COMSovereign Holding Corp. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - COMSovereign Holding Corp.	ex311.htm
EX-32.1 - EXHIBIT 32.1 - COMSovereign Holding Corp.	ex321.htm
EX-32.2 - EXHIBIT 32.2 - COMSovereign Holding Corp.	ex322.htm
EX-31.2 - EXHIBIT 31.2 - COMSovereign Holding Corp.	ex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

\|X\|	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

\|_\|	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ___________

Commission File No. 333-150332

MACROSOLVE, INC.

(Exact name of registrant as specified in its charter)

Oklahoma

(State or other jurisdiction of incorporation or organization)

73-1518725

(I.R.S. Employer Identification No.)

1717 South Boulder Ave. Suite 700

Tulsa, OK 74119

(Address of principal executive offices)

(918) 280-8693

(Registrant’s telephone number, including area code)

N/A

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 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). Yes [ ] 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 [ ]

Smaller reporting company [ X ]

(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

The number of shares of the registrant's Common Stock, $0.001 par value per share, outstanding as of May 5, 2011 was 104,319,060.

Table of Contents

Part I –	Financial Information
	Item 1. Financial Statements (unaudited)
	Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010 (Audited)	3
	Statements of Operations for the three month periods ended March 31, 2011 and 2010 (Unaudited)	4
	Statements of Cash Flows for the three month periods ended March 31, 2011 and 2010 (Unaudited)	5
	Notes to Financial Statements	6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	17
	Item 4. Controls and Procedures	17
Part II –	Other Information	18
	Item 1. Legal Proceedings	18
	Item 1A. Risk Factors	18
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	18
	Item 3. Defaults upon Senior Securities	18
	Item 4. (Removed and Reserved)	18
	Item 5. Other Information	18
	Item 6. Exhibits	18
Signatures		19

PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

MACROSOLVE, INC.

BALANCE SHEETS
	(unaudited)			(audited)
	3/31/2011			12/31/2010

ASSETS

CURRENT ASSETS:
Cash	$	20,153		$	187,025
Accounts receivable - trade		19,993			31,535
Prepaid expenses and other		361,123			50,324
Total current assets		401,269			268,884

PROPERTY AND EQUIPMENT, at cost:		254,089			254,088
Less - accumulated depreciation and amortization		(167,905	)		(162,194	)

Net property and equipment		86,184			91,894

OTHER ASSETS:
Note receivable		135,577			135,577
Software development costs, net of accumulated amortization
of $454,684 and $398,715 as of March 31, 2011 and
December 31, 2010, respectively		1,048,689			938,942
Other assets		63,754			43,999


Total other assets		1,248,020			1,118,518

TOTAL ASSETS	$	1,735,473		$	1,479,296

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt	$	17,252		$	34,176
Revolving Line of Credit		200,000			-
Note Payable - Shareholder		100,223			-
Accounts payable - trade and accrued liabilities		167,004			123,022
Unearned income		18,713			8,523

Total current liabilities		503,192			165,721

LONG-TERM DEBT, less current maturities
Oklahoma Technology Commercialization Center		237,500			237,500
Convertible secured debentures		925,000			925,000
Total long-term debt, less current maturities		1,162,500			1,162,500

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 200,000,000 shares;
issued and outstanding 103,541,831 and 98,690,490 shares, at
March 31, 2011 and December 31, 2010, respectively		1,035,418			986,905
Additional paid-in capital		9,681,517			9,303,920
Accumulated deficit		(10,647,154	)		(10,139,750	)

Total stockholders' (deficit) equity		69,781			151,075

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,735,473		$	1,479,296

The accompanying notes are an integral part of these statements.

MACROSOLVE, INC.

STATEMENTS OF OPERATIONS (unaudited)

For the Periods Ended March 31,	3/31/2011			3/31/2010


SALES:
Solution services	$	95,686		$	166,940
Hardware sales		-			76,920
Software and Patent licensing		20,317			30,370

Net sales		116,003			274,230

COST OF SALES:
Solution services		46,784			102,746
Hardware sales		-			63,853
Software licensing		-			-

Total cost of sales		46,784			166,599

Gross profit		69,219			107,631

OPERATING EXPENSES:
Solution services		22,639			24,433
Depreciation and amortization		61,680			53,292
Marketing and sales		132,739			123,731
General and administrative		329,290			276,572

Total operating expenses		546,348			478,028

Loss from operations		(477,129	)		(370,397	)

