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, 2013
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.) |
9521-B Riverside Parkway, #134 Tulsa, Oklahoma | 74137 (918) 932-2000 |
| (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. Yesx Noo
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 o Nox
Note: The Company is a voluntary filer but has filed all reports it would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months if it was a mandatory filer.
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 28, 2013, based on the closing sales price of the Common Stock as quoted on the OTC Markets was $3,588,179. 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 24, 2014, there were 190,764,559 shares of registrant’s common stock outstanding.
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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; |
| | • | market conditions in the mobile solutions for business industry; |
| | • | the impact of government regulation; |
| | • | 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, including a favorable resolution of the recent decision of the USPTO to reject the claims of our ‘816 patent; |
| | • | claims of infringement on third party intellectual property; |
| | • | our financial position, business strategy and other plans and objectives for future operations; |
| | • | economic conditions in the U.S. and worldwide; 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
Organization
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. Following the sale of Illume Mobile division on July 31, 2012, we have 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 9521-B Riverside Parkway, #134, Tulsa, Oklahoma 74137.
MacroSolve has historically been a mobile applications development company, focused on enterprise applications, and has been an entrepreneurial force for over sixteen years. Our legacy customers, technology and development teams were profitably sold to DecisionPoint Systems for cash and equity in July 2012. In the third quarter of 2012, the Company retained key executives and BOD members in order to take advantage of a new strategy, which uses the Company’s position as an experienced business advisory team for mobile app developers, fortified by intellectual property, which we believe can create substantial passive revenues and equity holdings. DecisionPoint Systems was the first client in the portfolio we are creating under our new strategy. We hope to develop strategic relationships with large mobile app marketing and development companies in order to grow our portfolio.
Starting in March 2011, we began protecting our intellectual property rights against entities we identified as infringing our patent claims. This process was halted in March 2014 as a result of the USPTO Office Action, discussed below. In October 2010, we received U.S. patent #7,822,816, which we refer to as the ‘816 patent, which covers certain mobile information collection systems across all wireless networks, smart phones, tablets, and rugged mobile devices, regardless of carrier and manufacturer. Complaints were filed against 101 defendants. Out of these lawsuits, we received 68 settlements in the form of non-exclusive, perpetual paid-up licenses for licensed products or royalties based on a percentage of revenue. Our objective in these enforcement actions was not to monopolize or prevent other companies from competing; it was to get a return on our investment in the intellectual property.
Currently, the Company has a web presence at ‘www.macrosolve.com’ and maintains multiple social media profiles.
Recent Developments
On March 7, 2014, the United States Patent and Trademark Office (“USPTO”) sent the Company an office action related to an ex parte reexamination of the ‘816 patent, which rejected all the claims in the patent (the “USPTO Office Action”). The Company has two months to file a request for the patent examiners to reconsider the USPTO Office Action. In the event the examiners do not rescind the USPTO Office Action, the Company would have the option to file an appeal with the Patent Appeals Board. That process can be costly and take an indeterminate amount of time. As a result of the USPTO Office Action, the Company has withdrawn all outstanding litigation relating to the ‘816 patent without prejudice, which will allow it to refile such pending suits if the USPTO Office Action is rescinded or the Company’s rights under the ‘816 patent are restored. The Company will be unable to pursue any new lawsuits relating to the ‘816 patent until the USPTO Office Action is resolved. The inability to pursue claims pursuant to its ‘816 patent until the USPTO Office Action is resolved will negatively impact the Company’s primary source of revenue. Since the sale of Illume Mobile in July 2012, revenue from IP licensing has accounted for over 97% of the Company’s revenue. The Company is presently conferring with its legal counsel and evaluating its options with regard to the recent USPTO Office Action.
On August 5, 2013, the Company finalized an agreement with Dri-Eaz Products, Inc. for patent advisory services related to their launch of Dri-Plan, an iPad app dedicated to simplifying and automating job site documentation for restorers. As a part of those services, Dri-Eaz received a limited license to the ‘816’ patent in exchange for a royalty on the gross revenues received for the sale of licensed products. The app was marketed on a very limited release basis beginning late in 2013, resulting in minimal revenue to the Company in 2013.
The Company finalized an agreement on June 5, 2013 with Endexx Corporation (EDXC), a micro-cap company which collaborates with independent software developers, scientists, engineers and other companies to build businesses that can thrive collectively in the equity markets. During the six month engagement, the Company provided its virtual management team to assist Endexx with coordinating business planning, investor interests and intellectual property for a mobile app venture that uniquely addresses advertising market analytics. The Company also provided patent advisory services to Endexx. As part of those services, Endexx received a variable limited ‘816’ license during the course of the business advisory engagement while its app is in development with the agreement that a permanent license will be negotiated upon the app’s completion, estimated to be late in 2014. Endexx issued 125,000 shares of its restricted stock valued at $15,000 to the Company with the balance of $15,000 currently due.
The Company finalized an agreement on June 12, 2013 with RIJO Investment Group, a private company based in Los Angeles, California, to provide its virtual management team to assist RIJO with coordinating business planning, investor interests, content expertise and third party technology partners for a venture that uniquely optimizes historical content, GPS and social media. This was initially a two month project during the proof of concept phase and does not include patent advisory services or stock for services. The parties are working together towards a project extension to cover the initial funding and build out phase. Because of the size of the project and variety of potential funding sources, the next phases are expected to stretch into late 2014.
