UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2008
| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from _________ to _________
MACROSOLVE, INC.
(Exact name of registrant as specified in its charter)
Oklahoma (State or other jurisdiction of incorporation or organization) | 73-1518725 (I.R.S. Employer Identification No.) |
1717 South Boulder Ave. Suite 700 Tulsa, OK 74119 (Address of principal executive offices) |
(918) 280-8693
(Registrant’s telephone number, including area code)
Former name, former address, and former fiscal year, if changed since last report)
5800 E. Skelly Drive, Suite 300, Tulsa OK 74135
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o |
| | |
| Non-accelerated filer o | Smaller reporting company x |
| (Do not check if smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant's Common Stock, $0.001 par value per share, outstanding as of October 28, 2008 was 24,571,862.
Table of Contents
| | | Page |
| Part I – | Financial Information | 3 |
| | Item 1. Financial Statements (unaudited) | 4 |
| | Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 |
| | Item 3. Quantitative and Qualitative Disclosures about Market Risk | 18 |
| | Item 4T. Controls and Procedures | 18 |
| Part II – | Other Information | |
| | Item 1. Legal Proceedings | 18 |
| | Item 1A. Risk Factors | 18 |
| | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 18 |
| | Item 3. Defaults upon Senior Securities | 19 |
| | Item 4. Submission of Matters to a Vote of Security Holders | 19 |
| | Item 5. Other Information | 19 |
| | Item 6. Exhibits | 19 |
| Signatures | | 19 |
| Exhibit Index | 20 |
| Rule 13a-14(a) Certification executed by Clint Parr | |
| Rule 13a-14(a) Certification executed by Kendall Carpenter | |
| Section 1350 Certification | |
PART I
FINANCIAL INFORMATION
MACROSOLVE, INC.
Interim Unaudited Financial Statements
For the Quarter Ended September 30, 2008
| MACROSOLVE, INC. | | | | | | |
| | | | | | | |
| BALANCE SHEETS | | | | | | |
| | | Unaudited | | | | |
| As of September 30, 2008 and December 31, 2007 | | 09/30/2008 | | | 12/31/2007 | |
| | | | | | | |
| ASSETS | | | | | | |
| | | | | | | |
| CURRENT ASSETS: | | | | | | |
| Cash | | $ | 23,061 | | | $ | 25,668 | |
| Accounts receivable - trade | | | 242,307 | | | | 812,908 | |
| Note receivable, including accrued interest of $393 | | | 101,008 | | | | - | |
| Prepaid expenses and other | | | 82,533 | | | | 27,044 | |
| Total current assets | | | 448,909 | | | | 865,620 | |
PROPERTY AND EQUIPMENT, at cost: | | | 246,801 | | | | 277,303 | |
| Less - accumulated depreciation and amortization | | | (146,637 | ) | | | (222,878 | ) |
| Net property and equipment | | | 100,164 | | | | 54,425 | |
| | | | | | | | | |
| OTHER ASSETS: | | | | | | | | |
| Software development costs, net of accumulated amortization | | | | | | | | |
| of $594,565 as of September 30, 2008 and December 31, 2007 | | | | | | | | |
| respectively, | | | 568,993 | | | | 427,694 | |
| Deferred Equity Issuance Costs | | | 282,073 | | | | - | |
| Other assets | | | 18,243 | | | | 18,243 | |
| | | | | | | | | |
| Total other assets | | | 869,309 | | | | 445,937 | |
| TOTAL ASSETS | | $ | 1,418,382 | | | $ | 1,365,982 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Current maturities of long-term debt | | $ | 157,500 | | | $ | 107,500 | |
| Revolving line of credit | | | 100,000 | | | | 205,000 | |
| Accounts payable - trade and accrued liabilities | | | 247,547 | | | | 110,189 | |
| Investor Bridge Loans | | | 981,881 | | | | - | |
| Unearned income | | | 177,591 | | | | 649,848 | |
| Total current liabilities | | | 1,664,519 | | | | 1,072,537 | |
| LONG-TERM DEBT, less current maturities | | | 130,000 | | | | 233,514 | |
| COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY: | | | | | | | | |
| Common stock, $.01 par value; authorized 100,000,000 shares; | | | | | | | | |
| issued and outstanding 24,567,900 and 22,538,900 shares, | | | | | | | | |
| as of September, 2008 and December 31, 2007, respectively | | | 245,679 | | | | 225,389 | |
| Additional paid-in capital | | | 5,470,508 | | | | 5,151,136 | |
| Accumulated deficit | | | (6,092,324 | ) | | | (5,316,594 | ) |
| Total stockholders' equity | | | (376,137 | ) | | | 59,931 | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 1,418,382 | | | $ | 1,365,982 | |
| MACROSOLVE, INC. | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| STATEMENTS OF OPERATIONS | | | | | | | | | | | | |
| | | Unaudited | | | Unaudited | |
| | | For the Quarters Ended | | | For the Nine Months Ended | |
| | | 09/30/2008 | | | 09/30/2007 | | | 09/30/2008 | | | 09/30/2007 | |
| | | | | | | | | | | | | |
| SALES: | | | | | | | | | | | | |
| Solution services | | $ | 519,294 | | | $ | 592,083 | | | $ | 2,232,784 | | | $ | 1,745,427 | |