OTHER INCOME (EXPENSE):
Interest income		25			353
Interest expense		(6,313	)		(38,474	)
Loss on sale of asset		-			(17,944	)
Stock based compensation		(23,988	)		(19,526	)

Total other expense		(30,276	)		(75,591	)

LOSS BEFORE INCOME TAXES		(507,405	)		(445,988	)

INCOME TAXES		-			-

NET LOSS	$	(507,405	)	$	(445,988	)

LOSS ALLOCABLE TO COMMON STOCKHOLDERS:
Net loss	$	(507,405	)	$	(445,988	)

Loss allocable to common stockholders	$	(507,405	)	$	(445,988	)

Basic and diluted loss per share	$	(0.01	)	$	(0.01	)

The accompanying notes are an integral part of these statements.

MACROSOLVE, INC.

STATEMENTS OF CASH FLOWS (unaudited)

For the Periods Ended March 31,	3/31/2011			3/31/2010


OPERATING ACTIVITIES:
Net loss	$	(507,405	)	$	(445,988	)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization		61,680			53,292
Stock based compensation		24,111			8,883
Issuance of stock for services		402,000			16,500
Changes in current assets and liabilities:
Decrease in accounts receivable - trade		11,542			76,567
(Increase) decrease in prepaid expenses and other		(310,801	)		8,219
Increase (decrease) in accounts payable - trade and
accrued liabilities		43,983			(53,185	)
Increase (decrease) in unearned income		10,190			(61,917	)

Net cash (used in) provided by operating activities		(264,700	)		(397,629	)

INVESTING ACTIVITIES:
Purchase of equipment		-			(1,816	)
Sale of digiTicket assets		-			416,569
Disposal of equipment		-			616
Software development costs		(166,046	)		(100,630	)

Net cash provided by (used in) investing activities		(166,046	)		314,739

FINANCING ACTIVITIES:
Deferred offering costs		(19,425	)		-
Issuance of stock for debenture interest		-			28,983
Proceeds from debenture financing		-			283,880
Repayments of notes payable		(16,925	)		(16,654	)
Proceeds from shareholder loan		100,224			-
Proceeds from bank line of credit		200,000			-

Net cash provided by financing activities		263,874			296,209

NET INCREASE IN CASH		(166,872	)		213,319

CASH, beginning of year		187,025			51,120

CASH, end of year	$	20,153		$	264,439

The accompanying notes are an integral part of these statements.

MacroSolve, Inc.

Notes to Interim Unaudited Financial Statements

For the Period Ended March 31, 2011

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, 2010 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, 2010.

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 through Anyware Mobile Solutions and Illume Mobile, both divisions of MacroSolve. MacroSolve, Inc. filed a registration statement Form S-1 with the Securities and Exchange Commission which was declared effective on July 25, 2008.

3.	NOTE RECEIVABLE

Note receivable at March 31, 2011 and December 31, 2010 Consist of the following:	March 31, 2011		Dec 31, 2010

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

MacroSolve, Inc.

Notes to Interim Unaudited Financial Statements

For the Period Ended March 31, 2011

4.	DEBENTURES AND NOTES PAYABLE

Notes payable consist of the following:	March 31, 2011		Dec 31, 2010

On November 8, 2010, the Company began selling Convertible Debentures Series 2010 plus Series B Warrants. The Company has not established a minimum or maximum offering size; however, it exceeded its goal of $750,000 in aggregate subscriptions. The debentures accrue interest at 2.0% per annum with interest paid at maturity. The debentures may be prepaid in full for one hundred and fifty percent (150%) of the face amount of the debenture if notice of prepayment is given by the Company before July 1, 2011. Prepayment may be made in cash or shares of common stock at the election of the Company. If the prepayment is made in shares of common stock the shares will be valued at the volume weighted average price of the shares for the five-day trading period before the notice of prepayment. The Debentures may be converted into Common Stock by the holders after June 30, 2011, or upon notice of prepayment by the Company if notice is given before that date. Upon conversion the holder will be entitled to receive the number of shares of Common Stock that could be purchased with two hundred percent (200%) of the face amount of the Debentures together with accrued interest and with the Common Stock valued using the weighted average price for the five-day trading period before the notice of conversion. Investors will acquire common stock purchase warrants, designated by the Company as Class B Warrants, in an amount equal to fifty percent (50%) of the shares of common stock that would be issued upon conversion of the Debentures upon issue. The Warrants will have a termination date of December 31, 2015 and have an initial exercise price equal to the weighted average price of the common stock upon grant of the Warrants	$	925,000	$	925,000

