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CarbonMeta Technologies, Inc. - Quarter Report: 2010 June (Form 10-Q)

cowi_10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE OF 1934

For the quarterly period ended    June 30, 2010                                                                                                                                                                

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ________________ TO _________________

COMMISSION FILE NUMBER: 000-33231

COROWARE, INC.
 (EXACT NAME OF THE COMPANY AS SPECIFIED IN ITS CHARTER)

Delaware
 
95-4868120
(State or Other Jurisdiction
 
(I.R.S. Employer
of Incorporation)
 
Identification No.)

1410 Market Street, Suite 200
Kirkland, WA 98033
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

 (800) 641-2676
(REGISTRANT TELEPHONE NUMBER)


Indicate by check mark whether the Company (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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  þ Yes o No

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.
 
Large accelerated filer o Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company Smaller reporting company þ
       
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso No þ
 
As of August 19, 2010 there were 23,887,007 shares of the issuer's $.001 par value common stock issued and outstanding.



 
 

 

COROWARE, INC.
June 30, 2010 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS
 
PART I – FINANCIAL INFORMATION   PAGE  
         
Item 1. Consolidated Financial Statements     1  
  Consolidated Balance Sheets at June 30, 2010 (Unaudited) and December 31, 2009     1  
  Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009     2  
  Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009     3  
  Notes to Unaudited Consolidated Financial Statements     5 - 9  
           
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.     10  
Item 3. Quantitative and Qualitative Disclosures About Market Risk     13  
Item 4. Controls and Procedures     14  
           
PART II – OTHER INFORMATION        
           
Item 1.  Legal Proceedings     15  
Item 1A. Risk Factors     15  
Item 2. Unregistered Sales of Equity Securities and Use of Funds     15  
Item 3. Defaults Upon Senior Securities     15  
Item 4. (Removed and Reserved)     15  
Item 5. Other Information     15  
Item 6. Exhibits     15  
SIGNATURES       16  
 
 
 

 
 
PART I – FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
COROWARE, INC.
CONSOLIDATED BALANCE SHEETS
 
   
June 30,
2010
   
December 31,
2009
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash
  $ 24,674     $ 3,493  
Accounts receivable, net
    179,046       189,115  
Other current assets
    9,726       35,651  
Total current assets
    213,446       228,259  
                 
Property and equipment, net
    39,895       47,395  
Intangible assets, net
    24,381       37,681  
Other assets, net
    9,546       4,815  
Deferred financing costs, net
    -       6,250  
                 
TOTAL ASSETS
  $ 287,268     $ 324,400  
                 
   
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities:
               
Lines of credit
  $ 126,220     $ 123,696  
Accounts payable and accrued expenses
    3,473,503       2,968,131  
Accrued expenses, related parties
    98,525       88,438  
Notes payable
    327,732       357,732  
Notes payable, related parties
    388,793       408,229  
Derivative liability
    1,294,299       2,249,038  
Convertible debt, net of discount
    2,358,351       2,424,391  
Redeemable preferred stock, Series B, $.001 par value, 10,000,000
               
     shares authorized, 159,666 shares issued and outstanding as of
               
     June 30, 2010 and December 31, 2009
    201,153       274,251  
Long-term debt
    982,450       989,100  
Total current liabilities
    9,251,026       9,883,006  
Total liabilities
    9,251,026       9,883,006  
Commitments                
Stockholders’ deficit:
               
Common stock, $.001 par value, 900,000,000 shares authorized,
               
    16,186,331 and 4,506,191 shares issued and outstanding at
               
    June 30, 2010 and December 31, 2009, respectively
    16,186       4,506  
Additional paid-in capital
    15,234,734       14,901,673  
Accumulated deficit
    (24,178,978 )     (24,429,085 )
Treasury stock
    (35,700 )     (35,700 )
Total stockholders’ deficit
    (8,963,758 )     (9,558,606 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
  $ 287,268     $ 324,400  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
1

 
 

COROWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months ended June 30, 2010 and 2009
(Unaudited)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenues
  $ 632,813     $ 416,117     $ 1,178,622     $ 1,074,106  
Cost of revenues
    496,464       253,589       932,876       669,077  
Gross profit
    136,349       162,528       245,746       405,029  
Operating expenses:
                               
General and administrative
    267,736       190,353       489,513       413,042  
Sales and marketing
    64,409       30,642       95,123       46,327  
Research and development
    31,783       -       35,807       87  
Depreciation and amortization
    10,550       46,696       20,800       109,470  
Total operating expenses
    374,478       267,691       641,243       568,926  
                                 
Loss from operations
    (238,129 )     (105,163 )     (395,497 )     (163,897 )
                                 
                                 
Other income (expense):
                               
Derivative income (expense)
    63,731       (691,803 )     1,000,442       (2,277,262 )
Interest expense, net
    (140,173 )     (569,286 )     (417,554 )     (989,928 )
Other income
    30,156       -       30,156       -  
Gain on debt redemptions
    10,602       -       32,560       -  
               Total other income (expense)
    (35,684 )     (1,261,089 )     645,604       (3,267,190 )
                                 
Net income (loss)
  $ (273,813 )   $ (1,366,252 )   $ 250,107     $ (3,431,087 )
                                 
Net income (loss) per share:
                               
Basic
  $ (0 .02 )   $ (0.46 )   $ 0.02     $ (1.17 )
Diluted
  $ (0 .02 )   $ (0.46 )   $ 0.01     $ (1.17 )
Weighted average shares outstanding:
                               
Basic
   
14,399,307
      2,917,834       10,641,039       2,923,474  
Diluted
   
14,399,307
     
2,917,834
     
27,403,874
     
2,923,474
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
2

 
 
COROWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months ended June 30, 2010 and 2009
(Unaudited)
 
   
2010
   
2009
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
  $ 250,107     $ (3,431,087 )
Net income (loss)
               
Adjustments to reconcile net income (loss) to net cash flows
               
    from operating activities:
               
Depreciation and amortization
    20,800       109,470  
Stock option expense
    14,086       27,373  
Amortization of debt discount
    59,444       837,507  
Amortization of deferred financing costs
    6,250       70,528  
Derivative (income) loss
    (1,000,442 )     2,277,262  
Gain on debt redemptions
    (32,560 )     -  
Common stock issued for services
    89,584       -  
             Gain on settlement of liabilities with stock
    (6,576 )     -  
             Gain on partial settlement of mortgage note
    (6,650 )     -  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    10,069       (142,182 )
Other current assets, net
    21,194       5,748  
Accounts payable and accrued expenses
    628,500       (16,713 )
                       Accrued expenses, related parties
    10,087       24,993  
NET CASH FLOWS FROM OPERATING ACTIVITIES
    63,893       (237,101 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Additions to  property and equipment
    -       (23,192 )
NET CASH FLOWS FROM INVESTING ACTIVITIES
    -       (23,192 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from lines of credit, net
    2,524       91,892  
Payments on notes payable
    (40,000 )     (5,268 )
Payments on notes payable, related party
    (25,236 )     (30,000 )
Proceeds from notes payable
    -       500  
Proceeds from notes payable, related party
    20,000       172,340  
NET CASH FLOWS FROM FINANCING ACTIVITIES
    (42,712 )     229,464  
                 
NET INCREASE (DECREASE) IN CASH
    21,181       (30,829 )
Cash, beginning of period
    3,493       32,142  
Cash, end of period
  $ 24,674     $ 1,313  

Continued.
 
