COMSovereign Holding Corp. - Quarter Report: 2009 September (Form 10-Q)

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(Mark one)
x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2009
o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
	For the transition period from _________ to ___________

 

	Oklahoma				73-1518725
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

 

 

 

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(Do not check if smaller reporting company)

 

 

 

Part I –	Financial Information
	Item 1. Financial Statements (unaudited)
	Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008 (Audited)		1
	Statements of Operations for the three and nine month periods ended September 30, 2009 and 2008 (Unaudited)		2
	Statements of Cash Flows for the three and nine month periods ended September 30, 2009 and 2008 (Unaudited)		3
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
	Item 3. Quantitative and Qualitative Disclosures about Market Risk		16
	Item 4T. Controls and Procedures		16
Part II –	Other Information
	Item 1. Legal Proceedings		16
	Item 1A. Risk Factors		16
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		16
	Item 3. Defaults upon Senior Securities		17
	Item 4. Submission of Matters to a Vote of Security Holders		17
	Item 5. Other Information		17
	Item 6. Exhibits		19
Signatures			20
Exhibit Index
Rule 13a-14(a) Certification executed by Clint Parr
Rule 13a-14(a) Certification executed by Kendall Carpenter
Section 1350 Certification

 

 

 

MACROSOLVE, INC.

BALANCE SHEETS

		Unaudited 9/30/2009			Unaudited 12/31/2008
ASSETS
CURRENT ASSETS:
Cash		$	441,784		$	101,397
Accounts receivable - trade			41,969			134,199
Prepaid expenses and other			47,906			47,365
Total current assets			531,660			282,961
PROPERTY AND EQUIPMENT, at cost:			283,988			274,392
Less - accumulated depreciation and amortization			(167,681	)		(152,060	)
Net property and equipment			116,307			122,332
OTHER ASSETS:
Note receivable			135,577			135,577
Software development costs, net of accumulated amortization of $152,592 and $8,031 as of September 30, 2009 and December 31, 2008, respectively			1,049,345			675,778
Deferred offering costs			96,658			320,347
Other assets			18,243			18,243
Total other assets			1,299,823			1,149,945
TOTAL ASSETS		$	1,947,790		$	1,555,238
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt		$	129,696		$	162,638
Revolving line of credit			-			188,000
Accounts payable - trade and accrued liabilities			427,333			150,900
Unearned income			31,806			60,683
Total current liabilities			588,835			562,221
LONG-TERM DEBT, less current maturities
OTCC			162,500			125,000
Arvest equipment loan			37,580			74,841
Convertible secured debentures			1,320,601			-
Total long-term debt, less current maturities			1,520,681			199,841
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $.01 par value; authorized 200,000,000 shares; issued and outstanding 47,219,129 and 25,603,461 shares, at September 30, 2009 and December 31, 2008, respectively			472,191			256,035
Additional paid-in capital			7,204,920			6,903,609
Accumulated deficit			(7,838,838	)		(6,366,468	)
Total stockholders’ (deficit) equity			(161,727	)		793,176
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,947,790		$	1,555,238

 

MACROSOLVE, INC.
STATEMENTS OF OPERATIONS		Unaudited								Unaudited
		For the Quarters Ended								For the Nine Months Ended
		9/30/2009				9/30/2008				9/30/2009				9/30/2008
SALES:
Solution services		$	190,710			$	519,294			$	664,515			$	2,232,784
Hardware sales			64,605				6,254				123,370				34,869
Software licensing			7,428				9,427				21,399				29,261
Net sales			262,743				534,975				809,284				2,296,914
COST OF SALES:
Solution services			102,272				278,219				345,932				1,322,346
Hardware sales			59,811				4,912				111,177				27,768
Software licensing			-				91				77				1,110
Total cost of sales			162,083				283,222				457,186				1,351,224
Gross profit			100,660				251,753				352,098				945,690
OPERATING EXPENSES:
Solution services			39,984				117,589				206,295				397,596
Selling, general and administrative			458,601				394,514				1,347,360				1,202,894
Total operating expenses			498,585				512,103				1,553,655				1,600,490
Loss from operations			(397,925	)			(260,350	)			(1,201,557	)			(654,800	)
OTHER INCOME (EXPENSE):
Interest income			395				1,708				613				7,223
Interest expense			(19,064	)			(15,404	)			(28,726	)			(45,522	)
Stock based compensation			(186,411	)			(68,796	)			(242,713	)			(82,698	)
Total other expense			(205,080	)			(82,492	)			(270,826	)			(120,997	)
LOSS BEFORE INCOME TAXES			(603,005	)			(342,842	)			(1,472,383	)			(775,797	)
INCOME TAXES			-				-				-				-
NET LOSS		$	(603,005	)		$	(342,842	)		$	(1,472,383	)		$	(775,797	)
LOSS ALLOCABLE TO COMMON STOCKHOLDERS:
Net loss		$	(603,005	)		$	(342,842	)		$	(1,472,383	)		$	(775,797	)
Loss allocable to common stockholders		$	(603,005	)		$	(342,842	)		$	(1,472,383	)		$	(775,797	)
Basic and diluted loss per share		$	(0.02	)		$	(0.01	)		$	(0.05	)		$	(0.01	)