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 September 30, 2010), 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.	$	17,252	$	34,176

Advancing term loan with a financial institution of up to $200,000 with interest only payable monthly at prime rate plus 1.0% (4.25% at September 30, 2010), until September 2011, and secured by substantially all assets of the company and the personal guarantees of two company directors. In exchange for the guarantees, each director receives a $3,000 commitment fee and a five year warrant to purchase $100,000 of stock with a strike price of ten cents ($0.10) per share.	$	200,000	$	-

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 accrued interest and with the Common Stock valued using the weighted average price for the five-day trading period before the notice of conversion.	$	237,500	$	237,500
	$	1,379,752	$	1,196,676

As of March 31, 2011, maturities of long-term debt (including current maturities of long-term debt) are: $17,252 in 2011 and $1,162,500 thereafter.

MacroSolve, Inc.

Notes to Interim Unaudited Financial Statements

For the Period Ended March 31, 2011

5.	SHAREHOLDER LOAN

In March 2011, the Company placed $100,000 in promissory notes with a shareholder who is an accredited investor. The notes were unsecured and provided for accrued interest of prime plus 3% (6.25% as of March 31, 2011) payable on maturity of June 30, 2011. In April 2011, $50,000 in promissory notes were converted to the terms of the Convertible Debenture Series 2011.

6.	EMPLOYEE STOCK PLANS

A summary of activity under the Employee Stock Plans as of March 31, 2011 and changes during the period then ended is presented below:

	Stock Options					Restricted Stock

	Options			Weighted Average Exercise Price		Shares
Outstanding – December 31, 2011		5,774,763		$	0.56		8,354,801
Exercisable – December 31, 2011		5,621,163		$	0.51		-
Granted		-			-		738,434
Exercised or Vested		-			-		(3,160,687	)
Forfeited or Expired		(29,600	)		-		-
Outstanding – March 31, 2011		5,745,163		$	0.55		5,932,548
Exercisable – March 31, 2011		5,662,563		$	0.53		-

The weighted-average grant-date calculated value of options granted during the period ended March 31, 2011 is not applicable. Options outstanding at March 31, 2011 had an aggregate intrinsic value of $0 and a weighted-average remaining contractual term of 3.5 years. Options that were exercisable at March 31, 2011 had an aggregate intrinsic value of $-0- and a weighted-average remaining contractual term of 3.5 years.

A summary of the status of the Company’s nonvested options and restricted stock as of and for the Quarters Ended March 31, 2011 is presented below:

	Stock Options
Nonvested Shares	Options			Weighted- Average Grant Date Calculated Value		Restricted Stock
Nonvested - Beginning of Year 2011		153,600		$	-		8,354,801
Granted		-		$	-		738,434
Vested		(41,400	)	$	-		(3,160,687	)
Forfeited		(29,600	)	$	-		( -	)
Nonvested–Quarter Ended March 31, 2011		82,600		$	-		5,932,548

MacroSolve, Inc.

Notes to Interim Unaudited Financial Statements

For the Period Ended March 31, 2011

As of March 31, 2011, there was $-0- unrecognized compensation cost related to nonvested share-based compensation arrangements under the stock bonus plan. The weighted-average remaining vesting period is 6 months.

7.	SHAREHOLDERS’ EQUITY

The Company issued a total of 4,851,341 common shares in the quarter ended March 31, 2011, described further as follows:

The Company’s independent directors annual compensation is $16,000 to be paid quarterly in restricted stock. The Company issued the directors 87,910 shares of restricted stock on April 1, 2011 for their fourth quarter 2010 compensation.

The Company issued 738,434 compensation shares to employees for services rendered in the third and fourth quarters of 2010 which had been accrued at a value of $738 in stock based compensation. The shares were awarded on Restricted Stock Agreements which have a six month time lapse restriction and are subject to forfeiture upon voluntary termination of employment.

The Company engaged a public relations firm for services valued at $8,000 per month, of which $2-$4,000 per month will be paid in common stock. The Company issued 8,137 shares of stock in exchange for services rendered in December 2010 valued at $2,000.

The Company engaged two firms who provide both public relations and investor relations services for six months of services valued at $440,000, of which $400,000 was paid by issuance of 4,000,000 shares of common stock.

The Company had a stock bonus plan for the fourth quarter of 2008 which resulted in 16,860 shares of common stock being issued to employees at a value of $3,372 in stock based compensation. These shares represent the second year of a three year vesting period.