 
3

 
 
COROWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Six Months ended June 30, 2010 and 2009
(Unaudited)
 
   
2010
   
2009
 
SUPPLEMENTAL CASH FLOW INFORMATION
           
Interest paid
  $ -     $ 24,065  
Income taxes paid
  $ -     $ -  
                 
NON-CASH INVESTING AND FINANCING TRANSACTIONS
               
Common stock issued for redemption of convertible debentures
  $ 101,609     $ -  
Common stock issued in satisfaction of accrued liabilities
  $ 139,461     $ 4,100  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
 
COROWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of CoroWare, Inc. (“CoroWare” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report filed with the SEC on Form 10-K for the year ended December 31, 2009.  The consolidated financial statements include the accounts of the Company and its wholly-owned operating subsidiary, CoroWare Technologies, Inc.  Also included in the consolidated statements are the Company’s inactive wholly-owned subsidiaries, Innova Robotics, Inc., Robotic Workspace Technologies, Inc., and Robotics Software Service, Inc. (herein referred to as the “Subsidiaries”).  In the opinion of management, all adjustments consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year ended December 31, 2009 as reported in Form 10-K have been omitted.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Pronouncements

Management does not expect the impact of any other recently issued accounting pronouncements to have a material impact on its financial condition or results of operations.

NOTE 3 – FINANCIAL CONDITION AND GOING CONCERN

The Company has losses from operations for the six months ended June 30, 2010 of $395,497. Because of these losses, the current working capital deficit, and the projection of additional losses for 2010, the Company will require additional working capital to develop its business operations.

The Company intends to raise additional working capital through the use of private placements, public offerings, bank financing and/or related party financings.

There are no assurances that the Company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations; or (2) obtain additional financing through either private placements, public offerings, bank financing and/or related party financing necessary to support the Company's working capital requirements. To the extent that funds generated from operations, any private placements, public offerings, bank financing and/or related party financings are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available or, if available, will be on terms acceptable to the Company.

These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 
5

 
 
NOTE 4 – ACCOUNTS RECEIVABLE FACTORING
 
In March 2010, the Company entered into an accounts receivable factoring arrangement with Capefirst Funding, Inc. (“Capefirst”).  The agreement calls for Capefirst to advance up to 80% of the net face amount of each assigned account or up to 50% of eligible assigned purchase orders.  The agreement calls for a maximum facility amount of $200,000 with a purchase fee of 2% of the net face amount of each assigned account and a collection fee of 0.1% compounded daily.  In the event of a dispute or in the event of fraud, misrepresentation, willful misconduct or negligence on the part of the Company, Capefirst may require the Company to immediately repurchase the assigned accounts at a purchase price that includes the amount of the assigned account plus the discount fee, interest and collection fee and may include a processing fee of 10%.
 
NOTE 5 - CONVERTIBLE DEBT

The following table illustrates the carrying value of convertible debt:

   
June 30, 2010
   
December 31, 2009
 
   
Principal
   
Discount
   
Carrying Value
   
Principal
   
Discount
   
Carrying Value
 
$2,825,000 financing
  $ 1,458,351     $ -     $ 1,458,351     $ 1,564,949     $ (8,277 )   $ 1,556,672  
$   600,000 financing
    600,000       -       600,000       600,000       (17,888 )     582,112  
$   300,000 financing
    300,000       -       300,000       300,000       (14,393 )     285,607  
    $ 2,358,351       -     $ 2,358,351     $ 2,464,949     $ (40,558 )   $ 2,424,391  

The following tables illustrate the fair value adjustments that were recorded related to the derivative financial instruments associated with the convertible debenture financings:

   
Three Months ended June 30, 2010
 
Derivative income (expense)
 
Inception
   
Fair Value
Adjustments
   
Redemptions
   
Total
 
$2,825,000 financing
  $ -     $ 19,608     $ (5,817 )   $ 13,791  
$   600,000 financing
    -       50,148       -       50,148  
$   300,000 financing
    -       917       -       917  
Preferred stock, Series B
    -       (1,125 )     -       (1,125 )
    $ -     $ 69,548     $ (5,817 )   $ 63,731  
 
   
Three Months ended June 30, 2009
 
Derivative income (expense)
 