On March 12, 2013, the Company finalized an agreement with MEDL Mobile Holdings, Inc. (“MEDL”), a company involved in the creation, development, marketing and monetization of mobile apps. MEDL has the right to extend its license to the Company’s ‘816 patent to its app development clients on a ‘per install’ basis. The Company will receive a percentage of the passive revenues, which are subject to MEDL achieving minimum performance goals. As a part of the agreement, each Company received $50,000 worth of the other’s stock with the price per share determined by the Volume Weighted Average Price (“VWAP”) for each stock for the last twenty trading days prior to execution of the agreement. The Company received 147,692 shares of MEDL stock priced at $0.39 per share and MEDL received 2,500,000 shares of the Company’s stock priced at $0.02 per share. The shares were recorded at fair value on March 8, 2013 of $58,338. MEDL has not meet its minimum performance goals and has lost certain exclusivity conditions; however, the parties are working together to facilitate MEDL’s licensing strategy to its app development clients.
As previously reported, the Company sold substantially all of the assets relating to its Illume Mobile business on July 31, 2012 to DecisionPoint Systems, Inc. Accordingly, all operating results disclosed in this annual report only include the results from continuing operations, and exclude the results for the Illume Mobile business, which are presented as discontinued operations.
Overview
Market Opportunities
The mobile technology market is very large and research indicates that it will continue to expand. As mobile applications supply and demand grow, so does our target market for consulting and patent licensing clients.
The mobile technology market is being driven by the value that mobile applications are providing to end users, their mobile devices and wireless networks. According to CNET and Flurry research, app usage surged 115% in 2013, with over 1 trillion app sessions created by consumers. TopApps predicts that 76 billion apps will be downloaded in 2014. There are an estimated 1 million apps available on app stores. According to TechCrunch, Apple’s store generated over $10B in 2013 revenues. Since the Apple store opened, $15B in revenue share payouts has been made to app developers. TechCrunch also reported that in 2013, angel investments reached a new high, with investors crossing the billion-dollar threshold, committing $1.1 billion to entrepreneurs launching new tech companies. Venture capital markets have invested highly in the industry. According to Entrepreneur magazine, venture capital invested approximately $6.2 billion in U.S. companies involved in software related ventures.
Global smartphone penetration continues to grow according to research firm IDC, which believes shipment volumes will grow at a compound annual growth rate of 16.0% before reaching a total of 1.5 billion units shipped in 2017.
Worldwide combined shipments of computing devices (PCs, tablets and mobile phones) were projected to reach 2.32 billion units in 2013, a 4.5% increase from 2012, according to Gartner, Inc. The market is being driven by a shift to lower-priced devices in nearly all device categories. Worldwide shipments of traditional PCs (desk-based and notebook) were forecast to total 303 million units in 2013, an 11.2% decline from 2012, and the PC market, including ultramobiles, was forecast to decline 8.4% in 2013. Tablet shipments are expected to grow 53.4 percent this year, with shipments reaching 184 million units.
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.
Growth Strategies
There are four foundational areas of concentration in the Company’s growth strategy:
| · | Identify and support mobile app ventures with advisory services and patent protection, building a portfolio of market leading solutions which generate near term revenue and substantial earnings at liquidity for the Company; |
| · | Generate high margin potential, passive revenue by extending affordable patent protection to small and medium sized app developers through partnerships; |
| · | Subject to favorable resolution of the USPTO Office Action, continue enforcing current intellectual property; and |
| · | Subject to favorable resolution of the USPTO Office Action, increase intellectual property portfolio via continuation filings. |
Consulting Services
Our consulting services are focused on clients who have needs to begin or grow a mobile app business. We are advisors to the app entrepreneur on all aspects of starting and or expanding the venture. We do not engage in app development or app marketing but rely on partners in those industries for client referrals.
The consulting services that are offered include, but are not limited to:
| · | Visioning and Concepting – Exploring an app idea, its problem to solve and potential business models; |
| · | Competitive Analysis – Thorough examination of the market place and funding sources growing the competition; |
| · | Technology Evaluation – Discovery of best practices and platforms for mobile and web development; |
| · | Customer Economics Modeling – Quantification of initial and long term costs to acquire and grow customer segments; |
| · | Go-to-Market Strategy – Sales, marketing, channel, business and strategic partnership options review; |
| · | Financial Planning – Assumption modeling and creation of balance sheet, income and cash flow statements; |
| · | Funding Presentation and Coaching – Creation of PowerPoint and other communications materials in preparation for investor meetings; |
| · | Intellectual Property Advisory – Analysis of IP and options to protect and grow; |
| · | Management Team Evaluation and Augmentation – Review of strengths of management team along with growth plans. Virtual executive management team recommendations for interim periods; |
| · | Digital and Social Marketing – Pre-launch and post-launch messaging and communications channel management; and |
| · | Strategic Business Development – Focus on closing very large deals with strategic partners and/or clients which significantly enhance cash flow. |
Competition
Almost all of the Company’s revenues has come from patent license fees. By definition, a patent provides the owner the right to exclude others from making, using, selling offering for sale, or importing the patented invention for the term of the patent. Assuming a favorable resolution of the USPTO Office Action, our objective in enforcing our patent is not to monopolize or prevent other companies from competing; it is to get a return on our investment in the intellectual property.