In March 2011, the Company offered its employees a ninety day voluntary salary deferral plan while the Convertible Debenture Series 2011 funding was finalized. As an incentive to participate, each employee received a five year warrant to buy common stock at $.20 equal to the amount of their deferral. A total of 192,645 warrants were issued. The deferred salaries will be repaid in June 2011.

8.	EARNINGS (LOSS) PER SHARE

The Company has calculated the loss allocable to the common shareholders for the quarters ended March 31, 2011 and 2010:

	For the Quarters Ended
	March 31, 2011			March 31, 2010
Numerator:
Net Loss	$	(507,405	)	$	(402,759	)
Numerator for basic and diluted	$	(507,405	)	$	(402,759	)

Denominator:
Weighted-average number of
common shares outstanding		101,116,161			54,800,275

	$	(0.01	)	$	(0.01	)

9.	RELATED PARTY TRANSACTION

There were no related party transactions other than the shareholder loan discussed in footnote five.

MacroSolve, Inc.

Notes to Interim Unaudited Financial Statements

For the Period Ended March 31, 2011

10.	SUBSEQUENT EVENTS

The Company issued 615,714 shares of compensation shares to employees for services rendered during the first quarter of 2011 which had been accrued at a value of $6,157 in stock based compensation. The shares were awarded on Restricted Stock Agreements which have a six month time lapse restriction and are subject to forfeiture upon voluntary termination of employment.

The Company’s independent directors annual compensation is $16,000 to be paid quarterly in restricted stock. The Company issued the directors 93,895 shares of restricted stock on April 1, 2011 for their first quarter 2011 compensation. The Company recorded $4,000 in stock based compensation for each of its four independent directors.

The Company issued 20,000 shares of restricted common stock to its local public relations firm in exchange for $3,000 in services. The Company issued 47,619 shares of restricted stock to its national public relations firm in exchange for $10,000 in services.

On April 8, 2011, the Company began offering its Convertible Debentures Series 2011 and Series A Warrants to purchase common stock to accredited investors. The Debentures mature on December 31, 2016. The Company has not established a minimum or maximum offering size; its goal is $1,000,000 in aggregate subscriptions exclusive of the exchange of previously issued debentures. The proceeds from this offering will be used by the Company for working capital to increase its market share from the sale of mobile apps in dining and other vertical markets and may include working capital for acquired companies. The offering will continue until December 31, 2011 unless terminated by the Company at an earlier date. As of May 6, 2011, $550,000 has been invested in the Series 2011 Debentures and $425,000 of Series 2010 Debentures have been converted to Series 2011 Debentures.

The 2011 Debentures will earn interest at the annual rate of 12% which will be paid quarterly exclusively from the Debenture Account. Principal on the Debentures will be prepaid quarterly as the Debenture Account permits. The Debenture Account will be set up with a financial institution for the deposit of 25% of any recover it receives from any judgment or settlement in any infringement case or claim it prosecutes. The Debentures may be converted to common stock by the holder into the number of shares that could have been purchased with 200% of the principal amount of the Debenture, together with accrued and unpaid interest and the shares valued using the weighted average price for a five-day trading period preceding the Debenture investment. The Investors will also acquire Common Stock Series A Warrants in an amount equal to the shares of common stock that could be purchased at 50% of the Debenture conversion price. Each warrant has a term of five years.

11.	SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during Three Months ended March 31, 2011 and 2010 are:
	2011		2010

Interest	$	1,294	$	200
Income taxes	$	-	$	-

Noncash activities are as follows for the Three Months ended March 31, 2011 and 2010 are:
		2011		2010

Stock based compensation	$	24,111	$	8,883
Stock issued for services	$	402,000	$	16,500
Stock issued for debenture interest	$	-	$	28,983

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. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate,” or “believe.” 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 under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on March 11, 2011.

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

MacroSolve, Inc. (“MacroSolve,” “we,” “us,” or the “Company”) is an Oklahoma corporation formed on January 17, 1997, under the laws of the State of Oklahoma and does business through Anyware Mobile Solutions and Illume Mobile, both divisions of MacroSolve. MacroSolve, Inc. filed a registration statement Form S-1 with the Securities and Exchange Commission which was declared effective on July 25, 2008.