Inception
   
Fair Value Adjustments
   
Redemptions
   
Total
 
$2,825,000 financing
  $ -     $ (252,119 )   $ -     $ (252,119 )
$  600,000 financing
    -       (199,517 )     -       (199,517 )
$  300,000 financing
    -       11,786       -       11,786  
Preferred stock, Series B
    -       (251,953 )     -       (251,953 )
    $ -     $ (691,803 )   $ -     $ (691,803 )
 
   
Six Months ended June 30, 2010
 
Derivative income (expense)
 
Inception
   
Fair Value Adjustments
   
Redemptions
   
Total
 
$2,825,000 financing
  $ -     $ 685,791     $ (27,520 )   $ 658,271  
$   600,000 financing
    -       267,560       -       267,560  
$   300,000 financing
    -       1,513       -       1,513  
Preferred stock, Series B
    -       73,098       -       73,098  
    $ -     $ 1,027,962     $ (27,520 )   $ 1,000,442  

 
6

 

   
Six Months ended June 30, 2009
 
Derivative income (expense)
 
Inception
   
Fair Value Adjustments
   
Redemptions
   
Total
 
$2,825,000 financing
  $ -     $ (1,347,000 )   $ -     $ (1,347,000 )
$  600,000 financing
    -       (569,710 )     -       (569,710 )
$  300,000 financing
    -       (1,836 )     -       (1,836 )
Preferred stock, Series B
    -       (358,716 )     -       (358,716 )
    $ -     $ (2,277,262 )   $ -     $ (2,277,262 )

The following table illustrates the components of derivative liabilities:

   
June 30, 2010
 
   
Compound
Derivative
   
Warrant
Liability
   
Other
warrants
   
 
Total
 
$2,825,000 financing
  $ 951,125     $ -     $ -     $ 951,125  
$   600,000 financing
    339,798       3,360       -       343,158  
$   300,000 financing
    -       16       -       16  
    $ 1,290,923     $ 3,376     $ -     $ 1,294,299  
 
   
December 31, 2009
 
   
Compound
Derivative
   
Warrant
Liability
   
Other
warrants
   
 
Total
 
$2,825,000 financing
  $ 1,636,133     $ 657     $ -     $ 1,636,790  
$   600,000 financing
    605,639       5,079       -       610,718  
$   300,000 financing
    -       1,530       -       1,530  
    $ 2,241,772     $ 7,266     $ -     $ 2,249,038  

All of our financings with Yorkville have matured and are currently in default.  As such, all amounts of unpaid principal and interest are due and payable.

The following table summarizes the number of common shares indexed to the derivative financial instruments as of June 30, 2010:
 
Financing or other contractual arrangement:
 
Conversion
Features
   
 
Warrants
   
 
Total
 
$2,825,000 Convertible note financing
    190,308,342       8,333       190,316,675  
$   600,000 Convertible note financing
    67,959,697       525,000       68,484,697  
$   300,000 Convertible note financing
    65,764       33,333       99,097  
      258,333,803       566,666       258,900,469  

The embedded conversion features associated with our convertible debentures are valued based on the number of shares that are indexed to that liability. Keeping the number of shares constant, the liability associated with the embedded conversion features increases as our share price increases and, likewise, decreases when our share price decreases.  In the same manner, derivative expense is created when our share price increases and derivative income is created when our share price decreases.  During the six months ended June 30, 2010, Yorkville converted $75,800 of principal into 3,922,107 shares of the Company’s common stock.  A gain of $32,560 was recognized on the conversion.

All of the Company’s convertible debt instruments are past due and in default.  However, the terms of the agreements allow conversion of the debt during periods of default.  In computing the derivative liability associated with the conversion, one of the inputs is maturity of the instruments which, in this case, is technically in the past.  Accordingly, the management has estimated a debt maturity date of ten months form the period-end date for purposes of the derivative liability calculation.