 

 

MACROSOLVE, INC.
STATEMENTS OF CASH FLOWS (unaudited)
For the Periods Ended September 30,		Unaudited 9/30/2009				Unaudited 9/30/2008
OPERATING ACTIVITIES:
Net loss		$	(1,472,383	)		$	(775,797	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			160,336				14,706
Stock based compensation			41,198				71,195
Issuance of stock for services			29,025				-
Changes in current assets and liabilities:
Decrease in accounts receivable - trade			92,230				570,601
(Increase) in inventory			(562	)			-
Decrease (increase) in prepaid expenses and other			22				(55,488	)
Increase in accounts payable - trade and accrued liabilities			276,432				137,358
(Decrease) in unearned income			(28,877	)			(472,257	)
Net cash used in operating activities			(902,579	)			(509,682	)
INVESTING ACTIVITIES:
Advances on Note Receivable			-				(101,008	)
Purchase of equipment			(10,917	)			(68,805	)
Disposal of equipment			1,168				8,360
Software development costs			(518,128	)			(141,299	)
Net cash used in investing activities			(527,877	)			(302,752	)
FINANCING ACTIVITIES:
Deferred equity issuance costs			(49,258	)			(179,719	)
Proceeds from issuance of common stock			600,000				154,578
Proceeds from debenture financing			994,321
Common stock issued for advisory services			-				11,600
Proceeds from exercise of warrants and options			120,203				-
Investor loans, including accrued interest			326,280				981,882
Advances on notes payable			-				100,000
Repayments of notes payable			(188,000	)			(267,500	)
(Repayments) proceeds from long term debt			(32,703	)			8,986
Dividend on preferred stock			-				-
Net cash provided by financing activities			1,770,843				809,827
NET INCREASE (DECREASE) IN CASH			340,387				(2,607	)
CASH, beginning of period			101,397				25,668
CASH, end of period		$	441,784			$	23,061

 

 

 

1.	BASIS OF PRESENTATION
	The accompanying unaudited interim financial statements 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, 2008 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 10K for the calendar year ended December 31, 2008.
2.	DESCRIPTION OF BUSINESS
	MacroSolve, Inc. is an Oklahoma corporation formed on January 17, 1997, under the laws of the State of Oklahoma and does business as Anyware Mobile Solutions, a division of MacroSolve. Anyware is a technology and services company that develops mobile solutions for businesses. MacroSolve, Inc. has been a fully reporting OTC Bulletin Board company since August 15, 2008.

 

3.	NOTE RECEIVABLE
	Note receivable at September 30, 2009 and December 31, 2008 Consist of the following:		Sept 30, 2009			Dec 31, 2008
	Convertible promissory note with a customer negotiated as part of a strategic alliance. Under the Master Services Agreement, customer may borrow up to $150,000 to finance development work with interest accrued monthly at prime rate plus 5% (8.25% at September 30, 2009), due June 30, 2011. The note may be converted to common stock of the borrower prior to the due date at MacroSolve’s discretion.		$	135,577		$	135,577
4.	DEBENTURES AND NOTES PAYABLE
	Notes payable at September 30, 2009 and December 31, 2008 consist of the following:		Sept 30, 2009			Dec 31, 2008
	On July 20, 2009 the Company entered into a Securities Purchase Agreement with a syndicate of private investors to obtain up to $2.3 million financing through the issue of convertible secured debentures. Draws against the debentures occurred at closing and monthly thereafter, unless waived by Lead Investor, provided the Company meets monthly operational milestones agreed with Lead Investor. The debentures accrue interest at prime rate plus 5.0% (8.25% at September 30, 2009) to be paid quarterly in cash or in common stock at the Company’s option. The value per share of common stock issued for accrued interest is 85% of the volume weighted average closing price on the last five days of trading prior to the interest payment date, but not less than $0.10 per share. Accrued interest of $15,776 at September 30, 2009 will be settled by the issuance of 415,170 shares valued at $0.038.