| Hardware sales | | | 6,254 | | | | 62,171 | | | | 34,869 | | | | 130,875 | |
| Software licensing | | | 9,427 | | | | 6,942 | | | | 29,261 | | | | 18,653 | |
| Net sales | | | 534,975 | | | | 661,196 | | | | 2,296,914 | | | | 1,894,955 | |
| | | | | | | | | | | | | | | | | |
| COST OF SALES: | | | | | | | | | | | | | | | | |
| Solution services | | | 278,219 | | | | 277,654 | | | | 1,322,346 | | | | 942,372 | |
| Hardware sales | | | 4,912 | | | | 47,832 | | | | 27,768 | | | | 101,201 | |
| Software licensing | | | 91 | | | | 0 | | | | 1,110 | | | | 0 | |
| Total cost of sales | | | 283,222 | | | | 325,486 | | | | 1,351,224 | | | | 1,043,573 | |
| Gross profit | | | 251,753 | | | | 335,710 | | | | 945,690 | | | | 851,382 | |
| | | | | | | | | | | | | | | | | |
| OPERATING EXPENSES: | | | | | | | | | | | | | | | | |
| Solution services | | | 117,589 | | | | 120,759 | | | | 397,596 | | | | 302,202 | |
| Selling, general and administrative | | | 394,514 | | | | 332,783 | | | | 1,202,894 | | | | 1,041,101 | |
| Total operating expenses | | | 512,103 | | | | 453,542 | | | | 1,600,490 | | | | 1,343,303 | |
| Loss from operations | | | (260,350 | ) | | | (117,832 | ) | | | (654,800 | ) | | | (491,921 | ) |
| | | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | |
| Interest income | | | 1,708 | | | | 3,662 | | | | 7,223 | | | | 23,390 | |
| Interest expense | | | (15,404 | ) | | | (9,663 | ) | | | (45,522 | ) | | | (25,662 | ) |
| Other | | | (68,796 | ) | | | (6,377 | ) | | | (82,698 | ) | | | (19,573 | ) |
| Total other expense | | | (82,492 | ) | | | (12,378 | ) | | | (120,997 | ) | | | (21,845 | ) |
| | | | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (342,842 | ) | | | (130,210 | ) | | | (775,797 | ) | | | (513,766 | ) |
| INCOME TAXES | | | - | | | | - | | | | - | | | | - | |
| NET LOSS | | $ | (342,842 | ) | | $ | (130,210 | ) | | $ | (775,797 | ) | | $ | (513,766 | ) |
| | | | | | | | | | | | | | | | | |
| LOSS ALLOCABLE TO COMMON STOCKHOLDERS: | | | | | | | | | | | | | | | | |
| Net loss | | $ | (342,842 | ) | | $ | (130,210 | ) | | $ | (775,797 | ) | | $ | (513,766 | ) |
| Preferred stock dividend | | | - | | | | - | | | | - | | | | (149,437 | ) |
| Loss allocable to common stockholders | | $ | (342,842 | ) | | $ | (130,210 | ) | | $ | (775,797 | ) | | $ | (663,203 | ) |
| Basic and diluted loss per share | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) |
| MACROSOLVE, INC. | | | | | | |
| | | | | | | |
| STATEMENTS OF CASH FLOWS | | | | | | |
| | | Unaudited | | | Unaudited | |
| For the Nine Months Ended September 30, 2008 and 2007 | | 09/30/2008 | | | 09/30/2007 | |
| | | | | | | |
| OPERATING ACTIVITIES: | | | | | | |
| Net loss | | $ | (775,795 | ) | | | (513,766 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 14,706 | | | | 60,687 | |
| Stock based compensation | | | 71,195 | | | | 18,339 | |
| Loss on disposal of equipment | | | 8,360 | | | | - | |
| Changes in current assets and liabilities: | | | | | | | | |
| Decrease (increase) in accounts receivable - trade | | | 570,601 | | | | (224,760 | ) |
| (Increase) in prepaid expenses and other | | | (55,490 | ) | | | (14,178 | ) |
Increase (decrease)in accounts payable - trade and accrued liabilities | | | 137,358 | | | | (74,786 | ) |
| (Decrease) increase in unearned income | | | (472,257 | ) | | | 104,115 | |
| Net cash used in operating activities | | | (501,322 | ) | | | (644,349 | ) |
| | | | | | | | | |
| INVESTING ACTIVITIES: | | | | | | | | |
| Advances on note receivable | | | (101,008 | ) | | | - | |
| Purchase of equipment | | | (68,805 | ) | | | (51,012 | ) |
| Software development costs | | | (141,299 | ) | | | (157,923 | ) |
| Patent applications | | | 0 | | | | (1,700 | ) |
| Net cash used in investing activities | | | (311,112 | ) | | | (210,635 | ) |
| | | | | | | | | |
| FINANCING ACTIVITIES: | | | | | | | | |
| Deferred Equity Issuance Costs | | | (179,719 | ) | | | - | |
| Proceeds from (cost of) issuance of common stock | | | 154,578 | | | | (1,318 | ) |
| Common stock issued for advisory services | | | 11,600 | | | | - | |
| Investor Bridge loans, including accrued interest | | | 981,882 | | | | - | |
| Advances on notes payable | | | 100,000 | | | | 140,000 | |
| Repayments of notes payable | | | (267,500 | ) | | | (2,003 | ) |
| Proceeds from long term debt | | | 8,986 | | | | 22,500 | |
| Dividend on preferred stock | | | - | | | | (8,514 | ) |
| Net cash provided by financing activities | | | 809,827 | | | | 150,665 | |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH | | | (2,607 | ) | | | (704,319 | ) |
| CASH, beginning of period | | | 25,668 | | | | 715,017 | |
| CASH, end of period | | $ | 23,061 | | | $ | 10,698 | |
MacroSolve, Inc.