For our consulting business, many wireless carriers, application development technology leaders and major consulting companies provide mobile application consulting services. Our target market is small and medium sized businesses (“SMB”) where competitors such as AT&T, Adobe and Accenture do not have an advantage due to affordability and agility. We specifically target clients who do not have management in place who can grow a business around a mobile app, an underserved market which is cost-effective for us to serve in a way not feasible for large or national consultancies. Rocksauce Studios of Austin, Texas, a development partner with our former operating division, Illume Mobile, competes in this area by offering business plans tailored to specific mobile apps. Similar consulting services are offered by BigInnovations of Hobe Sound, Florida, MasterPlans of Portland, Oregon and SocializeMobilize of San Francisco, California.
The competitors in the SMB target market include technology companies and mobile marketing companies. Applico, Silicus, 1MobileSolution, Diaspark are some of the companies whose services are fundamentally centered on application design, technology integration and developers who create and manage the solution. Brandignity, Appulat, Fiksu, AppTap and Flurry are companies with core competencies in marketing and branding applications and can indirectly compete with us. In many cases, these competitors’ business models compliment ours and have the potential to be business development partners. This is the case with Fiksu, a company which has established a mutual client referral agreement with us.
Customers and Suppliers
Illume Mobile’s customers were transitioned to DecisionPoint Systems, Inc. after the July 31, 2012 transaction. MacroSolve current customers consist of licensees who hold non-exclusive, perpetual paid-up licenses for licensed products, which are non-recurring revenues and consulting customers, which represented less than 3% of 2013 revenues as the Company continues to build its services offerings and prospects list of small or early-stage mobile app companies. The Company received payment in full on all perpetual paid-up licenses issued pursuant to settlement agreements; therefore, there is no commercial effect to the Company as a result of the recent USPTO Office Action for those licenses. However, regarding those clients who received patent advisory services and pay royalties based on agreements that are dependent upon the ‘816 patent, the failure to have the Office Action resolved in the Company’s favor could have an adverse impact on those royalty agreements. 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 USPTO has issued U.S. Patent No. 7,822,816 to our company. The patent covers certain mobile information collection systems across all wireless networks, smart phones, tablets, and rugged mobile devices, regardless of carrier and manufacturer. On March 7, 2014, the USPTO sent the Company the USPTO Office Action relating to the ‘816 patent, which rejected all the claims in the ‘816 patent. The Company is presently evaluating its options in appealing that decision. If we are successful in overturning the USPTO Office Action, we will continue to pursue the monetization this patent and our other IP assets.
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 is currently considering its options as related to this continuation.
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 three full-time employees that comprise its executive management and accounting team. We have no labor union contracts and believe relations with our employees are satisfactory.
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 recently received notice that the USPTO rejected the claims in our ‘816 patent, which has been our primary source of revenue. If we are not successful in appealing the USPTO Office Action, it would have a material adverse effect on our business.
On March 7, 2014, the USPTO sent us the USPTO Office Action relating to the ‘816 patent, which rejected all the claims in the ‘816 patent. We have two months to file a request for the patent examiners to reconsider the USPTO Office Action. In the event the examiners do not rescind the USPTO Office Action, we would have the option to file an appeal with the Patent Appeals Board. That process can be costly and take an indeterminate amount of time. The inability to pursue claims pursuant to its ‘816 patent until the USPTO Office Action is resolved will negatively impact our primary source of revenue. Since the sale of Illume Mobile in July 2012, revenue from IP licensing has accounted for over 97% of our revenue. We are presently conferring with our legal counsel and evaluating our options with regard to the USPTO Office Action. If we are unable to reverse the USPTO Office Action, it would have a material impact on our business and we would need to find new sources of revenue. There are no assurances that we will be successful in reversing the USPTO Office Action in a timely manner, if at all.
We are currently unable to monetize our ‘816 patent due to the USPTO Office Action.
In October 2010, we received Patent #7,822,816, which covers certain mobile information collection systems across all wireless networks, smart phones, tablets, and rugged mobile devices, regardless of carrier and manufacturer. Efforts to monetize the ‘816 patent were initiated in March 2011 and the efforts continued through March 2014. During 2013, over $1.4 million in licensing revenues were generated as a result of the ‘816 patent, representing approximately 97% of our revenues. Until the USPTO Office Action is resolved, we are not able to continue to enforce and monetize this patent. We continue to make progress on our consulting business not directly related to patent licensing, however, the likelihood of it generating near term revenues sufficient to fund current operations is remote.
As a result of the USPTO Office Action, we may need to obtain additional funding. If we are unable to obtain additional funding when needed, our business operations will be harmed and if we do obtain additional financing our then existing shareholders may suffer substantial dilution.