 

	The Holder of the debenture can convert the principle and interest into the Company’s common stock at a conversion rate of $0.10 per share with thirty days notice.
	The Company also has the right to redeem the principal and accumulated interest of any outstanding debentures in cash or by issuance of Common Stock at a price of $0.10 per share, but no later than sixty months from the initial closing date. For each share that the debenture may convert into, the Holder will receive one warrant exercisable at the Holder’s option into one share of common stock. The Warrants expire on the earlier of five years from issuance or July 30, 2014. Until August 31, 2010, the Holders also have the right to acquire up to 50% of any securities issued or proposed to be issued other than in connection with the Debentures or Warrants.		$	1,320,601		$	-
	Revolving line of credit with a financial institution which was secured by substantially all assets of the Company. The credit facility was retired from the proceeds of the debenture financing on August 4, 2009 and was not renewed.		$	-		$	188,000
	Advancing term loan with a financial institution of up to $125,000 with interest only payable monthly at prime rate plus 2.0% (5.25% at March 31, 2009), until January, 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.		$	104,703		$	125,000
	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%), through September 2007. The repayment terms were modified in September, 2007 to require 24 equal monthly installments of $12,500, consisting of principal only, beginning May, 2008. The monthly payments were suspended in October 2008 with resumption anticipated upon significant equity raise.		$	237,500		$	237,500

 

	As of September 30, 2009, maturities of long-term debt are: $129,696 in 2009 and $200,080 in 2010.
5.	INVESTOR LOANS
	In May and June 2008, the Company placed $325,000 in promissory notes with qualified investors. The notes were unsecured and provided for accrued interest of prime plus 2% (5.25% as of June 30, 2009) payable on maturity of September 1, 2009. The notes were converted to debentures in the debenture financing round which closed on July 20, 2009 including $1,280 in accrued interest.

 

6.	DEFERRED OFFERING COSTS
	The Company incurred cash and non-cash expenses in connection with its registration of stock for public sale. Costs associated with the Company’s intended plan to raise additional equity in an institutional PIPE transaction ceased being capitalized in July 2009 when the Company revised its plan and issued convertible secured debentures. Costs of $64,280 associated with the Company’s private placement offering have been netted against equity proceeds. Activity related to deferred offerings costs for the period ended September 30, 2009 are as follows:

 

Outstanding balance - December 31, 2008		$	320,347
Financial advisory services and investor relations			101,656
Travel expenses			1,792
Other			725
Total increase – first quarter 2009			104,173
Less costs associated with private placement offering			-64,280
Deferred equity issuance costs as of July 20, 2009			360,240
Costs associated with debenture draws			-263,582
Outstanding Balance at September 30, 2009		$	96,658

 

7.	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. Stock allocated to the participants remains in the Trust for the benefit of the Participant until the grant date specified by the Trustees. In the event of termination of employment of the participants, any previously allocated stock reverts back to the Trust. As of September 30, 2009, there are 160,000 shares in the trust with 150,000 shares unallocated. On February 16, 2009, the Trustees granted 10,000 shares which vest on February 16, 2010. Compensation expense for stock awards is recognized ratably over the implicit vesting period from the date of grant and is based upon the market value of the Company’s common stock at the date of grant, adjusted for marketability if applicable. The Company recognized stock based compensation expense related to these awards of $3,276 and $0 for the periods ended September 30, 2009 and 2008, respectively.
	A summary of activity under the Employee Stock Plans as of September 30, 2009 and changes during the period then ended is presented below:

 

		Stock Options								Stock Bonus Plan				Restricted Stock
		Options				Weighted Average Exercise Price				Shares
Outstanding – June 30, 2009			5,788,559			$	0.60				10,000				724,393
Exercisable – June 30, 2009			5,525,359			$	0.53				-				-
Granted			-				-				-				-
Exercised			-				-				-				-
Forfeited or Expired			-				-				-				-
Outstanding – September 30, 2009			5,788,559			$	0.60				10,000				724,393
Exercisable – September 30, 2009			5,531,359			$	0.53				-				-

 

The weighted-average grant-date calculated value of options granted during the period ended September 30, 2009 is not applicable. Options outstanding at September 30, 2009 had an aggregate intrinsic value of $263 and a weighted-average remaining contractual term of 5.0 years. Options that were exercisable at September 30, 2009 had an aggregate intrinsic value of $-0- and a weighted-average remaining contractual term of 5.0 years.

