COMSovereign Holding Corp. - Quarter Report: 2008 June (Form 10-Q)
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: June
30, 2008
|
|
|_|
|
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.)
|
5800
East Skelly Drive, Suite 300
Tulsa,
OK 74135
(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)
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 [ ]
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 [ ] | Accelerated filer [ ] |
|
Non-accelerated
filer [ ]
(Do
not check if smaller reporting company)
|
Smaller reporting company [X] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
The
number of shares of the registrant's Common Stock, $0.001 par value per share,
outstanding as of September 2, 2008 was 24,560,100
Table
of Contents
|
Part
I –
|
Financial
Information
|
F-1
|
|
Item
1. Financial Statements (unaudited)
|
F-1
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
2
|
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
8
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|
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Item
4T. Controls and Procedures
|
8
|
|
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Part
II –
|
Other
Information
|
8
|
|
Item
1. Legal Proceedings
|
8
|
|
|
Item
1A. Risk Factors
|
8
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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8
|
|
|
Item
3. Defaults upon Senior Securities
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9
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|
|
Item
4. Submission of Matters to a Vote of Security Holders
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9
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|
Item
5. Other Information
|
9
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|
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Item
6. Exhibits
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9
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Signatures
|
10
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Exhibit
Index
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||
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Rule
13a-14(a) Certification executed by Clint Parr
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||
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Rule
13a-14(a) Certification executed by Kendall Carpenter
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||
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Section
1350 Certification
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||
PART I
FINANCIAL
INFORMATION
|
MACROSOLVE,
INC.
|
||||||||
|
BALANCE
SHEETS
|
||||||||
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Unaudited
|
||||||||
|
As
of June 30, 2008 and December 31, 2007
|
06/30/2008
|
12/31/2007
|
||||||
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ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
|
$ | 414,605 | $ | 25,668 | ||||
|
Accounts
receivable - trade
|
337,548 | 812,908 | ||||||
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Prepaid
expenses and other
|
36,184 | 27,044 | ||||||
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Total
current assets
|
788,337 | 865,620 | ||||||
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PROPERTY AND EQUIPMENT,
at cost:
|
289,947 | 277,303 | ||||||
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Less
- accumulated depreciation and amortization
|
(223,655 | ) | (222,878 | ) | ||||
|
Net
property and equipment
|
66,292 | 54,425 | ||||||
|
OTHER
ASSETS:
|
||||||||
|
Software
development costs, net of accumulated amortization
|
||||||||
|
of
$594,565 as of June 30, 2008 and December 31, 2007
|
||||||||
|
respectively,
|
520,532 | 427,694 | ||||||
|
Deferred
Equity Issuance Costs
|
218,131 | - | ||||||
|
Other
assets
|
18,243 | 18,243 | ||||||
|
Total
other assets
|
756,906 | 445,937 | ||||||
|
TOTAL
ASSETS
|
$ | 1,611,535 | $ | 1,365,982 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Current
maturities of long-term debt
|
$ | 157,500 | $ | 107,500 | ||||
|
Revolving
line of credit
|
- | 205,000 | ||||||
|
Accounts
payable - trade and accrued liabilities
|
195,953 | 110,189 | ||||||
|
Investor
Bridge Loans
|
967,515 | - | ||||||
|
Unearned
income
|
224,980 | 649,848 | ||||||
|
Total
current liabilities
|
1,545,948 | 1,072,537 | ||||||
|
LONG-TERM
DEBT, less current maturities
|
167,500 | 233,514 | ||||||
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COMMITMENTS
AND CONTINGENCIES
|
||||||||
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STOCKHOLDERS'
EQUITY:
|
||||||||
|
Common
stock, $.01 par value; authorized 100,000,000 shares;
|
||||||||
|
issued
and outstanding 24,560,100 and 22,538,900 shares,
|
||||||||
|
as
of June, 2008 and December 31, 2007, respectively
|
245,602 | 225,389 | ||||||
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Preferred
stock, $.01 par value; authorized 10,000,000 shares;
|
||||||||
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issued
and outstanding -0- shares
|
- | - | ||||||
|
Additional
paid-in capital
|
5,401,967 | 5,151,136 | ||||||
|
Accumulated
deficit
|
(5,749,482 | ) | (5,316,594 | ) | ||||
|
Total
stockholders' equity
|
(101,913 | ) | 59,931 | |||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 1,611,535 | $ | 1,365,982 | ||||
F-1
|
MACROSOLVE,
INC.