Notes to Interim Unaudited Financial Statements
For the Quarter Ended September 30, 2008
The accompanying unaudited interim financial statements as and for the Quarters ended September 30, 2008 and 2007, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements not misleading. The financial statements as of December 31, 2007 have been audited by an independent registered public accounting firm. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Form S-1 and Form S-1a for the calendar year ended December 31, 2007.
Reclassifications
Certain reclassifications have been made to the September 30, 2007 and December 31, 2007 financial statements to conform to the September 30, 2008 presentation.
| 2. | DESCRIPTION OF BUSINESS | | |
MacroSolve, Inc. (the Company) was formed in January 1997. The Company is engaged in the design, delivery and integration of custom solutions for the application of mobile technology in business processes.
| Note receivable at September 30, 2008 and December 31, 2007 consist of the following: | | Sep 30, 2008 | | | Dec 31, 2007 | |
| | | | | | | |
| Convertible promissory note with a customer negotiated as part of a strategic alliance. Under the Master Services Agreement, customer may borrow up to $150,000 to finance development work with interest accrued monthly at prime rate plus 5% (10% at Sep 30, 2008), due June 30, 2011. The note may be converted to common stock of the borrower prior to the due date at MacroSolve’s discretion. | | $ | 101,008 | | | $ | - | |
| Notes payable at September 30, 2008 and December 31, 2007 consist of the following: | | Sep 30, 2008 | | | Dec 31, 2007 | |
| | | | | | | |
| Revolving line of credit with a financial institution of up to $500,000 with interest payable monthly at prime rate plus 2.0% (7.0% at Sep 30, 2008), due Jan 31, 2009, and secured by substantially all assets of the Company. The line of credit may be withdrawn, at the lender’s option, if the Company is found to be in default on the loan as that term is defined in the borrowing arrangement. | | $ | 100,000 | | | $ | 205,000 | |
| Advancing term loan with a financial institution of up to $125,000 with interest only payable monthly at prime rate plus 2.0% (7.0% at December 31, 2007), until January, 2009, with principal and interest due at prime rate plus 2.0% amortized ratably over 30 months, due July 31, 2011, and secured by substantially all assets of the company. | | $ | 50,000 | | | $ | 50,000 | |
| | | | | | | | | |
| Note from the State of Oklahoma Technology Business Finance Program (OTCC loan) represented by a $150,000 refundable award to be repaid at two times the amount of the award. The balance includes accrued interest (imputed at 14.27%), at Sep 30, 2008. The repayment terms were modified in September, 2007 to require 24 equal monthly installments of $12,500, consisting of principal only, beginning May, 2008. | | $ | 237,500 | | | $ | 291,014 | |
| | As of September 30, 2008, maturities of long-term debt are: $157,500 in 2008, $105,500 in 2009, $24,500 in 2010. |
| | |
| 5. | INVESTOR BRIDGE LOANS |
| | |
| | In March, 2008, the Company placed $950,000 in convertible notes with qualified investors. The notes are unsecured and provide for accrued interest of prime plus 1% (6.0% as of September 30, 2008) payable on maturity of December 31, 2008. The notes are convertible at the Company’s option through the issuance of its shares of common stock valued at $.60 per share or, if the Company is traded in the OTC market, at 80% of the volume weighted average closing price for the last five days of 2008. The balance of these notes in the financial statements includes approximately $32,000 in accrued interest as of September 30, 2008. |
| | |
| 6. | EMPLOYEE STOCK PLANS |
Certain employees of the Company are participants in a stock bonus plan established in 2003 by the MacroSolve, Inc. Stock Bonus Trust Agreement (the Trust), and an entity under common control. The Trust provides for previously issued shares of Company common stock to be allocated and distributed as a deferred contingent bonus to the participants upon the occurrence of a liquidating event, as that term is defined in the trust document, or the termination of the trust which will occur in June 2010. Stock allocated to the participants remains in the Trust for the benefit of the Participant until such event occurs. In the event of termination of employment of the participants, any previously allocated stock reverts back to unallocated trust property. On August 15, 2008, the Trustees determined that a liquidating event occurred when the Company’s stock began trading on the Over the Counter Bulletin Board. The allocated shares were issued to the participating employees as restricted stock and the unamortized compensation expense related to those shares was recorded as stock based compensation expense in August 2008. The remaining 160,000 shares in the trust are not allocated to any Participants.