 

A summary of the status of the Company’s nonvested options as of and for the Quarters Ended September 30, 2009, June 30, 2009 and March 31, 2009 is presented below:

 

		Stock Options
Nonvested Shares		Options				Weighted- Average Grant Date.Calculated Value				Stock Bonus Plan				Restricted Stock
Nonvested - Beginning of Year 2009			77,200			$	-				-				140,853
Granted			224,000			$	-				10,000				138,610
Vested			(30,123	)		$	-				-				-
Forfeited			(7,877	)		$	-				-				(2,118	)
Nonvested–Quarter Ended March 31, 2009			263,200			$	-				10,000				277,345
Granted			-			$	-								-
Vested			-			$	-				-				-
Forfeited			-			$	-				-				-
Nonvested–Quarter Ended June 30, 2009			263,200			$	-				10,000				-
Granted			-			$	-								-
Vested			6,000			$	-				-				-
Forfeited			-			$	-				-				-
Nonvested–Quarter Ended September 30, 2009			257,200			$	-				10,000				277,345

 

	As of September 30, 2009, there was $10,407 unrecognized compensation cost related to nonvested share-based compensation arrangements under the stock bonus plan.
8.	SHAREHOLDERS’ EQUITY
	The Company issued 20,128,707 shares of common stock as a result of financing activities in the Third Quarter of 2009 and the associated trigger of a most favored nations clause with the investors in the private placement offering, as follows:

 

2008 private placement investors adjusted to $0.10 per share			13,041,206
2009 private placement investors adjusted to $0.10 per share			5,600,001
Lead Investor fee of $100,000 paid in shares valued at $0.10 each			1,000,000
Director compensation for investor loans paid in shares valued at $0.10 each			487,500
			20,128,707

 

9.	EARNINGS (LOSS) PER SHARE
	The Company has calculated the loss allocable to the common shareholders for the quarters ended September 30, 2009 and 2008:

 

		For the Quarters Ended September 30,						For the Nine Months Ended September 30,
		2009			2008			2009			2008
Numerator:
Net Loss		($	603,005	)	($	342,842	)	($	1,472,383	)	($	775,797	)
Numerator for basic and diluted		($	603,005	)	($	342,842	)	($	1,472,383	)	($	775,797	)
Denominator:
Weighted-average number of common shares outstanding			37,154,776			22,039,993			31,703,908			22,039,993
Basic and diluted loss per share		($	0.02	)	($	0.01	)	($	0.05	)	($	0.01	)

 

10.	RELATED PARTY TRANSACTION
	During the period ended September 30, 2009, four shareholders made short term operating loans totaling $325,000 and $1,280 in accrued interest were converted to the terms of the Debenture Financing which closed on July 20, 2009.
11.	SUBSEQUENT EVENTS
	The Company filed a Form S8 with the Securities and Exchange Commission on October 9, 2009 to register a total of 32,500,000 shares reserved for issuance under the 2009 Stock Compensation Plan and 2,470,000 shares issued as incentive bonuses to certain employees, officers and directors of the Company under the Company’s Stock Bonus Plan.
	The Company filed a Form 8K with the Securities and Exchange Commission on October 6, 2009 to report that on September 30, 2009, the State of Oklahoma confirmed the Company’s Second Amended and Restated Certificate of Incorporation to increase the Company’s authorized common stock, par value $0.01 per share, to 200,000,000 shares from 100,000,000 shares. The increase in the authorized common stock was approved by the Company’s Board of Directors and a majority of the Company’s outstanding common stock entitled to vote.
	MacroSolve, Inc. (the “Company”) entered into Securities Purchase Agreements, dated July 20, 2009 (each, an “Agreement”), with nine investors pursuant to which the Company will issue up to $2,326,280 in Floating Rate Convertible Subordinated Debentures (“Convertible Debentures”). The Corporation has been authorized to sell and issue up to a total of $4 million under this Agreement.
	The Company issued approximately $915,000 of Convertible Debentures between July 20-31, 2009. The remaining Convertible Debentures will be issued on a monthly schedule from September 2009 through November 2009 and February 2010 through September 2010, dependent upon the Company meeting certain milestones.
	The Convertible Debentures shall bear interest at prime rate, set at the beginning of each calendar quarter, plus five percent. The Company may elect, in its sole discretion, to make interest payments in cash, the Company’s common stock or a combination thereof. The convertible debentures mature on July 31, 2014 and may be converted by the investor into the Company’s common stock at $0.10 per share. The investors will also receive up to 23,262,800 warrants to purchase the Company’s common stock for $0.10 per share. The number of warrants issued will depend on the amount of Convertible Debentures issued by the Company. Each investor will receive 100% warrant coverage on its investment in the Convertible Debentures.
	The Agreement contains customary representations, warranties, covenants and conditions to closing. The foregoing summary is not complete and is qualified in its entirety by reference to the full text of the Agreement, which is filed as Exhibit 10.9 to Form 8-K filed July 24, 2009.