 
7

 
 
NOTE 6 - OTHER STOCKHOLDERS’ EQUITY

a)  
 Stock Options:

The following table summarizes stock option activity:
 
   
Total
Options
   
Weighted
Average Price
 
Outstanding, December 31, 2009
    38,528     $ 2.97  
Granted
    -          
Cancelled
    -          
Exercised
    -          
Outstanding, June 30, 2010
    38,528     $ 2.97  
Exercisable at June 30, 2010
    36,490          

b)  
 Outstanding warrants:

At June 30, 2010, the Company had the following warrants outstanding:

   
Grant Date
 
Expiration Date
 
Warrants Granted
   
Exercise Price
 
$2,825,000 financing
 
07/21/06
 
 07/21/11
    8,333     $ 6.00  
$   300,000 financing
 
03/19/08
 
03/19/13
    33,333     $ 6.00  
              41,666          

a)
Reverse stock split:

All common share amounts and per share amounts in the accompanying financial statements for the three months ended June  30, 2009 reflect retroactive application of the one-for-three hundred reverse stock split of the issued and outstanding shares of common stock of the Company, effective April 8, 2009.

b)  
Issuance of common stock:

The following table summarizes common stock issued for services during the quarter ended June 30, 2010:
   
Shares
   
Value
 
Employee compensation
    2,176,700     $ 65,867  
Professional fees
    692,318       23,717  
      2,869,018     $ 89,584  
c)  
 Dividends on preferred stock:

At June 30, 2010 and December 31, 2009, there were cumulative undeclared dividends to Preferred Series B shareholders of $27,942 and $23,950, respectively, the obligation for which is contingent on declaration by the board of directors.
 

NOTE 7 – RELATED PARTY TRANSACTONS

During the period ended June 30, 2010, the Company received advances of $20,000 from directors of the Company and made repayments of $25,236 on certain related party notes payable.

 
8

 
 
NOTE 8 – SUBSEQUENT EVENTS

The Company issued the following shares subsequent to June 30, 2010:

Shares issued for employee compensation and professional fees
    5,217,300  
Shares issued in connection with redemptions on our convertible debentures
    768,628  
Shares issued in satisfaction of payables
    1,714,748  
      7,700,676  
 
NOTE 9 – COMMITMENTS
 
Lease Agreement:
 
On June 11, 2010, the Company entered into a lease with Market Street Building LLC for a period of five (5) years.
 
Future minimum rentals on non-cancelable leases are as follows:
 
For the year ending December 31,
     
2010
 
$
18,675
 
2011
 
$
46,314
 
2012
 
$
49,551
 
2013
 
$
52,788
 
2014
 
$
56,025
 
2015
 
$
14,193
 
   
$
237,546
 
 
 
 
9

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may" "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those in the forward-looking statements as a result of various important factors. Although we believe that the expectations reflected in the forward-looking statements are reasonable, they should not be regarded as a representation by CoroWare, Inc., or any other person, that such expectations will be achieved. The business and operations of CoroWare, Inc. are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this report.
 
BACKGROUND

CoroWare, Inc ("CoroWare" or "the Company") is a public holding company whose principal subsidiary, CoroWare Technologies, Inc. ("CTI"), has expertise in information technology consulting, mobile robotics, and affordable telepresence.  Through its subsidiary, the Company delivers custom engineering services, hardware and software products, and subscription services that benefit customers in North America, Europe, Asia and the Middle East.  Their customers span multiple industry sectors and comprise universities, software and hardware product development companies, and non-profit organizations.  The company also maintains a Near Shore practice which is comprised of multiple subcontracting companies with whom the company maintains close working relationships.  Through these relationships, the Company is able to provide services in South America.

COROWARE TECHNOLOGIES, INC.

CTI is a software professional services company with a strong focus on Information Technology integration and robotics integration, business automation solutions, and unmanned systems solutions to its customers in North America and Europe.

CTI’s expertise includes the deployment and integration of computing platforms and applications, as well as the development of unmanned vehicle software and solutions for customers in the research, commercial, and homeland security market segments.  CTI shall continue to offer its high value software systems development and integration services that complement the growing trend in outsourced software development services in Asia, Latin America and Eastern Europe.