Compensation expense for stock awards is recognized ratably over the implicit vesting period from date of grant to the termination of the trust. Compensation expense for stock awards is based upon the estimated market value of the Company’s common stock at the date of grant. The Company recognized stock based compensation expense related to these awards of $57,019 and $6,327 for the Quarters Ended September 30, 2008 and 2007, respectively.
A summary of activity under the Employee Stock Plans as of September 30, 2008 and changes during the three quarters then ended is presented below:
| | | Stock Options | | | Stock Bonus Plan | |
| | | Options | | | Weighted Average Exercise Price | | | Shares | |
| Outstanding – December 31, 2007 | | | 4,838,300 | | | $ | 0.50 | | | | 2,809,000 | |
| | | | | | | | | | | | | |
| Exercisable – December 31, 2007 | | | 3,945,360 | | | $ | 0.49 | | | | - | |
| | | | | | | | | | | | | |
| Granted | | | 659,298 | | | $ | 2.50 | | | | - | |
| | | | | | | | | | | | | |
| Exercised | | | (80,000 | ) | | $ | 0.00 | | | | - | |
| | | | | | | | | | | | | |
| Distributed | | | 0 | | | $ | 0.00 | | | | (2,649,000 | ) |
| | | | | | | | | | | | | |
| Forfeited or Expired | | | (47,780 | ) | | $ | 0.00 | | | | - | |
| | | | | | | | | | | | | |
| Outstanding – Sep 30, 2008 | | | 5,369,818 | | | $ | 0.52 | | | | 160,000 | |
| | | | | | | | | | | | | |
| Exercisable – Sep 30, 2008 | | | 4,616,218 | | | $ | 0.51 | | | | - | |
The weighted-average grant-date calculated value of options granted during the Quarter Ended September 30, 2008 was $-0-. Options outstanding at September 30, 2008 had an aggregate intrinsic value of $37,680 and a weighted-average remaining contractual term of 3.25 years. Options that were exercisable at September 30, 2008 had an aggregate intrinsic value of $-0- and a weighted-average remaining contractual term of 2.25 years.
The weighted-average grant-date calculated value of stock awards granted during the Quarter Ended September 30, 2008 was $0.06.
A summary of the status of the Company’s nonvested options as of the Nine Months Ended September 30, 2008 and June 30, 2008, and changes during the year then ended, is presented below:
| Nonvested Shares | | Options | | | Weighted- Average Grant Date Calculated Value | |
| Nonvested - Beginning of Year 2008 | | | 894,000 | | | $ | - | |
| Granted | | | 201,000 | | | $ | - | |
| Vested | | | (313,640 | ) | | $ | - | |
| Forfeited | | | (27,760 | ) | | $ | - | |
| Nonvested–Nine Months Ended September 30, 2008 | | | 753,600 | | | $ | - | |
As of September 30, 2008, there was $-0- unrecognized compensation cost related to nonvested share-based compensation arrangements under the stock bonus plan as all designated shares were distributed in August 2008. At December 31, 2007, there was $69,319 unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the stock bonus plan. There are no unrecognized compensation costs related to non-vested share options.
Effective February 26, 2008, all of the holders of Preferred Series A and Preferred Series B stock elected to convert their shares to 235,289 and 41,667 shares of common stock, respectively. Effective with the April 14, 2008 19:1 stock dividend referenced below, the total amount of converted stock is 4,705,780 and 833,340 shares of common stock, respectively.
On March 26, 2008, the Company filed a second amendment and restatement of its Certificate of Incorporation with the Oklahoma Secretary of State, effectively amending its authorized number of shares to stock to 100,000,000 of common stock and 10,000,000 of preferred stock, each with a par value of $0.01.
The Company declared a stock dividend of 19 shares for each share of common stock owned on April 14, 2008 for shareholders of record on March 31, 2008. Outstanding warrants and options to purchase MacroSolve shares have been adjusted as to number of shares and price to reflect this stock dividend.
During the first quarter of 2008, the Company sold $154,598 in common stock to qualified investors who exercised their rights to convert warrants and options at the prices stated in their respective instruments.
The Company engaged consulting services with an agreement to pay in restricted stock. As of September 30, 2008, the consultant had earned 3,000 shares of stock; the remaining 1,500 shares are anticipated to be distributed in the fourth quarter of 2008.
Independent Directors of the Company became entitled to $12,000 annual compensation paid quarterly in restricted stock in the third quarter of 2008 as outlined in the MacroSolve, Inc. Compensation Plan approved at the September 16, 2008 Board meeting. A total of 4,800 shares of restricted common stock was issued as of September 30, 2008 to the four independent directors for their third quarter 2008 compensation.
| 8. | EARNINGS (LOSS) PER SHARE | | |
The Company has calculated the loss allocable to the common shareholders for the Quarters Ended September 30, 2008 and 2007:
| | | For the Quarters Ended Sept 30 | | | For the Nine Months Ended Sept 30 | |
| Numerator: | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| Net Loss | | $ | (342,842 | ) | | $ | (130,210 | ) | | $ | (775,797 | ) | | $ | (513,766 | ) |
| Preferred Stock Dividends | | | - | | | | - | | | | - | | | $ | (149,437 | ) |
| Numerator for basic and diluted loss per share | | $ | (342,842 | ) | | $ | (130,210 | ) | | $ | (775,797 | ) | | $ | (663,203 | ) |
| | | | | | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | | | | | |
| Weighted-average number of common shares outstanding | | | | | | | | | | | | | | | | |
| | | | 22,039,993 | | | | 16,763,046 | | | | 22,039,993 | | | | 16,763,046 | |
| | | | | | | | | | | | | | | | | |
| Basic and diluted loss per share | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) |
| 9. | COMMITMENTS AND CONTINGENCIES | | |
At September 30, 2008, the Company was obligated under an operating lease for certain office space for approximately $11,833 per month for 30 months and approximately $12,250 per month in months 31-60.