|
||||||||||||||||
|
STATEMENTS
OF OPERATIONS
|
||||||||||||||||
|
Unaudited
|
Unaudited
|
|||||||||||||||
|
For
the Quarters Ended
|
For
the Six Months Ended
|
|||||||||||||||
|
06/30/2008
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06/30/2007
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06/30/2008
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06/30/2007
|
|||||||||||||
|
SALES:
|
||||||||||||||||
|
Solution
services
|
$ | 657,329 | $ | 404,316 | $ | 1,713,490 | $ | 1,153,344 | ||||||||
|
Hardware
sales
|
9,734 | 62,680 | 28,615 | 68,704 | ||||||||||||
|
Software
licensing
|
10,837 | 7,341 | 19,834 | 11,711 | ||||||||||||
|
Net
sales
|
677,900 | 474,337 | 1,761,939 | 1,233,759 | ||||||||||||
|
COST
OF SALES:
|
||||||||||||||||
|
Solution
services
|
363,221 | 157,853 | 1,044,127 | 664,718 | ||||||||||||
|
Hardware
sales
|
7,448 | 48,899 | 22,856 | 53,369 | ||||||||||||
|
Software
licensing
|
440 | - | 1,019 | 0 | ||||||||||||
|
Total
cost of sales
|
371,109 | 206,752 | 1,068,002 | 718,087 | ||||||||||||
|
Gross
profit
|
306,791 | 267,585 | 693,937 | 515,672 | ||||||||||||
|
OPERATING
EXPENSES:
|
||||||||||||||||
|
Solution
services
|
142,533 | 98,616 | 280,007 | 181,443 | ||||||||||||
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Selling,
general and administrative
|
436,270 | 342,825 | 808,380 | 708,318 | ||||||||||||
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Total
operating expenses
|
578,803 | 441,441 | 1,088,387 | 889,761 | ||||||||||||
|
|
||||||||||||||||
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Loss
from operations
|
(272,012 | ) | (173,856 | ) | (394,450 | ) | (374,089 | ) | ||||||||
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OTHER
INCOME (EXPENSE):
|
||||||||||||||||
|
Interest
income
|
3,460 | 7,911 | 5,515 | 19,728 | ||||||||||||
|
Interest
expense
|
(20,007 | ) | (7,643 | ) | (30,118 | ) | (15,999 | ) | ||||||||
|
Other
|
(6,814 | ) | (6,377 | ) | (13,902 | ) | (13,196 | ) | ||||||||
|
Total
other expense
|
(23,361 | ) | (6,109 | ) | (38,505 | ) | (9,467 | ) | ||||||||
|
LOSS
BEFORE INCOME TAXES
|
(295,373 | ) | (179,965 | ) | (432,955 | ) | (383,556 | ) | ||||||||
|
INCOME
TAXES
|
- | - | - | - | ||||||||||||
|
NET
LOSS
|
$ | (295,373 | ) | $ | (179,965 | ) | $ | (432,955 | ) | $ | (383,556 | ) | ||||
|
LOSS
ALLOCABLE TO COMMON STOCKHOLDERS:
|
||||||||||||||||
|
Net
loss
|
$ | (295,373 | ) | $ | (179,965 | ) | $ | (432,955 | ) | $ | (383,556 | ) | ||||
|
Preferred
stock dividend
|
- | (49,974 | ) | - | (99,322 | ) | ||||||||||
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Loss
allocable to common stockholders
|
$ | (295,373 | ) | $ | (229,939 | ) | $ | (432,955 | ) | $ | (482,878 | ) | ||||
|
Basic
and diluted loss per share
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
F-2
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MACROSOLVE,
INC.
