months of 2012 and 2011, respectively.
Operating Expenses: Operating expenses from operations include marketing and sales expenses, general and administrative expenses and depreciation and amortization expenses. Marketing, sales and unabsorbed operating expenses increased by $735,000, depreciation and amortization increased by $366,000 and G&A expenses increased by $20,000 for a net increase of $1,122,000, or 64%, in the first nine months of 2012 to $2,873,000 from $1,751,000 in 2011. The increase in sales, marketing and unabsorbed operations expenses is primary due to payroll and benefits for 11 additional employees hired in 2012 to support growth. The G&A increase is primarily due to the $135,000 note receivable write down and $58,000 increase in salaries and benefits associated with a new CEO employed in August 2011 offset by a $168,000 decrease in corporate branding and awareness expenses in 2012, a $26,000 decrease in 2012 financial advisory services and $14,000 in tax rebates received in 2012 from the Oklahoma Quality Jobs program. Amortization expense primarily increased by $337,000 for MoBiz 360, including its one-time amortization of net capitalized development costs of $293,000 and amortization of Illume Mobile products including DineInsight, ReForm iPhone, Blackberry and Android of $161,000 in 2012 compared to $129,000 in 2011, an increase of $32,000.
Loss from Operations: Loss from operations for the first nine months of 2012 was $1,752,000, an increase of $448,000, or 34%, from the loss from operations in 2011 of $1,304,000 as a result of the one-time $293,000 non-cash write down of the MoBiz360 business and a $135,000 uncollectible note receivable.
Other Income and Expense: Total other expense of $216,000 in 2012 represented an increase of 28%, or $47,000, from $169,000 in 2011. This increase is due a $43,000 increase in interest expense associated with 2011 debentures that were converted to stock in 2012 and a $4,000 expense related to the net book value of computers that were given to three corporate executives not retained after the sale of Illume Mobile.
Net Loss from Operations: Net loss from operations of $1,968,000 for the first nine months of 2012 was up $495,000, or 34%, than the net loss of $1,476,000 for the same period in 2011 as a result of the factors described above.
Liquidity and Capital Resources
As of September 30, 2012, the Company had total current assets of $1,037,445 and total current liabilities of $856,046 resulting in working capital of $181,399. As of September 30, 2012, the Company had cash and cash equivalents of $314,811 and an accumulated deficit of $14,873,454 since operations commenced in 1997. It is the Company’s intention to raise additional working capital from licensing revenues, royalties and consulting fees.
As a result of working capital deficiency and a significant accumulated deficit at December 31, 2011 and a net loss of $2,534,444 in the prior year of 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. For the three and nine months ended September 30, 2012, the Company continued its net losses. 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 raise working capital to finance its operations.
We finance our operations primarily through operating revenues, 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. In March 2012, the remaining $50,000 principal amount of 2010 Debentures outstanding was converted into 940,734 shares of restricted 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 September 30, 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 at management’s discretion and 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.
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 September 30, 2012, fifteen of the sixteen investors elected to convert $1,575,000 in debentures to 16,831,553 shares of common stock. The accrued interest on the converted debentures of $179,312 was settled with $16,167 cash and the issuance of 870,543 shares of common stock. As of September 30, 2012, there was $100,000 principal amount of 2011 Class A Debentures outstanding that were convertible into approximately 1,587,302 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 September 30, 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 September 30, 2012, eighteen of the nineteen investors elected to convert $846,161,000 in debentures to 16,923,227 shares of common stock. The accrued interest on the converted debentures of $45,941 was settled with the issuance of 459,412 shares of common stock. As of September 30, 2012, there were $50,000 principal amount of 2011 Class B Debentures outstanding that were convertible into approximately 1,000,000 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 September 30, 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 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.
On April 23, 2012, the directors converted $500,000 of debentures and $7,243 in accrued interest into 5,790,452 shares of restricted common stock and the associated warrants were cancelled.