| 10. | DEFERRED EQUITY ISSUANCE COSTS | | |
The Company has incurred cash and non-cash expenses totaling approximately $265,000 in connection with its registration of stock for public sale. The majority of the expenses were for financial advisory and legal services to Concordia Financial Group and Sichenzia Ross Friedman Ference LLP, with the remainder consisting of other legal services and directly related travel expenses. Subsequent to the registration of its issued stock, approximately $17,000 was spent on additional financial advisory services and travel expenses related to raising equity through the intended sale of newly issued shares to private investors. When the first round of investment is received, these expenses, which are recorded on the financial statements as a current asset, will be netted against the equity proceeds.
Unearned income represents amounts received in advance for services to be provided to customers where the customer has not yet received the service. Amounts included as unearned income which were also reported as Accounts Receivable were $66,500 and $638,850 as of September 30, 2008 and December 31, 2007.
On July 29, 2008, James McGill and John Clerico agreed to each loan MacroSolve up to $250,000 in increments of no less than $50,000 secured by a Promissory Note specifying monthly interest of Wall Street Journal Prime plus 2%, interest payable monthly, maturity at March 1, 2009 or within 30 days of an equity raise of $3 million or more. In October 2008, Mr. McGill and Mr. Clerico each advanced the company $50,000 under the loan agreement.
| 13. | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | |
Cash paid during the Quarters ended September 30, 2008 and 2007 are:
| | | 2008 | | | 2007 | |
| Interest | | $ | 15,404 | | | $ | 9,663 | |
| Income taxes | | $ | - | | | $ | - | |
Noncash activities are as follows for the Quarters ended September 30, 2008 and 2007 are:
| | | 2008 | | | 2007 | |
| Stock based compensation | | $ | 68,618 | | | $ | 5,923 | |
| Dividend expense accrued | | $ | - | | | $ | 3,017 | |
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special Note on Forward-Looking Statements
Certain statements in Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words "believe," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight including changes in the trends of the mobile computing industry, formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers should carefully review the risk factors and related notes included in the Company’s Form S-1 and Form S-1a filed with the Securities and Exchange Commission.
Overview
The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of MacroSolve, Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements ("Notes").
Background
We are a technology and services company that develops mobile solutions for businesses. A mobile solution is typically the combination of mobile handheld devices, wireless connectivity, and software that streamlines business operations resulting in improved efficiencies and cost savings. We are development and marketing partners with the major mobile device manufacturers, wireless carriers and many software providers.
Our customers rely on us to define, design, develop and support the best combination of technologies in a market that is very dynamic. We assist software and web-based application companies by modifying their software product offerings so that they can be used by a mobile end-user who typically has a Smartphone or a similar cellular device. Many of these customers rely on our technology and marketing expertise. We also serve enterprises that find it difficult to identify a mobile software product which addresses their specific need to streamline operational processes, and do not have the competency in house. Our technology and services capabilities generate a growing base of contract and annuity based revenue. We have one mobile software product, ReForm™, which helps to minimize mobile application development effort. This product is currently being upgraded and has yet to contribute significant revenues to MacroSolve.
Plan of Operation and Financing Needs
Subsequent to December 31, 2007, the Company raised an additional $157,000 in equity through the exercise of options and warrants by existing shareholders and employees. Additionally, the Company has placed $950,000 in convertible notes with qualified investors. Two shareholders each executed $250,000 Loan Agreements which can be drawn upon for general purposes under promissory notes bearing prime plus 2% interest rate with any sums borrowed thereunder due by March 1, 2009 or upon a three million dollar equity raise, whichever occurs first. These shareholders advanced the Company $100,000 under these agreements in the Third Quarter of 2008. These monies obtained through equity raise and debt placement together with funds available through our line of credit with a financial institution and cash generated from current operations are expected to provide adequate capital to fund the Company’s operations.
The Company does lack growth capital and anticipates that approximately $10 million in additional capital will be required within the next three years to execute our growth strategy. We are presently investigating various financing alternatives including equity and/or debt financing. The Company was approved for the registration of its stock with the Securities and Exchange Commission as a fully reporting OTC Bulletin Board company and trading commenced on August 15, 2008. It is the Company’s intention to raise additional amounts of equity later in 2008 or early 2009 to support it growth requirements. There is no assurance that capital in any form would be available to us and, if available, on terms and conditions that are acceptable. If we are unable to obtain sufficient funds, we may not be able to implement our growth strategy.
Positioned as an experienced provider of mobile solutions, we will continue to market our products and services to enterprises seeking business process operational efficiencies while also marketing our expertise and relationships to technology companies who wish to apply mobile solutions to enhance their current software products. We will take advantage of our long standing relationships with wireless carriers, mobile hardware manufacturers and related applications companies and jointly market to each customer segment. Within these customer engagements we seek longer term projects with promising passive revenues including license fees, revenue share arrangements and equity participations.