|
||||||||
|
STATEMENTS
OF CASH FLOWS
|
||||||||
|
Unaudited
|
Unaudited
|
|||||||
|
For
the Six Months Ended June 30, 2008 and 2007
|
06/30/2008
|
06/30/2007
|
||||||
|
OPERATING
ACTIVITIES:
|
||||||||
|
Net
loss
|
$ | (432,955 | ) | (383,556 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
10,324 | 50,545 | ||||||
|
Stock
based compensation
|
14,176 | 12,654 | ||||||
|
Changes
in current assets and liabilities:
|
||||||||
|
(Increase)
decrease in accounts receivable - trade
|
475,360 | (111,267 | ) | |||||
|
(Increase) decrease
in prepaid expenses and other
|
(9,140 | ) | 799 | |||||
|
(Decrease)
increase in accounts payable - trade and accrued
liabilities
|
88,804 | (135,596 | ) | |||||
|
Increase
(decrease) in unearned income
|
(424,868 | ) | 79,730 | |||||
|
Net
cash provided by (used in) operating activities
|
(278,299 | ) | (486,691 | ) | ||||
|
INVESTING
ACTIVITIES:
|
||||||||
|
Purchase
of equipment
|
(22,191 | ) | (27,462 | ) | ||||
|
Software
development costs
|
(92,838 | ) | (102,419 | ) | ||||
|
Patent
applications
|
0 | (1,700 | ) | |||||
|
Net
cash used in investing activities
|
(115,029 | ) | (131,581 | ) | ||||
|
FINANCING
ACTIVITIES:
|
||||||||
|
Deferred
Equity Issuance Costs
|
(218,131 | ) | - | |||||
|
Proceeds
from (cost of) issuance of common stock
|
154,604 | (1,288 | ) | |||||
|
Common
stock issued for advisory services
|
102,269 | - | ||||||
|
Investor
Bridge loans, including accrued interest
|
967,515 | - | ||||||
|
Repayments
of notes payable
|
(230,000 | ) | (1,410 | ) | ||||
|
Proceeds
from long term debt
|
8,986 | 15,000 | ||||||
|
Dividend
on preferred stock
|
(2,978 | ) | (2,761 | ) | ||||
|
|
||||||||
|
Net
cash provided by financing activities
|
782,265 | 9,541 | ||||||
|
NET
INCREASE (DECREASE) IN CASH
|
388,937 | (608,731 | ) | |||||
|
CASH,
beginning of period
|
25,668 | 715,017 | ||||||
|
CASH,
end of period
|
$ | 414,605 | $ | 106,286 | ||||
F-3
MacroSolve, Inc.
Notes
to Interim Unaudited Financial Statements
For
the Quarter Ended June 30, 2008
|
1.
|
BASIS OF
PRESENTATION
|
The
accompanying unaudited interim financial statements as and for the Quarters
ended June 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 June 30, 2007 and December 31, 2007
financial statements to conform to the June 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.
|
3.
|
NOTES
PAYABLE
|
|
Notes
payable at June 30, 2008 and December 31, 2007 consist of the
following:
|
June 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 June 30, 2008), due
January 31, 2009, 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.
|
$ | - | $ | 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 February, 2009, with principal and interest due at prime rate plus
2.0% amortized ratably over 30 months, due August 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 June 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.
|
$ | 275,000 | $ | 291,014 | ||||
F-4
As of
June 30, 2008, maturities of long-term debt are: $157,500 in 2008,
$156,986 in 2009, $10,514 in 2010.
|
4.
|
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 June 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 $17,000 in accrued interest as of June 30,
2008.
|
5.
|
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), 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.
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 $14,176 and $12,654
for the Six Months Ended June 30, 2008 and 2007, respectively.
A summary
of activity under the Employee Stock Plans as of June 30, 2008 and changes
during the quarter then ended is presented below:
|
Stock
Options
|
Stock Bonus Plan | |||||||||||
|
Options
|
Weighted
Average
Exercise Price
|
Shares
|
||||||||||
|
Outstanding
– December 31, 2007
|
4,839,360 | $ | 0.50 | 2,809,000 | ||||||||
|
Exercisable
– December 31, 2007
|
3,945,360 | $ | 0.49 | - | ||||||||
|
Granted
|
615,060 | $ | 0.60 | - | ||||||||
|
Exercised
|
(80,000 | ) | $ | 0.60 | - | |||||||
|
Forefeited
or Expired
|
(47,780 | ) | $ | 0.60 | - | |||||||
|
Outstanding
– June 30, 2008
|
5,326,640 | $ | 0.51 | 2,809,000 | ||||||||
|
Exercisable
– June 30, 2008
|
4,453,800 | $ | 0.48 | - | ||||||||
The
weighted-average grant-date calculated value of options granted during the
Quarters Ended June 30, 2008 and 2007 was $-0-. Options outstanding
at June 30, 2008 had an aggregate intrinsic value of $47,940 and a
weighted-average remaining contractual term of 3.6 years. Options
that were exercisable at June 30, 2008 had an aggregate intrinsic value of $-0-
and a weighted-average remaining contractual term of 2.6 years. The Board of
Directors elected to extend until July 1, 2010 the expiration date on all
options and warrants held by affiliates which were scheduled to expire prior to
July 1, 2010. There were 1,788,820 options and warrants extended by this
action.