2012 Common Stock Private Offering
In the first half of 2012, the Company issued an aggregate of ten units (“Units”) to certain investors (the “Purchasers”) for aggregate cash proceeds of $250,000 (the “Financing”). Each Unit had a purchase price of $25,000 per Unit and consisted of Two Hundred Fifty Thousand (250,000) shares of the Company’s common stock, $0.01 par value (the “Common Stock”) and Series C Warrant to purchase Two Hundred Fifty Thousand (250,000) shares of Common Stock (the “Warrants”). The Warrants have an exercise price of $0.15 per share of Common Stock and will be exercisable until December 31, 2017. The Warrants may be exercised by the Purchasers by cashless exercise. In connection with the Financing, the Company granted each Purchaser registration rights upon the occurrence of a specified event.
Other
In May and June 2012, four directors loaned the Company a total of $449,300 for working capital. In July 2012, three directors loaned a total of $50,000 for working capital. The notes were secured by the unencumbered 75% of patent settlement license fees secondary to the security interest of a financial institution and provided for accrued interest at 12% payable on maturity at September 30, 2012. The total accrued interest on shareholder loans which matured September 30, 2012 was $25,381. The total amount due to the four directors of $524,681, including accrued interest, was rolled over into new notes dated September 30, 2012. The new notes are secured by the unencumbered 75% of patent settlement license fees and provide for accrued interest at 6% payable on maturity at January 1, 2015. The accrued interest at September 30, 2012 is $-0-.
On July 31, 2012, the assets of the Illume Mobile operations were sold to DecisionPoint Systems, Inc. Management believes that the divestiture of this cash-dilutive operation will enable the Company to pursue its patent licensing strategy from internally generated funds as the Company is now cash flow positive. As previously discussed, the operating losses in the third quarter included significant one-time non-cash charges and ongoing operating expenses have been significantly scaled back. However, if we are unable to obtain sufficient patent licensing revenues to support the greatly reduced operating burden, we will not be able to implement our patent licensing strategy.
To lower its required cash expenditures for the first nine months of 2012, the Company issued 2,800,000 shares of common stock to vendors and 8,965,068 shares of common stock to directors and employees for compensation for services.
Sources and Uses of Cash
| | | Nine Months ended September 30, | |
(In thousands) | | 2012 | | | 2011 | |
| Cash flow data: | | | | | | |
| Net cash (used in) operating activities | | $ | (1,048 | ) | | $ | (869 | ) |
| Net cash provided by (used in) investing activities | | | 12 | | | | (485 | ) |
| Net cash provided by financing activities | | | 1,078 | | | | 1,563 | |
| Net increase in cash and cash equivalents | | | 42 | | | | 209 | |
| Cash and cash equivalents, beginning of period | | | 273 | | | | 187 | |
| Cash and cash equivalents, end of period | | $ | 315 | | | $ | 396 | |
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2012 was $1,048,000, an increase of $179,000 from the same period in 2011. More cash was used in operating activities primarily due to the workforce growth from 11 employees in the first half of 2011 to 38 employees in the first half of 2012.
Investing Activities
Cash provided by investing activities for the nine months ended September 30, 2012 was $12,000, an increase of $497,000 from the $485,000 cash used in investing activities during the same period in 2011, which increase was primarily due to the $250,000 cash received from the sale of Illume Mobile assets and $226,000 reduction in software development costs in 2012.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2012 was $1,078,000 compared with $1,563,000 for the same period in 2011, a decrease of $485,000. In the first nine months of 2012, the Company raised $750,000 in debenture financing and sale of stock to accredited investors, $500,000 less than was raised in 2011 from the sale of debentures.
Critical Accounting Policies
Accounts Receivable and Credit Policies:
Trade accounts receivable consist of amounts due from the sale of patent licenses, software licenses and solution services. Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days of receipt of the invoice. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts based on historical collection experience and a review of the current status of trade accounts receivable. In many instances, customers make a substantial prepayment for services before rendered; therefore the Company is extending trade terms to customers who have already proven to be credit worthy.
At the quarter ending September 30, 2012 and at fiscal year ending December 31, 2011, the Company deems all trade receivable amounts recorded as collectible and, thus has not provided an allowance for uncollectible amounts.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is computed using straight-line methods applied to individual property items based on estimated useful lives.