Our near term focus will be on the expansion of marketing and sales efforts which will increase the number of revenue streams, especially those with more passive recurring revenue including license fees and revenue share arrangements. We are completing the development of a new version of ReForm which is expected to be marketable by the end of the fourth quarter. Our mobile video platform project will position us to compete in mobile solutions which require video. Growth in these and other areas will require more geographical sales resource coverage with modest plans to expand within Oklahoma and the Midwest in the near term. Finally, we will augment our joint marketing arrangements with other mobile industry technology leaders and utilize more efficient and effective Web-based methods for attracting customers and streamlining the sales process.
In October 2008, the Company announced it was actively seeking acquisition candidates in the Business To Business (B2B) mobility space. Acquisition targets include: mobile application and platform providers; regional mobile business solutions providers that serve small to medium sized businesses; and Web 2.0 firms complementary to the upcoming launch of MacroSolve’s online mobility marketplace. The company will adhere to strict acquisition guidelines mandating accretive acquisitions for stock with pay out periods and retention of key personnel.
We continuously monitor industry trends and adjust projections about the direction of the business in anticipation of the continuous change in client requirements as the mobile industry evolves. We believe that our current direction is one that will bring profits, however our ability to drive sales volume is limited without additional capital. There is no expected purchase or sale of capitalized assets, significant equipment or intellectual property in the next 12 months.
Results of Operations
Quarter Ended September 30, 2008 compared to Quarter Ended September 30, 2007 (all references are to the Quarter Ended September 30)
Total Net Sales: Total Net Sales decreased $126,000 or 19% to $535,000 in the third quarter ended September 30, 2008 from $661,000 for the same period in 2007. Sources of revenue were derived from our services business, hardware sales and software licensing. Services revenue represented the majority of Total Net Sales with a decrease for the quarter of $73,000 in 2008 to $519,000 from $592,000 in 2007 primarily due to $51,000 in subcontractor pass-thru revenue recognized in 2007 and a decrease in hours necessary to perform work under contract in 2008. Hardware sales to third parties and in support of our services activities were modest for the third quarter at $6,000, down $56,000 or 90% from $62,000 in 2007. Software licensing sales increased $2,000 or 29% for the period to $9,000 from $7,000 in 2007. The Company’s ReForm™ software product is still in development stage and has not been actively marketed to date.
Cost of Sales and Gross Profit: Cost of Sales for the third quarter of 2008 decreased $42,000 or 13% in line with the lower level of revenues from $283,000 to $325,000 in 2007. The majority of this decrease was associated with the subcontractor pass-thru related to the delivery of the services revenue. The resultant Gross Profit for the third quarter of 2008 of $252,000 was down $84,000 or 25% under the Gross Profit for the same period in 2007 of $336,000. Profit margin was down for the quarter from 51% to 47% reflecting a project overage for which the customer had not yet agreed to cover under a change order.
Operating, Selling, General and Administrative Expenses: Operating, selling, general and administrative expenses increased by $58,000, or 13% in the 2008 third quarter to $512,000 from $454,000 in 2007. This increase reflects increases in marketing expenses related to the development of a prototype Community Website which will serve as a social network for businesses with modest or no I.T. staff and provide a platform to promote our customers’ products and those of the Company. In addition, the Company relocated its offices to accommodate expected near-term growth resulting in one-time moving expenses and additional rent.
Loss from Operations: Loss from operations for the third quarter of 2008 was $260,000, an increase of $142,000 or 120% from the loss from operations in 2007 of $118,000 as a result of the aforementioned decrease in gross profit and increase in operating, sales and marketing expenses.
Other Income and Expense: Total other expense of $82,000 in 2008 represented an increase of $70,000 from $12,000 in 2007 as a result of higher net interest expense for the period related to the proceeds from convertible notes received in the first quarter of 2008 and the acceleration of amortization of stock based compensation related to the Employee Stock Trust shares distributed in the third quarter.
Net Loss: Net loss of $343,000 for the third quarter of 2008 was $213,000 or 164% higher than the net loss of $130,000 for the same period in 2007 as the higher operating, sales and marketing expenses, net interest expenses and stock based compensation combined with the decrease in gross profit from the higher revenue achieved in the period.
Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30, 2007: (all references are to the nine months ended September 30).
Total net sales increased $402,000 or 21% in the nine months ended September 30, 2008 to $2.297 million from $1.895 million in 2007. Services revenue increased $487,000 or 28% for the period to $2.233 million from $1.745 million as the company established relationships with new clients and expanded its work with several existing customers. Hardware sales in 2008 were down $96,000 or 73% to $35,000 from $131,000 while software licensing revenues in 2008 of $29,000 were up $10,000 or 53% from $19,000 for the same period in 2007.