CoroWare Technologies comprises three separately managed lines of business:
 
·  
CoroWare Business Solutions:  IT and lab management; software architecture, design and development; content delivery; partner and program management.
·  
Robotics and Automation:   Custom engineering such as visualization, simulation and software development; and mobile robot platforms for university, government and corporate researchers.
·  
Telepresence:  High definition video conferencing products, solutions and subscription services.

The Company’s revenues are principally derived from standing contracts that include Microsoft (partner management and IT professional services), a European auto manufacturer (simulation software custom development), and other customers whose product development groups require custom software development and consulting companies. Existing contract revenues vary month by month based on the demands of the clients. The Company’s telepresence effort is in the early stages of growth and will require additional working capital to compete effectively against new entrants in this rapidly growing market.
 
 
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RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2010 COMPARED TO THREE MONTHS ENDED JUNE 30, 2009:

During the three-month period ended June 30, 2010 (the "2010 Period") revenues were $632,813 compared to revenues of $416,117 during the three-month period ended June 30, 2009 (the "2009 Period").  Our revenues increased compared to the previous year as customers began to purchase videoconferencing services, infrastructure and room systems; and increasingly request for CoroWare’s software development services for billing integration, social networking, and game testing projects.

Cost of revenues was $496,464 for the 2010 Period compared to $253,589 for the 2009 Period. Cost of revenues represents primarily labor and labor-related costs in addition to overhead costs.  Gross profit on these 2010 revenues amounted to $136,349 (21.5% gross profit percentage) compared to $162,528 (39.1% gross profit percentage) for the 2009 Period.  The reduced gross profit percentage resulted from our investment of operational resources into our CoroCall telepresence service that we believe will result in new business in the coming months.

Research and development was $31,783 for the 2010 Period compared to $0 in the 2009 Period.  The increased research and development investment resulted from our software development and testing initiatives, including CoroWare Usage Reporter for Vidyo Systems, CoroWare Billing Integration Framework for MetraTech and Vidyo, and CoroWare NameTag.

Operating expenses were $374,478 during the 2010 Period compared to $267,691 during the 2009 Period.  Selling expenses were higher in the 2010 Period as the Company increased its sales and marketing expenses to help increase major account sales of CoroCall and CoroWare’s telepresence product sales in the coming months.

Loss from operations was $238,129 during the 2010 Period compared to $105,163 in the 2009 Period.  The increase in this loss is a result of increasing our Research and Development and Sales investments in telepresence to increase sales in 2010.

Total other income (expense) was ($35,684) during the 2010 Period compared to ($1,261,089) in the 2009 Period.  Other income (expense) is comprised primarily of derivative income (expense) and amortization of debt discount and deferred finance costs.  Derivative income in the 2010 Period was $63,731 compared to derivative expense of ($691,803) in the 2009 Period.  The embedded conversion features associated with our convertible debentures are valued based on the number of shares that are indexed to that liability. Keeping the number of shares constant, the liability associated with the embedded conversion features increases as our share price increases and, likewise, decreases when our share price decreases.  Derivative income (expense) displays the inverse relationship.  The derivative income in the 2010 Period is the result of the decrease in our stock price on the measurement dates during the three month period ($0.028 at March 31, 2010 versus $0.012 at June 30, 2010).  The derivative expense in the 2009 Period was not related to a change in the share price as the share price remained constant ($0.18 at March 31, 2009 versus $0.18 at June 30, 2009).  The derivative expense in the 2009 Period was the indirect result of losing the par floor on the conversion feature subsequent to the 1-for-300 reverse split.  The par floor had the effect of limiting the number of shares indexed to the debt and thus limiting the liability.  Subsequent to the reverse split, the stock was trading well above par so the number of shares indexed to the debt was not limited, the liability was thus greater and derivative expense was recorded. Interest expense for the three month 2010 Period is $140,173 compared to $569,286 for the three month 2009 Period.  The decrease in interest expense is a direct result of the amortization of debt discount on the convertible debt.  The debt discount was amortized using the effective interest method.  Under this method, the amount of amortization increased exponentially as the underlying carrying value of the amortized debt increased.  The debt discounts associated with the $2.8 million financing and the $600,000 financing finished amortizing in the fourth quarter of 2009.