Revenue Recognition and Unearned Income:
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, and 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. Unearned income associated with Illume Mobile contracts of $36,971 was transferred to DecisionPoint Systems as part of the Illume Mobile asset sale in July 2012. The $500,000 in unearned income at September 30, 2012 consists of the total potential earn-out payment from DecisionPoint Systems from the sale of Illume Mobile assets.
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. The Company no longer offers solutions services after the sale of Illume Mobile in July 2012.
Software Development Costs:
The Company accounts for software development costs in accordance with ASC 985-20, “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. The Company sold a total of $1,213,550 in gross capitalized software development costs and associated $194,070 in accumulated amortization, or a net of $1,019,480, to DecisionPoint Systems in July 2012. The Company is not presently developing software.
Long-Lived Assets:
The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35, “Impairment or Disposal of Long-lived Assets”. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment charges were incurred during the periods ended September 30, 2012 and December 31, 2011.
Stock-Based Compensation:
The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation”. 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 uses the Black-Sholes model for determining the value of the options. One of the factors required to compute the options price is volatility of the stock price. The Company’s own stock commenced public trading in August, 2008; however due to initially thin trading activity, management determined that the technology sector fund XLK and its standard deviation would continue to be used to provide the volatility factor required to compute the option value.
Effect of Recently Issued Accounting Pronouncements
In December 2011, 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 U.S. GAAP and IFRS related to the offsetting of financial instruments. The existing U.S. 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 2011, 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.
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required under Regulation S-K for “smaller reporting companies.”
ITEM 4 - 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 Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. 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 our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2012, 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.
Effective August 1, 2012, Mr. Steve Signoff resigned as our President and Chief Executive Officer and Mr. Randy Ritter resigned as our Chief Operating Officer. As a result of the resignations of Messrs. Signoff and Ritter, we only had one executive officer, Ms. Kendall Carpenter, our Chief Financial Officer, until October 3, 2012, when James McGill was appointed as President and Chief Executive Officer. Other than the resignations of Messrs. Signoff and Ritter, there were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
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 16 legal proceedings we initiated in the United States District Court Eastern District of Texas against 20 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 by the Company that are still outstanding and the status of legal proceedings that have been resolved since last reported is as follows:
| Filing Date | Defendant | Case Number | Status | Date of Disposition (if any) |
| 8-Jun-11 | BizSpeed, Inc. | 6:11-CV-287 | (a) | 10/23/2012 |
| 8-Jun-11 | Environmental Systems Research Institute, Inc. | 6:11-CV-287 | (a) | 9/28/2012 |
| 8-Jun-11 | Spira Data Corp. | 6:11-CV-287 | (a) | 10/16/2012 |
| 8-Jun-11 | TrueContext Mobile Solutions Corporation | 6:11-CV-287 | (a) | 9/27/2012 |
| 8-Jun-11 | Invensys Systems, Inc. (d/b/a Invensys Operations Management) | 6:11-CV-287 | (b) | 8/9/2012 |