MacroSolve is a leading developer and marketer of mobile technologies, apps, and solutions. 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. Leveraging its intellectual property portfolio, including its recently issued landmark patent #7,822,816, MacroSolve generates revenues through licensing; development and sales of its patented technologies including the ReForm XT™ rapid mobile app development platform and its apps powered by ReForm XT including ClubInsight™, DineInsight™, and SchoolInsight™, as well as development of customized mobile business apps.

The company operates through its Illume Mobile and Anyware Mobile Solutions divisions to provide mobile business apps, as well as licensing its core patented technology to companies across the mobile ecosystem.

Illume Mobile is our mobile solutions services division that provides solution management, product development, project management, quality assurance and support services to address the needs of a client base seeking to use mobility to improve their process efficiencies and modify software applications so that they can be used in a mobile environment.

Anyware Mobile Solutions maintains a dedicated staff for sales, product development and support for the ReForm XT™ rapid mobile app development platform and its apps Powered by ReForm XT.

The Company’s principal executive offices are located at 1717 South Boulder, Tulsa, Oklahoma 74119 Currently the Company has ongoing projects across the United States, operates three websites including ‘www.macrosolve.com’, ‘www.illumemobile.com’ and ‘www.goanyware.com’, and maintains multiple social media profiles.

Plan of Operation

The Illume Mobile division is satisfying a unique set of market demands by providing advanced mobile application development and maintenance services. With the exploding growth of tablets, such as the iPad, there are also new ideas on the utilization of this type of mobile device. Companies with internal drivers to use tablets and even individual entrepreneurs wishing to create the next market leading app, trust the Illume division and its technical, marketing and business development experience to rapidly create a product to be sold on app stores or in other channels. Where high demand, untapped markets are emerging, this division creates mobile platforms whereby customer demand can be met more efficiently with tools that enable the distribution and customization of apps to be less costly to the partner and end users. Illume Mobile is expected to contribute more than 60% of the 2011 annual revenues.

The Anyware Mobile Solutions division continues to develop, host and maintain our primary product platform, ReForm XT. From this platform, the division and its customers develop applications that are both branded and enterprise apps, a unique capability in the marketplace. Branded apps are being adopted by companies to promote their offerings by placing their app for customers to download for free from the app stores. This type of application is replacing or supplementing the construction and maintenance of websites. To address the many industries, the platform has been modified and re-branded ‘Insight’. Currently, this division licenses, markets and sells DineInsight, ClubInsight and SchoolInsight. Enterprise apps, which are generally used internally in a company’s operations to streamline communications and related efficiencies, leverage the ReForm XT platform as well. The division is currently licensing this platform for integration into customer systems for rapid development and deployment to employees and even third parties involved in daily operations. The Company has entered into several reseller arrangements and is actively pursuing additional channels, resellers and licensees for its “powered by ReFormXT” products in specialized vertical markets. DineInsight, ClubInsight and SchoolInsight are expected to contribute less than 35% of the 2011 annual revenues.

In October 2010, the United States Patent and Trademark Office issued U.S. Patent No. 7,822,816 to our company. The patent, a significant intellectual property asset, further advances our position as a leader in the mobile solutions market. We are immediately pursuing the monetization of this patent and its other IP assets and are currently in discussions with several companies in the mobile communications market. The patent addresses mobile information collection systems across all wireless networks, smartphones, tablets, and rugged mobile devices, regardless of carrier and manufacturer, and is currently utilized in our ReForm XT™ rapid mobile app development platform.

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 maximize sales volume in the short term is limited without additional capital. There is no expected purchase or sale of capitalized assets, significant equipment or intellectual property in the next three months.

Results of Operations

Quarter Ended March 31, 2011 compared to Quarter Ended March 31, 2010 (all references are to the Quarter Ended March 31)

Net Sales: Net Sales decreased $158,000 or 58% to $116,000 in the first quarter ended March 31, 2011 from $274,000 for the same period in 2010 largely from a decrease in hardware sales as a result of the sale of digiTicket, a division which was sold to private investors in February 2010. We are no longer pursuing hardware sales and did not have any hardware sales after the second quarter of 2010. Sources of revenue in the first quarter of 2011 were derived from our services business and software and patent licensing. Services revenue represented the majority of Net Sales with $96,000, a decrease of $71,000 during the first quarter of 2011 from $167,000 in the first quarter of 2010. This was primarily due to a reduction in ongoing support and maintenance fees from a significant customer on custom 2009 product enhancements. Software licensing sales decreased $10,000 or 33% for the period to $20,000 from $30,000 for the same period in 2010.