F-5
The
weighted-average grant-date calculated value of stock awards granted during the
Quarters Ended June 30, 2008 and March 31, 2008 was $0.06. Stock awards
outstanding at June 30, 2008 had an aggregate intrinsic value of $166,642 and a
weighted-average remaining contractual term of 2.25 years.
A summary
of the status of the Company’s nonvested options as of the six
months Ended June 30, 2008 and March 31, 2008 is presented
below:
|
Nonvested Shares
|
Options
|
Weighted-
Average
Grant
Date
Calculated
Value
|
||||||
|
Nonvested
- Beginning of Year 2008
|
894,000 | $ | - | |||||
|
Granted
|
201,000 | |||||||
|
Vested
|
(192,400 | ) | ||||||
|
Forfeited
|
(29,760 | ) | ||||||
|
Nonvested
– six months Ended June 30, 2008
|
872,840 | $ | - | |||||
As of
June 30, 2008, there was $56,955 unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the stock bonus
plan. At December 31, 2007, there was $69,319 unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
stock bonus plan. These costs are expected to be recognized over a weighted
average period of 2 years. There are no unrecognized compensation
costs related to non-vested share options.
|
6.
|
EARNINGS (LOSS) PER
SHARE
|
The
Company has calculated the loss allocable to the common shareholders for the
Quarters and the Six Months Ended June 30, 2008 and 2007:
|
For the Quarters Ended June
30
|
For the Six Months Ended June
30
|
|||||||||||||||
|
Numerator:
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Net
Loss
|
$ | (295,373 | ) | $ | (179,965 | ) | $ | (432,955 | ) | $ | (383,556 | ) | ||||
|
Preferred
Stock Dividends
|
- | (49,974 | ) | - | (99,322 | ) | ||||||||||
|
Numerator
for basic and diluted loss per share
|
$ | (295,373 | ) | $ | (229,939 | ) | $ | (432,955 | ) | $ | (482,878 | ) | ||||
|
Denominator:
|
||||||||||||||||
|
Weighted-average
number of common shares outstanding
|
24,560,100 | 14,390,169 | 24,560,100 | 14,390,169 | ||||||||||||
|
Basic
and diluted loss per share
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
F-6
|
7.
|
COMMITMENTS AND
CONTINGENCIES
|
At June
30, 2008, the Company was obligated under an operating lease for certain office
space for approximately $5,940 per month. Commitments for this lease, which was
extended for an additional month and now expires on August 31, 2008, are
$14,277.
On May
27, 2008, the Company signed an operating lease for new office space of
approximately $12,000 per month. Commitments for this lease, which runs from
September 1, 2008 until August 31, 2013, are approximately
$720,000.
|
8.
|
DEFERRED EQUITY
ISSUANCE COSTS
|
The
Company has incurred cash and non-cash expenses totaling $218,131 in connection
with its pending registration of stock for public sale. These expenses, which
are recorded on the financial statements as a current asset, will be netted
against future equity proceeds. The majority of the expenses are 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.
|
9.
|
UNEARNED
INCOME
|
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 $107,361 and $638,850 as of June 30, 2008 and December 31, 2007.
|
10.
|
SUBSEQUENT
EVENTS
|
On August
15, 2008, the Trustees of The Macrosolve, Inc. Stock Bonus Trust amended the
Stock Bonus Plan to define Liquidity Event as occuring the first day that the
shares of MacroSolve, Inc. are traded publicly. Pursuant to that amendment, the
Trustees authorized the distribution of shares to the participants on August 15,
2008. Compensation expense of approximately $50,000 related to these awards will
be recognized in August, 2008.
|
11.