Net loss for the 2010 Period was $273,813 compared to net loss of $1,366,252 for the 2009 Period.
 
 
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Basic weighted average shares outstanding were 14,399,307 during the 2010 Period compared to 2,917,834 in the 2009 Period.

SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO SIX MONTHS ENDED JUNE 30, 2009:

During the six-month period ended June 30, 2010 (the "2010 Period") revenues were $1,178,622 compared to revenues of $1,074,106 during the three-month period ended June 30, 2009 (the "2009 Period").  Our revenues increased in the 2010 period compared to the previous year as customers began to purchase videoconferencing services, infrastructure and room systems; and increasingly request CoroWare’s software development services for billing integration, social networking, and game testing projects.

Cost of revenues was $932,876 for the 2010 Period compared to $669,077 for the 2009 Period. Cost of revenues represents primarily labor and labor-related costs in addition to overhead costs.  Gross profit on these 2010 revenues amounted to $245,746 (20.9% gross profit percentage) compared to $405,029 (38% gross profit percentage) for the 2009 Period revenues.

Research and development was $35,807 for the 2010 Period compared to $87 in the 2009 Period.

Operating expenses were $641,243 during the 2010 Period compared to $568,926 during the 2009 Period.

Loss from operations was $395,497 during the 2010 Period compared to $163,897 in the 2009 Period.

Total other income (expense) was $645,604 during the 2010 Period compared to ($3,267,190) in the 2009 Period.  Other income (expense) is comprised primarily of derivative income (expense) and amortization of debt discount and deferred finance costs.  Derivative income in the 2010 Period was $1,000,442 compared to derivative expense of ($2,277,262) in the 2009 Period.  The embedded conversion features associated with our convertible debentures are valued based on the number of shares that are indexed to that liability. Keeping the number of shares constant, the liability associated with the embedded conversion features increases as our share price increases and, likewise, decreases when our share price decreases.  Derivative income (expense) displays the inverse relationship.  The derivative income in the 2010 Period is the result of the decrease in our stock price on the measurement dates during the three month period ($0.08 at December 31, 2009 versus $0.012 at June 30, 2010).  The derivative expense in the 2009 Period is the direct result of the increase in our stock price on the measurement dates during the six month period ($0.03 at December 31, 2008 versus $0.18 at June 30, 2009).  An increase in the stock price resulted in an increased value of the embedded conversion feature (using the Monte Carlo calculator) which resulted in derivative expense.  Interest expense for the six month 2010 Period is $417,554 compared to $989,928 for the six month 2009 Period.  The decrease in interest expense is a direct result of the amortization of debt discount on the convertible debt.  The debt discount was amortized using the effective interest method.  Under this method, the amount of amortization increased exponentially as the underlying carrying value of the amortized debt increased.  The debt discounts associated with the $2.8 million financing and the $600,000 financing finished amortizing in the fourth quarter of 2009.

Net income for the 2010 Period was $250,107 compared to net loss of ($3,431,087) for the 2009 Period.

Basic weighted average shares outstanding were 10,641,039 during the 2010 Period compared to 2,923,474 in the 2009 Period.  Fully diluted weighted average shares outstanding were 27,403,874 for the 2010 Period.  There is no fully diluted calculation for the 2009 Period as the effect would be anti-dilutive.
 
 
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LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2010, we had current assets of $213,446, current liabilities of $9,251,026, negative working capital of $9,037,580 and an accumulated deficit of $24,178,978.

We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding. We will still need additional capital in order to continue operations until we are able to achieve positive operating cash flow. Additional capital is being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms.  If we do not obtain additional capital, we may cease operations.

However, even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
 
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, results of operations, liquidity or capital expenditures.
 