Cost of Sales and Gross Profit: Cost of Sales for the first quarter of 2011 decreased $120,000 or 72%, in line with the lower level of revenues from $167,000 in 2010 to $47,000 in 2011. Reduced hardware sales accounted for $64,000 of the decrease and the remaining decrease was associated with reassignments of resources to product development. The resultant Gross Profit for the first quarter of 2011 of $69,000 was down $38,000 or 36% under the Gross Profit for the same period in 2010 of $108,000. The digiTicket hardware sales in the first quarter of 2010 did not contribute significantly to profit margins as the initial customers are allowed substantial price incentives in exchange for serving as reference accounts. Gross profit margins were 60% and 39% for the first quarter of 2011 and 2010, respectively. The Company anticipates gross profit margins to stabilize near 60% for both the Anyware Mobile and Illume Mobile divisions.

Operating, Expenses: Operating expenses include direct division expense, marketing and sales expense, general and administrative expenses and depreciation and amortization expenses. Operating expenses increased by $68,000, or 14% in the first quarter of 2011 to $546,000 from $478,000 in 2010. This increase is primarily due to pubic relations and investor relations services in 2011 which were paid using restricted stock.

Loss from Operations: Loss from operations for the first quarter of 2011 was $477,000, an increase of $106,000 or 29% from the loss from operations in 2010 of $371,000 primarily due to public relations and investor relations services in 2011 which were paid using restricted stock and also due to the overall decline in net sales.

Other Income and Expense: Total other expense of $30,000 for the first quarter of 2011 decreased 60% from $75,000 in the first quarter of 2010. Interest expense in the first quarter of 2011 was $6,000, an 84% decrease from interest expense of $38,000 for the same period in 2010. The decrease in interest expense was primarily as a result of the conversion of debentures into common stock in November 2010. The Company also recognized a loss of $18,000 in the first quarter of 2010 on the sale of digiTicket to private investors.

Net Loss: Net loss of $507,000 for the first quarter of 2011 was $61,000 or 14% greater than the net loss of $446,000 for the same period in 2010 primarily due to public relations and investor relations services in 2011 which were paid in restricted stock.

Liquidity and Capital Resources

We finance our operations primarily through internally generated funds, proceeds from bank loans and shareholder loans and investments of equity by accredited investors.

On November 3, 2010, the Board of Directors approved Convertible Debentures Series 2010 plus Series B Warrants (the “2010 Debentures”). The $925,000 proceeds from the offering were used for general corporate purposes through the first quarter of 2011.

The 2010 Debentures accrue interest at 2.0% per annum with interest paid at maturity. The debentures may be prepaid in full for one hundred and fifty percent (150%) of the face amount of the debenture if notice of prepayment is given by the Company before July 1, 2011. Prepayment may be made in cash or shares of common stock at the election of the Company. If the prepayment is made in shares of common stock the shares will be valued at the volume weighted average price of the shares for the five-day trading period before the notice of prepayment.

The 2010 Debentures may be converted into Common Stock by the holders after June 30, 2011, or upon notice of prepayment by the Company if notice is given before that date. Upon conversion the holder will be entitled to receive the number of shares of Common Stock that could be purchased with two hundred percent (200%) of the face amount of the Debentures together with accrued interest and with the Common Stock valued using the weighted average price for the five-day trading period before the notice of conversion.

Series 2010 Debenture Investors will acquire common stock purchase warrants, designated by the Company as Class B Warrants, in an amount equal to fifty percent (50%) of the shares of common stock that would be issued upon conversion of the Debentures upon issue. The Warrants will have a termination date of December 31, 2015 and have an initial exercise price equal to the weighted average price of the common stock upon grant of the Warrants.

On March 25, 2011, the Board of Directors approved raising an additional $1,000,000 for general corporate purposes.

On April 8, 2011, the Company began offering its Convertible Debentures Series 2011 and Series A Warrants to purchase common stock to accredited investors. As of May 6, 2011, $550,000 has been invested in the Series 2011 Debentures and $425,000 of Series 2010 Debentures have been converted to Series 2011 Debentures.

The Debenture financing, line of credit loans from investors and cash generated from current operations and patent license fees is expected to provide adequate capital to fund the Company’s operations through 2011.