At December 31, 2013, we had total current assets of $777,596 and total current liabilities of $316,172 for working capital of $461,424. While we currently believe we have sufficient capital to continue our operations for the next 12 months, we may incur significant expenses if we chose to appeal the USPTO Office Action. If we appeal, we could deplete our cash and working capital more rapidly than expected, which could require additional funds to sustain our appeal of the USPTO Office Action and our 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, if needed. The inability to obtain additional capital when needed will restrict our ability to appeal the USPTO Office Action and may reduce our ability to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our business operations. Any additional equity financing may involve substantial dilution to our then existing shareholders.
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 $240,684 and $8,258,937 for the years ended December 31, 2013 and 2012, respectively. The loss in 2012 included $5,875,562 in non-cash expenses related to derivatives. In addition, at December 31, 2013, we had an accumulated deficit of $21,173,815. Since our inception, we have experienced negative cash flow from operations; however, since divesting of Illume Mobile, we have been operationally cash flow positive. We cannot assure you that we can achieve profitability or sustain cash flow positive operations 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.
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 through a combination of reliance on intellectual property laws (including copyright, patent, trademark and trade secret laws) as well as licensing and other agreements preventing the unauthorized disclosure and use of our intellectual property. Also, third parties may be able to successfully challenge, oppose, invalidate or circumvent our patents, trademarks, copyrights and trade secret rights. For example, on March 7, 2014, the USPTO sent the Company the USPTO Office Action relating to the ‘816 patent, which rejected all the claims in the ‘816 patent. 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 patented intellectual property rights is difficult and costly. During 2013, nearly $850,000 in patent enforcement fees and costs were incurred, representing approximately 59% of the Company’s revenues. 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, including taking action to overturn the USPTO Office Action. 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. 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. We have not filed for any patent protection rights outside the United States and 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 technologies by obtaining and enforcing 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 license our technologies 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. On March 7, 2014, the USPTO sent the Company the USPTO Office Action relating to the ‘816 patent, which rejected all the claims in the ‘816 patent. The Company is presently evaluating its options in appealing that decision.
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 technologies similar to ours or design around any patents on our technologies.
In addition, the USPTO 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 IP and services.
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.
We may be involved in lawsuits to protect or enforce our intellectual property rights, 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 USPTO to determine the priority of inventions. The defense and prosecution of intellectual property suits, USPTO 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 intellectual property, 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.
A third party may assert that our patents are invalid and/or unenforceable. On March 7, 2014, the USPTO sent the Company the USPTO Office Action relating to the ‘816 patent, which rejected all the claims in the ‘816 patent. The Company is presently evaluating its options in appealing that decision. 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.
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; |
| | • | 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. |
We might experience significant errors or security flaws in our former products and services.
We ceased providing mobile software products and custom mobile app development services on July 31, 2012 when we sold Illume Mobile operations. We are not liable for errors or security flaws in Illume Mobile software products and services rendered after July 31, 2012. While we might be held liable for products and services rendered prior to July 31, 2012, we are unaware of any reported or unresolved problems regarding product liability, performance or warranty issues with our former customers.
If we fail to maintain or expand our relationships with strategic partners and indirect distribution channels our consulting revenues could decline.
Our consulting 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.
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 technologies 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 services, actions by competitors, etc.), we may not be able to maintain or expand our recent revenue growth.
We depend on key employees in a competitive market for skilled personnel.
The success of our business will continue to depend upon certain key executive management personnel who 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 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 will depend in part upon our ability to attract and retain highly skilled personnel. 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.
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 business plans, 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, 2013, our stock traded less than 104,000 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 3,058,400. Out of the 252 trading days in 2013, zero shares traded on 36 days. On the 216 days that trading occurred, 73 days traded 20,000 shares or less and only 36 days traded 200,000 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.
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.
None.
We maintain our mailing address at 9521-B Riverside Parkway, #134, Tulsa, Oklahoma 74137. Due to the small number of employees, we no longer maintain a physical workspace, but allow our employees to work remotely. The Company has no obligation under any operating lease.
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 not a party to any legal proceedings. All proceedings related to the ‘816 patent have been dismissed without prejudice, meaning the cases can refiled upon a favorable resolution of the USPTO Office Action. See “Part 1 – Business – Recent Developments” for a complete description of the USPTO Office Action.