Cost of Sales and Gross Profit: Cost of Sales for 2008 of $1.351 million represented an increase of $307,000 or 29% from $1.044 million in 2007 reflecting related costs of delivery of the services revenue. The resultant Gross Profit for the 2008 nine month period of $946,000 was up $95,000 or 11% over the Gross Profit for the same period in 2007 of $851,000. Profit margin was 41% for 2008 as compared with 45% for the first nine months of 2007 as a result of decreasing the revenue on a primary client contract reflecting a project overage for which the customer had not yet agreed to cover under a change order. Negotiations are currently underway with the customer to recoup part of the overage with a fourth quarter change order.
Operating, Selling, General and Administrative Expenses: Operating, selling, general and administrative expenses increased by $257,000, or 19% in 2008 to $1.6 million from $1.343 million in 2007. This increase reflects both increases in costs associated with project staffing in support of the higher services revenue and increases in marketing expenses related to the development of a prototype Community Website which will serve as a mobility community of interest network for businesses with modest or no I.T. staff and provide a platform to promote our customers’ products and those of the Company. In addition, the Company relocated its offices to accommodate expected near-term growth resulting in one-time moving expenses and additional rent.
Loss from Operations: Loss from operations for the nine month period in 2008 of $655,000 was $163,000 or 33% higher than the loss from operations for the same period in 2007 of $492,000 as the increase in operating and marketing expenses more than offset the increase in gross profit realized from increased revenues in the period.
Other Income and Expense: Total other net expense of $121,000 in 2008 was $99,000 more than the $22,000 in 2007 as a result of higher net interest expenses related to the proceeds from convertible notes received in the first quarter of 2008 and the acceleration of amortization of stock based compensation related to the Employee Stock Trust shares.
Net Loss: Net loss for the nine month period ended September 30, 2008 was $776,000, an increase of $262,000 or 51% from the net loss for the same period in 2007 of $514,000 as the higher operating, sales and marketing expenses, net interest expenses and stock based compensation combined more than offset the increase in gross profit from the higher revenue achieved in the period.
Liquidity and Capital Resources
We finance our operations primarily through internally generated funds, a bank line of credit and investments of equity by qualified investors or placement of debt with qualified lenders.
In March, 2008, the Company raised an additional $155,000 in equity through the exercise of options and warrants by existing shareholders. Additionally in March, 2008, the Company placed $950,000 in convertible notes with qualified investors. The notes are unsecured and provide for accrued interest of prime plus 1% payable on maturity of December 31, 2008. The notes, including accrued interest, are convertible, at the Company’s option, through the issuance of its shares of common stock valued at 80% of the volume weighted average closing price for the last five trading days of 2008.
The Company has renewed its $500,000 line of credit with a financial institution for an additional six months to January 31, 2009. Additionally, the Company has extended its $125,000 advancing term loan with a financial institution for an additional six months to provide for interest only payments until February, 2009 with outstanding principal and interest payable ratably over 30 months due July 31, 2011. Two shareholders each executed $250,000 Loan Agreements which can be drawn upon under promissory notes bearing interest at prime plus 2% with any sums borrowed there under due by March 1, 2009 or upon a three million dollar equity raise, whichever occurs first. These shareholders advanced the Company $100,000 under these agreements in the Forth Quarter of 2008. An additional $2,000 in equity was raised in the Fourth Quarter 2008 by employees exercising options.
As of September 30 2008, we had cash and cash equivalents of $23,000. This liquidity, together with funds available through its credit facilities with a financial institution and cash generated from current operations, are expected to provide adequate capital to fund the Company’s operations.
Sources and Uses of Cash
| | | Nine Months Ended Sept 30, | |
| (In thousands) | | 2008 | | | 2007 | |
| Cash flow data: | | | | | | |
| Net cash provided by (used in) operating activities | | | (501 | ) | | | (644 | ) |
| Net cash (used in) investing activities | | | (311 | ) | | | (211 | ) |
| Net cash provided (used) by financing activities | | | 809 | | | | 151 | |
| Net increase (decrease) in cash and cash equivalents | | | (3 | ) | | | (704 | ) |
| Cash and cash equivalents, beginning of period | | | 26 | | | | 715 | |
| Cash and cash equivalents, end of period | | | 23 | | | | 11 | |
Operating Activities
Net cash used in operating activities for the Nine Months ended September 30, 2008 was $501,000, a decrease of $143,000 from the same period in 2007 reflecting the use of a partial prepayment of a significant project by a major customer.
Investing Activities
Cash used in investing activities for the Nine Months ended September 30, 2008 was $311,000, up $100,000 from the same period in 2007 represented principally in both periods by costs associated with the development of the Company’s ReForm™ software product and in 2008 by investment in capitalized assets primarily associated with the recent move of offices and advances on note receivable.
Financing Activities
Net cash provided by financing activities for the Nine Months ended September 30, 2008 was $809,000 as compared with $151,000 for the same period last year. Investor bridge loans provided $950,000. The Company raised an additional $157,000 in capital through the exercise of options and warrants by existing shareholders and employees.
The Company began repaying its note with the State of Oklahoma Technology Business Finance Program in May, 2008 at $12,500 per month. Additionally, the Company has incurred $282,000 in legal and financial advisory expenses through September 30, 2008 associated with registration of its stock for public sale with the intention of then raising additional amounts of equity to support its growth requirements. These expenses, which have been recorded as an Other Asset, will be netted against future equity proceeds. Interest totaling $32,000 on $950,000 in investor bridge loans during the period is accrued but unpaid as the outstanding balance of these notes including accrued interest are convertible at the Company’s option to shares of the Company’s stock. Proceeds from the convertible notes were used to repay $205,000 borrowed on a line of credit with a financial institution.