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW
INFORMATION
|
Cash paid
during the Six Months ended June 30, 2008 and 2007 are:
|
June 30
|
||||||||
|
2008
|
2007
|
|||||||
|
Interest
|
$ | 30,117 | $ | 15,999 | ||||
|
Income
taxes
|
$ | - | $ | - | ||||
Noncash
activities are as follows for the Six Months ended June 30, 2008 and 2007
are:
|
June 30
|
||||||||
|
2008
|
2007
|
|||||||
|
Stock
Based Compensation
|
$ | 14,176 | $ | 12,654 | ||||
|
Dividend
expense accrued
|
$ | - | $ | 9949,975 | ||||
|
Dividends
reinvested in Common Stock
|
$ | - | 46,464 | |||||
F-7
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 $155,000 in equity
through the exercise of options and warrants by existing shareholders.
Additionally, the Company has placed $950,000 in convertible notes with
qualified investors. These monies, together with funds available through
our line of credit with a financial institution, continuing investments of
equity by qualified investors, and cash generated from current operations are
expected to provide adequate capital to fund the Company’s
operations.
2
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 will be investigating various financing
alternatives including equity and/or debt financing. The Company has been
approved for the registration of its stock with the Securities and Exchange
Commission as a fully reporting OTC Bulletin Board company and is
awaiting FINRA approval of its Form 211 so that trading can
commence. 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. 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.
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 plant, significant equipment or intellectual property in the next 12
months.
Results
of Operations
Quarter
Ended June 30, 2008 compared to Quarter Ended June 30, 2007 (all references are
to the Quarter Ended June 30)
Total Net
Sales: Total Net Sales increased $204,000 or 43% to $678,000 in the
second quarter ended June 30, 2008 from $474,000 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 an increase for the quarter of $253,000 in
2008 to $657,000 as the Company expanded its contracts and related work with
several of its major clients and established relationships with several new
clients. Hardware sales to third parties and in support of our
services activities were modest for the second quarter at $10,000, down $53,000
or 84% from 2007. Software licensing sales increased $3,000 or 48%
for the period to $11,000 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 second quarter of 2008
increased $164,000 to $371,000 in support of the higher level of revenues,
or 79%, from $207,000 in 2007. The majority of this increase was
represented by the staffing costs related to the delivery of the services
revenue. The resultant Gross Profit for the second quarter of 2008 of
$307,000 was up $39,000 or 15% over the Gross Profit for the same period in 2007
of $268,000. Profit margin was down for the quarter from 56% to 45%
reflecting current percentage completion calculations associated with the
revenue recognition for a primary client contract.
3
Operating,
Selling, General and Administrative Expenses: Operating, selling,
general and administrative expenses increased by $137,000, or 31% in the 2008
second quarter to $579,000 from $441,000 in 2007. This increase
reflects both increases in costs associated with aforementioned staff additions
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 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.
Loss from
Operations: Loss from operations for the second quarter of 2008 was
$272,000, an increase of $98,000 or 56% from the loss from operations in 2007 of
$174,000 as a result of the aforementioned increase in operating, sales and
marketing expenses.
Other
Income and Expense: Total other expense of $23,000 in 2008
represented an increase of $17,000 from $6,000 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.
Net
Loss: Net loss of $295,000 for the second quarter of 2008 was
$115,000 or 64% higher than the net loss of $180,000 for the same period in 2007
as the higher operating, sales and marketing expenses and net interest expenses
more than offset the increase in gross profit from the higher revenue achieved
in the period.
Six
Months Ended June 30, 2008 compared to Six Months Ended June 30, 2007: (all
references are to the six months ended June 30).
Total net
sales increased $528,000 or 43% in the six months ended June 30, 2008 to $1.762
million from $1.234 million in 2007. Solution Services revenue
increased $560,000 or 49% for the period to $1.713 million from $1.153 million
as the company established relationships with new clients and expanded its work
with several existing customers. Hardware sales in 2008 were down
$40,000 or 58% to $29,000 from $69,000 while software licensing revenues in 2008
of $20,000 were up $8,000 or 69% from $12,000 for the same period in
2007.
Cost of
Sales and Gross Profit: Cost of Sales for 2008 of $1.068 million
represented an increase of $350,000 or 49% from $718,000 in 2007 reflecting the
staffing additions and related costs of delivery of the services revenue. The
resultant Gross Profit for the 2008 six month period of $694,000 was up $178,000
or 34% over the Gross Profit for the same period in 2007 of
$516,000. Profit margin was 39% for 2008 as compared with 42% for the
first six months of 2007.