During the first quarter of 2011, the Company borrowed $200,000 on its line of credit agreement with a financial institution which was guaranteed by two directors. In March 2011, the Company placed $100,000 in promissory notes with a shareholder who is also an accredited investor. The notes were unsecured and provided for accrued interest of prime plus 3% (6.25% as of March 31, 2011) payable on maturity of June 30, 2011. In April 2011, $50,000 of the amount due to the shareholder was converted to the terms of the Convertible Debenture Series 2011 plus Series A Warrants.

The Company does lack growth capital and anticipates that approximately $5 million in additional investment capital will be required within the next twenty four months to execute our growth strategy. It is the Company’s intention to raise additional capital in 2011 to support its growth requirements. The Company is working with two investment banking firms to facilitate the raising of additional capital.

There is no assurance that capital in any form will 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.

As of March 31, 2011, the Company had total current assets of $401,269 and total current liabilities of $503,192. As of March 31, 2011, the Company had cash and cash equivalents of $20,153. As of March 31, 2011, the Company had borrowed to capacity on a $200,000 line of credit with a financial institution which was guaranteed by two directors. It is the Company’s intention to raise additional working capital from licensing revenues, sale of convertible debentures or sale of common stock through warrant exercises.

As a company that began operations in 1997, the Company has incurred $10,647,154 in cumulative total losses from inception through March 31, 2011. The Company's independent registered public accounting firm's audit report for the year ended December 31, 2010 included in the Company's Form 10-K a qualified opinion and an explanatory paragraph regarding the Company's ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company continues as a going concern and contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The ability of the Company to continue as a going concern on a long-term basis will be dependent upon its ability to create and market innovative products and services and sustain adequate working capital to finance its operations.

To lower our required cash expenditures, the Company issues both registered shares using Form S-8 and unregistered shares to employees and vendors for compensation for services. The Company issued a total of 4,851,341 common shares in the quarter ended March 31, 2011, described further in Part II, Item 2.

Sources and Uses of Cash

	Three Months ended March 31,
(In thousands)	2011			2010
Cash flow data:
Net cash (used in) operating activities	$	(265	)	$	( 397	)
Net cash provided by (used in) investing activities		(166	)		314
Net cash provided by financing activities		264			296
Net (decrease) increase in cash and cash equivalents		(167	)		213
Cash and cash equivalents, beginning of period		187			51
Cash and cash equivalents, end of period	$	20		$	264

Operating Activities

Net cash used in operating activities for the three months ended March 31, 2011 was $265,000, a decrease of $132,000 from the same period in 2010. Less cash was used in operating activities as a result of using our common stock, in lieu of cash, for vendor services and employee compensation.

Investing Activities

Cash used in investing activities for the three months ended March 31, 2011 was $166,000, a decrease of $480,000 from the same period in 2010 represented principally by the $416,000 proceeds of selling digiTicket to private investors in February 2010 and $65,000 increase in software development costs.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2011 was $264,000 as compared with $296,000 for the same period last year, a decrease of $32,000. Cash provided by financing activities in first quarter 2011 was primarily from $200,000 in revolving line of credit with a financial institution and $100,000 from shareholder loans and in first quarter 2010 was primarily from $284,000 in financing received from the sale of Debentures.

As of March 31, 2011, the Company had cash and cash equivalents in the amount of $20,000 as compared with $264,000 at March 31, 2011.

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 March 31, 2011 and at fiscal year ending December 31, 2010, the Company deems all amounts recorded as collectible and, thus has not provided an allowance for uncollectible amounts.

Property and Equipment:

Property and equipment are recorded at cost. Depreciation is computed using straight-line methods applied to individual property items based on estimated useful lives.

Revenue Recognition and Unearned Revenue:

Revenue from Illume Mobile Products division consists primarily of professional services contracted to third party customers under contract for specific projects. Contracted projects that are fixed price are accounted for under the percentage-of-completion method of accounting. Revenue from contracted projects that are for provision of services is recognized at the time the service is provided.

Revenue from Anyware Mobile Solutions division consists of license fees for ReFormXT and the Insight product line, setup fees for customer apps, other services including marketing and graphic arts, custom programming and sale of mobile devices (hardware). Revenue from license fees is recognized ratably over the license period. Revenue from setup fees, marketing and other services is recognized at the time the service is provided. Sales of hardware are recognized upon delivery to the customer.

Revenue from patent license fees is recognized upon receipt. In the event a non-exclusive patent license is granted within the scope of a contracted project, ten percent (10%) of the contract amount is deemed to be payment for the patent license.

Software Development Costs:

The Company accounts for software development costs in accordance with ASC 985-10, “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. These costs are amortized over three years and are reviewed for impairment at each period end.