 

	The Convertible Debentures are being issued in transactions that were exempt from registration under Regulation D Rule 506 and/or Section 4(2) of the Securities Act of 1933, as amended (“Securities Act”), as transactions by an issuer not involving a public offering. All of the investors were knowledgeable, sophisticated and had access to comprehensive information about the Company and represented their intention to acquire the Convertible Debentures for investment only and not with a view to distribute or sell the Convertible Debentures.
	On July 20, 2009, the Board authorized the issuance of 1,000,000 shares of common stock par value $0.01 to compensate the lead investor in the amount of $100,000. This compensation is not related to the lead investor’s capacity as a director of the Corporation. As lead investor, Mr. Clerico has agreed to assume and perform a continuing service under the Securities Purchase Agreement that over not less than the next year will require him to establish milestones for the payment of funds under the Debentures and monitor the performance by the Corporation in relation to the milestones.
	As a result of the above described Securities Purchase Agreements, the Most Favored Nations clause of the Private Placement offering of December 30, 2008 was triggered. In a Board action dated July 28, 2009, 18,641,207 additional shares of common stock par value $0.01 were authorized to be issued and new warrants which replace the original warrants, with identical expiration dates as original warrants, to purchase 19,972,720 shares of common stock priced at $0.10 were authorized to issued to the investors in the Private Placement offering of December 30, 2008.
	In recognition of loans made in May and June 2009 by three directors, the Board authorized on July 20, 2009 a total of 487,500 shares of common stock par value $0.01 be issued to compensate them for the benefit each conferred upon the Corporation and the risk they assumed in making the loans. The aforementioned loans were converted to the terms of the Securities Purchase Agreements dated July 20, 2009.
	In an action by the Board on July 20, 2009 and approved by a majority of the shareholders of the Corporation on July 28, 2009, the Bylaws of the Corporation were amended to increase the capitalization of the Corporation to a total of 210,000,000 shares, consisting of 200,000,000 shares of common stock with a par value of $0.01 per share and 10,000,000 shares of preferred stock with a par value of $0.01 per share.
	Effective July 1, 2009, the revolving line of credit with a financial institution was converted to a standard commercial loan with an interest rate of prime plus 2% (7% as of July 1, 2009) with a maturity date of August 31, 2009. The loan was paid in full in August and not renewed.
12.	SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
	Cash paid during Nine Months ended September 30, 2009 and 2008 are:

 

		2009				2008
Interest		$	9,434			$	4,359
Income taxes		$	-			$	-

 

Noncash activities are as follows for the Nine Months ended September 30, 2009 and 2008 are:

 

		2009				2008
Stock based compensation		$	35,486			$	14,176
Stock issued for services		$	66,025			$	-
Deferred offering costs netted against private
placement proceeds		$	55,280			$	-
Deferred offering costs netted against debentures		$	263,582			$	-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

		Nine Months Ended Sept 30,
(In thousands)		2009				2008
Cash flow data:
Net cash (used in) operating activities		$	(902	)		$	(510	)
Net cash (used in) investing activities			(528	)			(303	)
Net cash provided by financing activities			1,771				810
Net increase (decrease) in cash and cash equivalents			341				(3	)
Cash and cash equivalents, beginning of period			101				26
Cash and cash equivalents, end of period		$	442			$	23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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