A summary of the legal proceedings that have been resolved since last reported is as follows:
Filing Date | Defendant | Cas e Number | Status | Date of Dis pos itio n (if any) |
| 21-Dec-11 | American Airlines , Inc. | 6:11-CV-685 | (a) | 3/24/2014 |
| 30-Jan-12 | Newegg Inc. | 6:12-CV-46 | (b) | 3/13/2014 |
| 17-Feb-12 | GEICO Cas ualty Company and Government Employees Ins urance Company | 6:12-CV-74 | (b) | 3/13/2014 |
| 17-Feb-12 | GEICO Ins urance Agency, Inc. | 6:12-CV-74 | (b) | 3/13/2014 |
| 4-Dec-12 | Sears Holdings Management Corporation et al | 6:12-CV-916 | (b) | 9/25/2013 |
| 21-Dec-12 | SkyMall, Inc. | 6:12-CV-977 | (b) | 9/11/2013 |
| 25-Feb-13 | Cos tco Wholes ale Corporation | 6:13-CV-198 | (b) | 1/2/2014 |
| 25-Feb-13 | GameStop Corp, et al | 6:13-CV-200 | (b) | 12/13/2013 |
| 25-Feb-13 | Gilt Groupe Holdings , Inc. et al | 6:13-CV-201 | (b) | 12/3/2013 |
| 25-Feb-13 | Kohl's Department Stores , Inc. et al | 6:13-CV-202 | (b) | 1/2/2014 |
| 26-Feb-13 | Nords trom, Inc. et al | 6:13-CV-204 | (b) | 12/13/2013 |
| 26-Feb-13 | Pandora Media, Inc. | 6:13-CV-205 | (b) | 1/2/2014 |
| 26-Feb-13 | Staples , Inc. et al | 6:13-CV-207 | (b) | 1/7/2014 |
| 12-Sep-13 | Box, Inc. | 6:13-CV-665 | (b) | 2/20/2014 |
| 12-Sep-13 | Carls on Hotels , Inc., et al | 6:13-CV-666 | (a) | 3/19/2014 |
| 12-Sep-13 | Chipotle Mexican Grill, Inc. et al | 6:13-CV-667 | (a) | 3/17/2014 |
| 12-Sep-13 | Comcas t Corporation et al | 6:13-CV-668 | (a) | 1/6/2014 |
| 12-Sep-13 | Dis cover Financial Services , Inc. et al | 6:13-CV-669 | (b) | |
| 12-Sep-13 | Dropbox, Inc. | 6:13-CV-670 | (a) | 3/17/2014 |
| 12-Sep-13 | Five Guys Enterpris es , LLC et al | 6:13-CV-671 | (a) | 3/17/2014 |
| 12-Sep-13 | Home Box Office, Inc. | 6:13-CV-672 | (a) | 3/17/2014 |
| 12-Sep-13 | MediaFire, LLC | 6:13-CV-673 | (a) | 3/17/2014 |
| 12-Sep-13 | Meetup, Inc. | 6:13-CV-674 | (a) | 3/17/2014 |
| 12-Sep-13 | Wyndham Hotel Group, LLC et al | 6:13-CV-675 | (b) | 1/15/2014 |
| (a) | Lawsuit dismissed without prejudice. |
| (b) | Lawsuit dismissed with prejudice pursuant to a settlement agreement. |
Not applicable.
PART II
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, 2012 through December 31, 2013. 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.
| | |
| | | 2013 | | | 2012 | |
| | | Sales Price | | | Sales Price | |
| | | High | | | Low | | | High | | | Low | |
| Quarter Ended | | | | | | | | | | | | |
| March 31 | | $ | 0.04 | | | $ | 0.01 | | | $ | 0. 14 | | | $ | 0. 06 | |
| June 30 | | | 0.06 | | | | 0.02 | | | | 0. 12 | | | | 0. 05 | |
| September 30 | | | 0.04 | | | | 0.01 | | | | 0. 06 | | | | 0. 02 | |
| December 31 | | | 0.04 | | | | 0.02 | | | | 0 .06 | | | | 0. 01 | |
Holders
As of March 24, 2014, there were approximately 905 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
| Plan category | | Number of securities to be issued upon exercise of outstanding options | | | Weighted-average exercise price of outstanding options | | Securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| (a) | (b) | (c) |
| Equity compensation plans approved by security holders | | 12,870,584 | | | $ | 0.37 | | 42,528,000 |
| Equity compensation plans not approved by security holders | | | - | | | | - | | - |
| Total | | 12,870,584 | | | $ | 0.37 | | 42,528,000 |
Not required under Regulation S-K for “smaller reporting companies.”
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, 2013 Compared to Year Ended December 31, 2012 (all references are to fiscal years).
Total Net Revenues: Total net revenues decreased $980,000, or 40%, to $1,454,000 in 2013 from $2,434,000 for 2012. Sources of revenue were derived from our IP licensing and services. Licensing revenues represented the majority of the net revenues with a decrease of $1,019,000, or 42%, in 2013 to $1,415,000 from $2,434,000 for the same period in 2012. IP licensing is subject to fluctuation based on the inherent nature of legal proceedings.
Cost of Revenues and Gross Profit: Cost of revenues for 2013 decreased $176,000, or 17%, from $1,030,000 in 2012 to $854,000 in 2013. Legal fees and costs associated with licenses sold pursuant to intellectual property monetization were $850,000, or 99%, of the 2013 cost of sales. Contingent legal fees decreased $401,000 in 2013 in relation to the reduced IP licensing revenues. Other legal expenses related to ongoing litigation was $301,000, a $221,000 increase over 2012. During 2013, legal costs associated with our intellectual property monetization increased due to a Markman hearing, discovery and expert witnesses. The resulting gross profit for 2013 of $600,000 was a decrease of $804,000, or 57%, from the gross profit for 2012 of $1,404,000. Gross profit margins were 41% and 58% for 2013 and 2012, respectively.
General and Administrative Expenses: General and administrative expenses decreased by $654,000, or 46%, in 2013 to $778,000 from $1,432,000 in 2012. Management cash salaries increased by $40,000 in 2013 but were offset by a decrease in equity based compensation of $106,000, for a net compensation decrease of $66,000. The Company paid $29,000 in cash financial advisory fees to two former officers in 2013, a $568,000 decrease from 2012 financial advisory fees. Directors received $16,000 in cash compensation and $70,250 in equity compensation in 2013 as compared to $0 in cash compensation and $100,205 in equity compensation in 2012, a net decrease of $14,000. The Company incurred $60,000 in legal expenses in 2013, a $45,000 decrease over legal expenses of $105,000 in 2012, primarily due to the additional legal expenses incurred in the sale of Illume Mobile in 2012. General and administrative services in 2012 were offset by $16,000 in transition services related to the sale of Illume Mobile; there were no offsets in 2013.