As of September 30, 2008, the Company had cash and cash equivalents in the amount of $23,000 as compared with $26,000 at September 30, 2007.
Critical Accounting Policies
Accounts Receivable and Credit Policies:
Trade accounts receivable consist of amounts due from the sale of solution services, software and hardware. Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days of receipt of the invoice. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts based on historical collection experience and a review of the current status of trade accounts receivable. In many instances, customers make a substantial prepayment for services before rendered; therefore the Company is extending trade terms to customers who have already proven to be credit worthy. The Company has not taken any direct write offs of bad debts in the past five years.
At the quarter ending September 30, 2008 and at fiscal year ending December 31, 2007, the Company deems all amounts recorded as collectible and, thus has not provided an allowance for uncollectible amounts.
Revenue Recognition and Unearned Revenue:
Revenue generated from the provision of services is recognized at the time the service is provided. On service contracts which specify hourly rates plus costs, revenue is recognized based upon hours worked at the specified hourly rate. On service contracts which are fixed price based upon a Statement of Work, revenue is recognized on the Percentage Completion method with updated estimates monthly of the project’s percentage complete. Margins may be affected, both positively and negatively, during the duration of the project as efficiencies either increase or decrease or as direct costs of doing business change. Sales of hardware are recognized upon delivery to the customer. Revenue from the licensing of software is recognized ratably over the license period.
Customarily on service contracts related to projects expected to take longer than one month to complete, the customer prepays one-third to one-half of the total estimated project in advance. The prepayment is recorded as Unearned Revenue and is subsequently adjusted at the end of each month based upon actual hours worked or percentage of project completion, as the case may be. If work is performed during the month which is not yet invoiceable to the customer under the terms of the agreement, a proforma entry is made to record the revenue in the proper accounting period.
Software Development Costs:
The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. Costs incurred prior to the establishment of technological feasibility are expensed as incurred as research and development costs. Costs incurred after establishing technological feasibility and before the product is released for sale to customers are capitalized. Additions to capitalized costs are recorded monthly based upon the actual hours worked at the developers’ hourly cost, including salary, direct employment benefits and direct overhead.
Once the software is deemed to be commercially available, these capitalized costs are amortized over three years and are reviewed for impairment at each period end. If management determines that projected revenue from the capitalized software costs are less than the net book value of the software, the capitalized software asset is written down per generally accepted accounting principles. No capitalized software costs are considered impaired at September 30, 2008.
Stock-Based Compensation:
The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.
The Company uses the Black-Sholes model for determining the value of the options. One of the factors required to compute the options price is volatility of the stock price. The Company’s own stock commenced public trading in August, 2008; however due to initially thin trading activity, management determined that the technology sector fund XLK and it’s standard deviation would continue to be used to provide the volatility factor required to compute the option value.
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109,” (“FIN 48”). FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has adopted these standards and there has been no effect on its financial statements.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements,” (“SAB 108”). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach. The rollover approach quantifies misstatements based on the amount of the error in the current year financial statements whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immediate errors would not require previously filed reports to be amended. SAB 108 is effective for the first fiscal year ending after November 15, 2006. The Company has adopted these standards and there has been no effect on its financial statements.
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The Company is currently evaluating the effect, if any, the adoption of SFAS 159 will have on its financial statements, results of operations and cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
N/A
Item 4T. Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2008 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There was no change in our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time we may be a defendant and plaintiff in various legal proceedings arising in the normal course of our business. We are currently not a party to any material pending legal proceedings or government actions, including any bankruptcy, receivership, or similar proceedings. In addition, management is not aware of any known litigation or liabilities involving the operators of our properties that could affect our operations. Should any liabilities be incurred in the future, they will be accrued based on management’s best estimate of the potential loss. As such, there is no adverse effect on our consolidated financial position, results of operations or cash flow at this time. Furthermore, Management of the Company does not believe that there are any proceedings to which any director, officer, or affiliate of the Company, any owner of record of the beneficially owned more than five percent of the common stock of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company.
Item 1A. Risk Factors.
There have been no material changes in our risk factors from those disclosed in our Form S-1/A filed with the SEC for the period ended March 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuance of Unregistered Securities
The Company issued 3,000 shares of restricted stock to a consultant for services in the third quarter of 2008. Outside directors were each issued 1,200 shares of restricted stock for services for a total of 4,800 shares to directors in the third quarter of 2008.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
| 31.1 | Certification of Periodic Financial Reports by Clint Parr in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | |
| 32.1 | Certification of Periodic Financial Reports by Clint Parr in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350 |
| 32.2 | Certification of Periodic Financial Reports by Kendall Carpenter in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | MACROSOLVE, INC. | |
| | | | |
| Date: November 12, 2008 | By: | /s/ Clint Parr | |
| | | Clint Parr | |
| | | Chief Executive Officer | |
| | | | |
| | | | |
| Date: November 12, 2008 | By: | /s/ Kendall Carpenter | |
| | | Kendall Carpenter | |
| | | Chief Financial Officer | |
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