CONTRACTUAL OBLIGATIONS
 
The following table sets forth the contractual obligations of the Company as of December 31, 2009:
 
   
Payments due by Period
 
Contractual Obligations
 
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
Convertible debt, net
  $ 2,468,525     $ 2,468,525     $ -     $ -     $ -  
Notes payable
    357,732       357,732       -       -       -  
Notes payable, related parties
    408,229       408,229       -       -       -  
Operating leases
    68,751       27,482       41,269       -       -  
Long –term debt
    989,100       989,100                          
  Total
  $ 4,292,337     $ 4,251,068     $ 41,269     $ -     $ -  

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Form 10-K for the year ended December 31, 2009.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this item.
 
 
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ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
With the participation of Lloyd T. Spencer, who serves as the Chief Executive Officer (the principal executive officer) and Interim Chief Financial Officer (the principal financial officer); the Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. As of the end of the period covered by this Report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our chief executive officer and interim chief financial officer concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.    The ineffectiveness of our disclosure controls and procedures is the result of certain deficiencies in internal controls constituting material weaknesses as discussed below.

The Company has historically had limited operating revenue and, as such, all accounting and financial reporting operations have been and are currently performed by a limited number of individuals.  The parties that perform the accounting and financial reporting operations are the only parties with any significant knowledge of generally accepted accounting principles. Thus, we lack segregation of duties in the period-end financial reporting process. This lack of additional accounting/auditing staff with significant knowledge of generally accepted accounting principles in order to properly segregate duties could result in ineffective oversight and monitoring and the possibility of a misstatement within the financial statements. However, the material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company's financial statements for the current reporting period.

 The Company is currently reviewing its policies and is evaluating its disclosure controls and procedures so that it will be able to determine the changes it can and should make to make such controls more effective.

Changes in Internal Controls over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the company's last fiscal quarter that have materially affected, or are likely to materially affect, the company's internal control over financial reporting, except that we were unable to timely file our 10K for the year ending December 31, 2009.
 
 
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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF FUNDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

(a)  
No material default in the payment of principal, interest, a sinking fund or purchase fund installment, or any other material default not cured within 30 days exists as of the balance sheet date.

(b)  
As of the balance sheet date the company is in arrears in the payment of dividends related to its Series B preferred stock in the amount of $15,969.

(c)  
As of July 21, 2009, we are in default on our Secured Convertible Debenture presently held by Yorkville Advisors, LLC.  The first tranche of this debenture was issued on July 21, 2006 in the original principal amount of $1,250,000 and the second tranche was issued on August 21, 2006 in the original principal amount of $575,000.  The debenture accrued interest at 10% per annum thru March 25, 2008 at which time the interest rate was increased to 14% per annum.  The debenture is convertible at the option of the holder into shares of CoroWare, Inc. common stock.

(d)  
As of September 25, 2009, we are in default on our Secured Convertible Debenture presently held by Yorkville Advisors, LLC in the face amount of $600,000.  The debenture accrued interest at 14% per annum and is convertible at the option of the holder into shares of CoroWare, Inc. common stock.

(e)  
As of March 19, 2010, we are in default on our Secured Convertible Debenture presently held by Yorkville Advisors, LLC in the face amount of $300,000.  The debenture accrued interest at 14% per annum and is convertible at the option of the holder into shares of CoroWare, Inc. common stock.
 
ITEM 4. (REMOVED AND RESERVED)
 
ITEM 5. OTHER INFORMATION
 
None.

ITEM 6. EXHIBITS

  
Certification of Periodic Financial Reports by Lloyd Spencer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002
  
Certification of Periodic Financial Reports by Lloyd Spencer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  CoroWare, Inc.  
       
       
       
Dated:  August 23, 2010 
 
/s/ Lloyd T. Spencer   
    Lloyd T. Spencer,  
    Chief Executive Officer and  
    Interim Chief Financial Officer  
    (Principal Executive Officer and Principal  
     Accounting and Financial Officer)  
 
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