Loss from Operations: Loss from operations for 2013 of $178,000 was an increase of $150,000 over the loss from operations in 2012 of $28,000, which resulted primarily due to the decrease in gross profit of $804,000, offset by the decrease in G&A expenses of $654,000.
Other Income and Expense: Total other expenses of $63,000 in 2013 were $5,963,000, or 99% less than the total of $6,026,000 in 2012. This decrease is due to a $4,000,000 non-cash expense for derivative accounting under ASC 815-15 “Derivative and Hedging” in 2012, amortization of debt discount of $1,800,000 in 2012 and higher non-cash interest expense of $100,000 for the Company debt in 2012.
Net Loss from Continuing Operations: Net loss of $241,000 in 2013 was $5,813,000 less than the net loss in 2012 of $6,054,000 primarily due to the factors previously discussed.
There was no provision for income taxes for the fiscal years ended 2013 and 2012 due to a valuation allowance of $4.6 million recorded for the years ended December 31, 2013 and 2012 on the total tax provision, as we believed that it is more likely than not that the tax asset will not be utilized during the next year.
Liquidity and Capital Resources
As of December 31, 2013, the Company had total current assets of $777,596 and total current liabilities of $316,172 for working capital of $461,424. As of December 31, 2013, the Company had cash and cash equivalents of $706,211 and an accumulated deficit of $21,173,815 since operations commenced in 1997.
Although there was a net loss of $240,684 in 2013, the Company's independent registered public accounting firm's audit report for the year ended December 31, 2013, included herein, did not contain a qualified opinion or an explanatory paragraph regarding the Company's ability to continue as a going concern. The Company demonstrated profitability after the divestiture of Illume Mobile, improved its financial ratios, and management’s plan does not contemplate future debt or equity raises. 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 resolve issues with the USPTO, including the rejection of claims 1-14 in the ‘816 patent and prosecution of continuation patents, to create and market innovative services and to sustain adequate working capital to finance its operations.
We have historically financed our operations through operating revenues, proceeds from bank loans, shareholder loans and sales of equity and debt securities to accredited investors. Since the divestiture of Illume Mobile and its deficit operation in July 2012, the Company has generated sufficient working capital through operations to support its requirements without additional debt or equity financing. However, the USPTO Office Action prevents us from continuing to generate licensing revenue from patent settlements. Unless we can obtain a reversal of the USPTO Office Action in the near future, it will have a material adverse effect on our operations. We continue to make progress on our business activities not directly related to patent licensing and we are proceeding with those segments of our business. However, we do not expect significant increases in revenues from our non-patent business activity in the near term. While we currently believe we have sufficient capital to continue our operations for the next 12 months, we may incur significant expenses in appealing the USPTO Office Action. As a result, we could deplete our cash and working capital more rapidly than expected, which could result in our need to curtail our operations.
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 which 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 “Debenture Account”). Principal on the 2011 Debentures will be paid quarterly as the Debenture Account permits. As of March 24, 2014, the Debenture Account had a balance of $195,000.
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 24, 2014, 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 March 24, 2014, 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 24, 2014, 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 March 24, 2014, there were Class B Warrants outstanding to purchase an aggregate of 8,961,614 shares of common stock at exercise prices of $0.10.
Other
As of December 31, 2011, the Company had recorded $169,306 in notes payable to directors. During 2012, multiple directors advanced $778,300 on short-term notes bearing 12% interest rates. Four directors agreed to exchange $320,000 of their short-term notes for 2012 Convertible Debentures Series C. During the same year, $115,000 in notes was repaid in cash and $21,075 in accrued interest was reclassified as note payable. The total amount due to multiple directors of $533,681, 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 December 31, 2013 is $40,092.
To lower its required cash expenditures for the calendar year 2013, the Company issued 6,100,690 shares of common stock to directors and management for compensation for services.
Sources and Uses of Cash
| | | Years Ended Dec 31, | |
| | | 2013 | | 2012 | |
| | | | | | |
| Cash flows provided by (used in) operating activities | | $ | 127,238 | | | $ | (588,190 | ) |
| Cash flows provided by investing activities | | | 2,269 | | | | 3.462 | |
| Cash flows (used in) provided by financing activities | | | (82.500 | ) | | | 970.800 | |
| Net increase in cash and cash equivalents | | $ | 47,007 | | | $ | 386,072 | |
Operating Activities:
Net cash provided by operating activities during the year ended December 31, 2013 was approximately $127,000, which was an increase in operating cash flow of approximately $715,000 from $588,000 net cash outflow from operating activities during the year ended December 31, 2012. The 2013 net loss of approximately $241,000 was $8,018,000 less than the 2012 loss of approximately $8,259,000, which included non-cash debt discount amortization of approximately $1,800,000, loss on derivative liability of approximately $4,029,000, higher equity based compensation expense of approximately $639,000 and higher amortization expense of approximately $514,000.