| 8-Jun-11 | Agilis Systems, LLC | 6:11-CV-287 | (b) | 10/31/2012 |
| 8-Jun-11 | RealTime Results, LLC | 6:11-CV-287 | (b) | 10/31/2012 |
| 8-Jun-11 | Ventyx Inc. | 6:11-CV-287 | (b) | 11/1/2012 |
| 8-Jun-11 | General Data Company, Inc. | 6:11-CV-287 | (c) | 12/5/2011 |
| 8-Jun-11 | Millennium Information Technology, Inc. (d/b/a MIT Systems, Inc.) | 6:11-CV-287 | (c) | 12/5/2011 |
| 8-Jun-11 | Air2Web Inc. | 6:11-CV-287 | Open | N/A |
| 8-Jun-11 | Xora, Inc. | 6:11-CV-287 | Open | N/A |
| 8-Jun-11 | Spring Wireless USA, Inc. | 6:11-CV-287 | Open | N/A |
| 8-Jun-11 | The DataMax Software Group Inc. | 6:11-CV-287 | Open | N/A |
| 15-Sep-11 | Citigroup Inc. | 6:11-CV-490 | Open | N/A |
| 3-Oct-11 | Whoop, Inc. | 6:11-CV-523 | Open | N/A |
| 21-Dec-11 | American Airlines, Inc. | 6:11-CV-685 | Open | N/A |
| 21-Dec-11 | Avis Rent A Car System, LLC | 6:11-CV-686 | Open | N/A |
| 21-Dec-11 | Continental Airlines, Inc. | 6:11-CV-687 | (b) | 8/20/2012 |
| 21-Dec-11 | United Air Lines, Inc. | 6:11-CV-694 | (b) | 8/20/2012 |
| 30-Jan-12 | Facebook, Inc. | 6:12-CV-44 | Open | N/A |
| 30-Jan-12 | Hyatt Corporation | 6:12-CV-45 | (b) | 10/1/2012 |
| 30-Jan-12 | Newegg Inc. | 6:12-CV-46 | Open | N/A |
| 30-Jan-12 | Wal-Mart Stores, Inc. | 6:12-CV-47 | (b) | 10/31/2012 |
| 17-Feb-12 | GEICO Casualty Company and Government Employees Insurance Company | 6:12-CV-74 | Open | N/A |
| 17-Feb-12 | GEICO Insurance Agency, Inc. | 6:12-CV-74 | Open | N/A |
| 17-Feb-12 | Marriott International, Inc. | 6:12-CV-76 | (b) | 11/2/2012 |
| 27-Feb-12 | AOL INC. | 6:12-CV-91 | (b) | 8/20/2012 |
| 27-Feb-12 | Inter-continental Hotels Corporation | 6:12-CV-92 | (b) | 10/5/2012 |
| 27-Feb-12 | Six Continents Hotels, Inc. | 6:12-CV-92 | (b) | 10/5/2012 |
| 23-Mar-12 | MovieTickets.com | 6:12-CV-194 | Open | N/A |
| 18-Jun-12 | JPMorgan Chase & Co, JPMorgan Chase Bank, N.A. | 6:12-CV-384 | (b) | 8/15/2012 |
| 18-Jun-12 | LinkedIn Corporation | 6:12-CV-385 | Open | N/A |
| 19-Jun-12 | Jetblue Airways Corporation | 6:12-CV-387 | Open | N/A |
| 19-Jun-12 | Kayak Software Corporation | 6:12-CV-388 | (b) | 7/27/2012 |
| 19-Jun-12 | Cumulus Media, Inc. | 6:12-CV-389 | Open | N/A |
| 26-Jun-12 | Fareportal, Inc. | 6:12-CV-416 | Open | N/A |
| 26-Jun-12 | LQ Management L.L.C. | 6:12-CV-417 | (b) | 10/4/2012 |
| 26-Jun-12 | Target Corporation | 6:12-CV-418 | Open | N/A |
| 5-Oct-12 | American Express Company | 6:12-CV-743 | Open | N/A |
| 5-Oct-12 | Redbox Automated Retail, LLC | 6:12-CV-744 | Open | N/A |
| (a) Lawsuit dismissed without prejudice |
| (b) Lawsuit dismissed with prejudice pursuant to a settlement agreement |
| (c) Default judgment entered |
Not required under Regulation S-K for “smaller reporting companies.”
The Company issued 3,234,405 shares of compensation shares to employees in lieu of $141,938 cash compensation for services rendered during the second quarter of 2012 which had been recorded at a value of $2,713 in stock based compensation based upon individual tax elections made by each recipient. The shares were awarded on Restricted Stock Agreements which have a six month time lapse restriction and are subject to forfeiture upon voluntary termination of employment.
The Company’s independent directors annual compensation is $16,000 to be paid quarterly in restricted stock. The Company issued the directors 280,700 shares of restricted stock on July 1, 2012 for their second quarter 2012 compensation. The Company recorded $4,000 in stock based compensation for each of its five independent directors.
None.
None.
None.
| * | In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | MACROSOLVE, INC. | |
| | | | |
| Date: November 13, 2012 | By: | /s/ JAMES C. MCGILL | |
| | | James C. McGill | |
| | | Chief Executive Officer (Principal Executive Officer) | |
| | | | |
| Date: November 13, 2012 | By: | /s/ KENDALL CARPENTER | |
| | | Kendall Carpenter | |
| | | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |
| | | | |
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