Long-Lived Assets:

The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35, “Impairment or Disposal of Long-lived Assets”. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment charges were incurred during the quarters ended March 31, 2011 and December 31, 2010.

Stock-Based Compensation:

The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.

The Company uses the Black-Sholes model for determining the value of the options. One of the factors required to compute the options price is volatility of the stock price. The Company’s own stock commenced public trading in August, 2008; however due to initially thin trading activity, management determined that the technology sector fund XLK and it’s standard deviation would continue to be used to provide the volatility factor required to compute the option value.

Effect of Recently Issued Accounting Pronouncements

In August 2010, the FASB issued Accounting Standards Update No. 2010-22, “Accounting for Various Topics”. ASU 2010-22 addresses technical corrections to various SEC paragraphs. The Company is currently evaluating the effect that ASU 2010-21 will have on its financial statements.

In August 2010, the FASB issued Accounting Standards Update No. 2010-21, “Accounting for Technical Amendments to Various SEC Rules and Schedules. ASU 2010-21 amends various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The Company is currently evaluating the effect that ASU 2010-21 will have on its financial statements.

In January 2010, the FASB issued Accounting Standards Update No. 2010-05, “Compensation – Stock Compensation (Topic 718)”. ASU 2010-05 addresses escrowed share arrangements and the presumption of compensation. The Company does not have escrowed share arrangements and there fore does not expect the adoption of ASU 2010-05 to have a material effect on our financial statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” (“SFAS No. 166”). SFAS No. 166 amends SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 166 improves the comparability of information that a reporting entity provides regarding transfers of financial assets and the effects on its financial statements. SFAS No. 166 is effective for interim and annual reporting periods ending after November 15, 2009.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in accordance with generally accepted accounting principles. SFAS No. 168 is effective for interim and annual reporting periods ending after September 15, 2009. On September 30, 2009, the Company adopted SFAS No. 168, which has no effect on the Company’s financial statements as it is for disclosure purposes only.

In May 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events, which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events. SFAS No. 165 is effective for interim and annual reporting periods ending after June 15, 2009. We have adopted the new disclosure requirements in our financial statements and do not expect it to have a material effect on our financial statements.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) as an update to the April 2009 FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). FSP FAS 157-4 provides guidance on estimating fair value when market activity has decreased and on identifying transactions that are not orderly. Additionally, entities are required to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value. This FSP is effective for interim and annual periods ending after June 15, 2009. The Company does not expect the adoption of ASU No. 2010-06 or FSP FAS 157-4 will have a material impact on its financial condition or results of operation.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

N/A

Item 4. Controls and Procedures.

Management’s Evaluation of Disclosure Controls and Procedures

We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.

As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and our management necessarily was required to apply its judgment in evaluating and implementing our disclosure controls and procedures. Based upon the evaluation described above, our Chief Executive Officer and Chief Financial Officer have concluded that they believe that our disclosure controls and procedures were effective, as of the end of the period covered by this report, in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures, and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are 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 become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are not currently aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

The Company has retained intellectual property counsel for the purpose of monetizing intellectual assets and enforcing its rights in those assets. Any resulting litigation, however, will be subject to inherent uncertainties and the favorable outcome of any litigation is inestimable.

Item 1A. Risk Factors.

There has been no material changes in our risk factors from those disclosed in our Form 10-K filed with the SEC on March 11, 2011, for the period ended December 31, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuance of Unregistered Securities

The Company issued a total of 4,851,341 common shares in the quarter ended March 31, 2011, described further as follows:

The Company engaged a public relations firm for services valued at $8,000 per month, of which $2,000 to $4,000 per month will be paid in common stock. The Company issued 8,137 shares of restricted stock in exchange for services rendered in December 2010 valued at $2,000.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

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		Certification of Per iodic Financial Reports by Kendall Carpenter in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Periodic Financial Reports by Clint Parr in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350
32.2		Certification of Periodic Financial Reports by Kendall Carpenter in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MACROSOLVE, INC.

Date: May 9, 2011	By:	/s/ Clint Parr
		Clint Parr
		Chief Executive Officer (Principal Executive Officer)



Date: May 9, 2011	By:	/s/ Kendall Carpenter
		Kendall Carpenter
		Chief Financial Officer (Principal Financial and Accounting Officer)

COMSovereign Holding Corp. - FORM 10-Q - May 9, 2011

Attached files

COMSovereign Holding Corp. Reports