Investing Activities:
Net cash provided by investing activities during the year ended December 31, 2013 was approximately $2,000, which was a decrease of approximately $1,000 from approximately $3,000 net cash provided by investing activities during the year ended December 31, 2012. The Company divested Illume Mobile in 2012, resulting in $250,000 cash, which was offset by the cessation of software development costs of approximately $233,000 in 2012. The Company no longer develops software. The Company invested approximately $2,000 in equipment in 2013, a decrease of approximately $7,000 from approximately $9,000 invested in 2012. The Company invested approximately $9,000 in patent related fees in 2013, an approximately $4,000 increase over the approximately $5,000 invested in 2012. The Company collected approximately $13,000 in 2013 from a customer’s note receivable.
Financing Activities:
Net cash used in financing activities was $82,500 in 2013 compared with approximately $971,000 provided by financing activities for the same period in 2012, a decrease of approximately $1,000,000. The Company reduced its Oklahoma Technology Commercialization Center note payable by $82,500 in 2013. Cash provided by financing activities in 2012 was primarily from $180,000 net proceeds from sales of convertible debentures, $250,000 net proceeds from sales of common stock, and approximately $778,000 proceeds from shareholder loans, which was offset by $100,000 repayment of the bank line of credit, $115,000 repayment of shareholder loans and $22,500 repayment of the Oklahoma Technology Commercialization Center loan.
Since our inception, we have experienced negative cash flow from operations. Although the Company has been experiencing positive cash flow from operations since divesting of Illume Mobile in July 2012, significant negative cash flow from operations are likely to occur in the future, as the USPTO office action rejecting our patent claims will have a material effect on our cash flow until the issue is resolved. Although we currently have adequate funds to sustain our operations in the near term, we have historically required additional funds to continue operations and may again in the future as a result of USPTO Office Action. We have no current plans to raise additional funds; however, if we need to raise additional funds through the issuance of equity, equity-related or convertible debt securities in the future, 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. Historically, we have financed our cash needs by registered private placements of our securities. There is no assurance that we will be able to obtain financing on terms consistent with our past financings or satisfactory to us, if at all.
As of December 31, 2013, our common stock is the only class of stock outstanding and we have in $784,136 debt that consists of $150,000 convertible secured debentures offset by $54,545 in debt discount, $533,681 in shareholder notes payable, $22,500 in note payable – related party and a $132,500 note from the Oklahoma Technology Commercialization Center, of which $112,500 is classified as current maturities of long-term debt.
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 in 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.
Accounts Receivable and Credit Policies:
Trade accounts receivable consist of amounts due from the sale of patent licenses and consulting 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, the Company is extending trade terms to customers who have agreed to acquire IP licenses as a result of settlement agreements. At the years ended December 31, 2013 and 2012, the Company deems all trade receivable amounts recorded as collectible and, thus has not provided an allowance for uncollectible amounts.
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, the applicable contingent legal expense is recorded as a cost of sale.
Consulting services revenues consist primarily of advisory services 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.
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 years ended December 31, 2013 and 2012.
Derivative Financial Instruments:
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a Black-Scholes option pricing model, assuming maximum value, in accordance with ASC 815-15 “Derivative and Hedging” to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
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.
Recently Issued Accounting Pronouncements
Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company's financial statements.
Not required under Regulation S-K for “smaller reporting companies.”
Our financial statements, together with the independent registered public accounting firm's report of MaloneBailey LLP, begin on page F-1, immediately after the signature page.
On August 14, 2013, we received notice of the resignation of Hood & Associates, CPAs, P.C. (“Hood”), as our independent registered public accounting firm. Hood’s resignation resulted from staffing considerations that resulted in Hood being unable to provide a concurring partner for review of the Company’s financial statements. In November 2013, The Public Accounting Oversight Board announced it had settled a disciplinary action against Hood. As a result, Hood was not permitted to reissue their audit opinion for the fiscal year ended December 31, 2012, which contained no adverse opinion or disclaimer of opinion nor was qualified or modified as to uncertainty, audit scope or accounting principles.
Effective August 19, 2013, we appointed MaloneBailey LLP (“MaloneBailey”) as our new independent registered public accounting firm. The decision to engage MaloneBailey was recommended and approved by our audit committee. As a result of Hood being prohibited from reissuing their audit opinion for the fiscal year ended December 31, 2012, MaloneBailey was engaged to reaudit that year in addition to the audit of fiscal year December 31, 2013. During the two most recent fiscal years and through the date of our engagement, we did not consult with MaloneBailey regarding either (1) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or (2) any matter that was either the subject of a disagreement (as defined in Regulation S-K Item 304(a)(1)(v)), during the two most recent fiscal years.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of December 31, 2013 pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms due to the material weaknesses identified below.