Operating,
Selling, General and Administrative Expenses: Operating, selling, general and
administrative expenses increased by $198,000, or 22% in 2008 to $1.088 million
from $890,000 in 2007. This increase reflects both increases in costs
associated with aforementioned staff additions 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 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.
Loss from
Operations: Loss from operations for the six month period in 2008 of
$394,000 was $20,000 or 5% higher than the loss from operations for the same
period in 2007 of $374,000 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 $39,000 in 2008 was
$30,000 more than the $9,000 in 2007 as a result of higher net interest
expenses.
4
Net
Loss: Net loss for the six month period ended June 30, 2008 was
$433,000, an increase of $49,000 or 13% from the net loss for the same period in
2007 of $384,000 as the higher operating, sales and marketing expenses and net
interest expenses 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 $0.60 per share after
consideration is given to the 19 share stock dividend 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.
Subsequent
to June 30, 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 until February, 2009 with outstanding principal and interest
payable ratably over 30 months due July 31, 2011.
As of
June 30 2008, we had cash and cash equivalents of $415,000. 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 cash
requirements.
Sources
and Uses of Cash
|
Six
Months Ended June 30,
|
||||||||
|
(In
thousands)
|
2008
|
2007
|
||||||
|
Cash
flow data:
|
||||||||
|
Net
cash provided by (used in) operating activities
|
(278 | ) | (487 | ) | ||||
|
Net
cash (used in) investing activities
|
(115 | ) | (132 | ) | ||||
|
Net
cash provided (used) by financing activities
|
782 | 10 | ||||||
|
Net
increase ( decrease) in cash and cash equivalents
|
389 | (609 | ) | |||||
|
Cash
and cash equivalents, beginning of period
|
26 | 715 | ||||||
|
Cash
and cash equivalents, end of period
|
415 | 106 | ||||||
Operating
Activities
Net cash
used in operating activities for the Six Months ended June 30, 2008 were
$278,000, a decrease of $209,000 from the same period in 2007 reflecting the
partial prepayment of a significant project by a major customer.
Investing
Activities
Cash used
in investing activities for the Six Months ended June 30, 2008 was $115,000,
down $17,000 from the same period in 2007 represented principally in both
periods by costs associated with the development of the Company’s ReForm™
software product. Equipment purchases for both periods were
nominal.
5
Financing
Activities
Net cash
provided by financing activities for the Six Months ended June 30, 2008 was
$782,000 as compared with $10,000 for the same period last year. The
Company began amortizing its note with the State of Oklahoma Technology Business
Finance Program in May, 2008 at $12,500 per month. Additionally, the
Company has incurred $218,000 legal and financial advisory expenses through June
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 $18,000 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. The Company raised an
additional $155,000 in capital through the exercise of options and warrants by
existing shareholders.
As of
June 30, 2008, the Company had cash and cash equivalents in the amount of
$415,000 as compared with $106,000 at June 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 June 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.
6
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 June 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-Scholes 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 has not been publicly traded, so management
determined that the technology sector fund XLK and it’s standard deviation would
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.
In May,
2008, the FASB issued Statement of Financial Accounting Standard 162, “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). The purpose
of this standard is to provide a consistent framework for determining what
accounting principles should be used when preparing U.S. GAAP financial
statements. SFAS 162 categorizes accounting pronouncements in a descending order
of authority. In the instance of potentially conflicting accounting principles,
the standard in the highest category must be used. This statement will be
effective 60 days after the SEC approves the Public Company Accounting and
Oversight Board’s related amendments. We do not expect the adoption of SFAS 162
to have a material effect on our financial statement.
7
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 June 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 on June 13, 2008.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Issuance
of Unregistered Securities
None.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers.
None.
8
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
|
9
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: September
2, 2008
|
By:
|
/s/
Clint
Parr
|
|
|
Clint
Parr
|
|||
|
Chief
Executive Officer
|
|||
|
Date: September
2, 2008
|
By:
|
/s/ Kendall
Carpenter
|
|
|
Kendall
Carpenter
|
|||
|
Chief
Financial Officer
|
|||
10