A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management's Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. The framework used by management in making that assessment was the criteria set forth in the document entitled “ Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our management has determined that as of December 31, 2013, the Company’s internal control over financial reporting were not effective for the purposes for which it is intended. Specifically, management’s evaluation was based on the following material weaknesses, which existed as of December 31, 2013:
| · | Financial Reporting Systems: We did not maintain a fully integrated financial consolidation and reporting system throughout the period and as a result, extensive manual analysis, reconciliation and adjustments were required in order to produce financial statements for external reporting purposes; and |
| · | Segregation of Duties: We do not currently have a sufficient complement of technical accounting and external reporting personnel commensurate to support standalone external financial reporting under public company or SEC requirements. Specifically, the Company did not effective segregate certain accounting duties due to the small size of its accounting staff, and maintain a sufficient number of adequately trained personnel necessary to anticipate and identify risks critical to financial reporting and the closing process. In addition, there were inadequate reviews and approvals by the Company’s personnel of certain reconciliations and other processes in day-to-day operations due to the lack of a full complement of accounting staff. |
As our current financial condition allows, we will analyze and develop processes for the establishment of formal policies and procedures with necessary segregation of duties, which will establish mitigating controls to compensate for the risk due to lack of segregation of duties.
This annual report does not include an attestation report by MaloneBailey LLP, 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.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 24, 2014. 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.
| Name | | Age | | Position |
| James C. McGill | | 70 | | Chairman of the Board of Directors, Chief Executive Officer and President |
| John Clerico | | 72 | | Director |
| David Humphrey | | 58 | | Director |
| Kendall Carpenter | | 58 | | Executive Vice President, Secretary and Chief Financial Officer |
Executive Biographies:
James C. McGill, Chairman of the Board of Directors, Chief Executive Officer and President
Jim McGill was appointed President and Chief Executive Officer in October 2012. Mr. McGill has been a member of the Board of Directors of MacroSolve, Inc. since 1999. 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.
John Clerico, Director
John Clerico joined the Board of Directors of MacroSolve, Inc., in 2006. Mr. 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.
David Humphrey, Director
David Humphrey joined the Board of Directors in February 2014, and was previously a director of between 2004 and October 2012. Mr. Humphrey has been the President and Chief Executive Officer of ADDvantage Technologies Group, Inc., a NASDAQ-listed supplier to the cable television industry throughout North America and Latin America since April 2012 and a director since April 2013. Between 2010 and 2011, Mr. Humphrey was the CEO of TokenEx, an early stage company focused on tokenization as a service for the payment card industry. From 2004 to 2010, Mr. Humphrey was Chief Operating Officer of Oklahoma Equity Partners, a venture capital fund. 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.
Kendall W. Carpenter, CPA, CGMA, CMA, Executive Vice President, Secretary and Chief Financial Officer
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, Chartered 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. 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. Clerico, 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 Mr. Humphrey, the Board considered his financial and executive expertise with Oklahoma Equity Partners, his many years of experience in business development, his current position as CEO of a NASDAQ listed company and his extensive history with the Company.
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) James McGill, 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) John Clerico and David Humphrey are each an independent director as defined in the Marketplace Rules of The NASDAQ Stock Market.
Meetings and Committees of the Board of Directors
During the fiscal year ended December 31, 2013, our board of directors held five meetings and approved certain actions by unanimous written consent. The board as a whole carries out the functions of the nominating committee. We expect our directors to attend all board and committee meetings and to spend the time needed and meet as frequently as necessary to properly discharge their responsibilities.
Board Committees
Following the sale of Illume Mobile in July 2012, the Board of Directors was reduced to three members. The current Board as a whole carries out the functions of the Audit Committee and Compensation Committee, which prior to 2013, were carried out by separate committees. Our Board 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.
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; |
| | | |
| | 2. | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| | | |
| | 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; |
| | | |
| | 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; |
| | | |
| | 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 Conduct available on its website at www.macrosolve.com/investors/.
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 $100,000 for fiscal years 2013 and 2012.
| Name and Principal Position | Year | | Salary | | | Bonus | | | Option and Warrant Awards (5) | | | Non-Equity Incentive Plan Compen- sation | | | Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) | | | All other Compen- sation (6) | | | Total | |
| James McGill, | 2013 | | $ | 30,000 | | | $ | $0 | | | $ | $16,637 | | | $ | $0 | | | $ | $0 | | | $ | 124,000 | | | $ | 170,637 | |
| Chief Executive Officer, | 2012 | | $ | 13,100 | | | | 0 | | | | 16,668 | | | | 0 | | | | 0 | | | $ | 142,000 | | | $ | 171,768 | |
| President and Director (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Kendall Carpenter, Executive Vice | 2013 | | $ | 150,000 | | | $ | $0 | | | $ | $17,290 | | | $ | $0 | | | $ | $0 | | | $ | 0 | | | $ | 167,290 | |
| President, Chief Financial Officer | 2012 | | $ | 133,075 | | | | 0 | | | | 15,771 | | | | 0 | | | | 0 | | | $ | 51,376 | | | $ | 200,222 | |
| and Secretary (2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Steve Signoff, Former Chief Executive | 2012 | | $ | 106,200 | | | $ | $0 | | | $ | $0 | | | $ | $0 | | | $ | $0 | | | $ | 114,091 | | | $ | 220,291 | |
| Officer, President and Director (3) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Randy Ritter, | 2012 | | $ | 74,212 | | | $ | 0 | | | $ | $0 | | | $ | $0 | | | $ | $0 | | | $ | 90,908 | | | $ | 165,120 | |
| former Chief Operating Officer (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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