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EX-32.1 - CoroWare, Inc,ex321.htm
EX-31.1 - CoroWare, Inc,ex311.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM ________________ TO _________________
 
COMMISSION FILE NUMBER: 000-33231
 
 
COROWARE, INC.
 
 
(EXACT NAME OF THE COMPANY AS SPECIFIED IN ITS CHARTER)
 
 
Delaware
 
95-4868120
(State or Other Jurisdiction
 
(I.R.S. Employer
of Incorporation)
 
Identification No.)
 
1410 Market Street, Suite 200
Kirkland, WA 98033
 
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
 (800) 641-2676
(ISSUER REGISTRANT TELEPHONE NUMBER)
 
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:  NONE
 
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
 
COMMON STOCK, PAR VALUE $.0001
(TITLE OF CLASS)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yeso  No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) the Act.  Yeso  No þ
 
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.  þ Yes   o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  þ Yes o No
 
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and  will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting company)
o
Smaller reporting company
þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
 
The aggregate market value of the of the registrant’s common stock held by non-affiliates of the registrant, computed by reference to price at which the common equity was sold, or the average bid and asked price of such common stock as of April 11, 2012, was $213,914. For purposes of this computation, the registrant has excluded the market value of all shares of its common stock reported as being beneficially owned by executive officers and directors and holders of more than 10% of the common stock on a fully diluted basis of the registrant; such exclusion shall not, however, be deemed to constitute an admission that any such person is an “affiliate” of the registrant.
 
As of April 11, 2012 there were 2,153,324,939 shares of the issuer's $.0001 par value common stock outstanding.
 
 
 
-1-

 
INDEX
 
 
PART I
     
         
Item 1.
Business.
   
 
 
Item 1A. 
Risk factors
   
 
 
Item 1B.
Unresolved Staff Comments
   
 
 
Item 2.
Properties.
   
 
 
Item 3.
Legal Proceedings.
   
 
 
Item 4. 
Mine Safety Disclosures.
   
 
 
           
 
PART II
       
           
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Registrant Purchases of Equity Securities.
   
 
 
Item 6.
Selected Financial Data
   
 
 
Item 7. 
Management’s  Discussion and Analysis or Financial Condition and Results of Operations
   
 
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
   
 
 
Item 8.
Financial Statements.
   
 
 
Item 9. 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
   
 
 
Item 9A.
Controls and Procedures.
   
 
 
Item 9B. 
Other Information.
   
 
 
           
 
PART III
       
           
Item 10. 
Directors, Executive Officers, and Corporate Governance.
   
 
 
Item 11.
Executive Compensation.
   
 
 
Item 12. 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
   
 
 
Item 13. 
Certain Relationships and Related Transactions, and Director Independence.
   
 
 
Item 14. 
Principal Accounting Fees and Services
   
 
 
           
 
PART IV
       
           
Item 15.
 Exhibits.
   
 
 
SIGNATURES
   
 
 
 
 
 
-2-

 
 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
In this annual report, references to “CoroWare,” “the Company,” “we,” “us,” and “our” refer to CoroWare, Inc.
 
This Annual Report on Form 10-K contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K.  Additionally, statements concerning future matters are forward-looking statements.
 
Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our  management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading "Risks Related to Our Business" below, as well as those discussed elsewhere in this Annual Report on Form 10-K. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K.
 
CoroWare undertakes no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout this Annual Report, which are designed to advise interested parties of the risk factors that may affect our business, financial condition, results of operations and prospects.

 
 
-3-

 
PART I
 
ITEM 1. BUSINESS
 
Overview
 
CoroWare, Inc is a public holding company whose principal subsidiary, CoroWare Technologies, Inc. (“CTI”), has expertise in information technology consulting, mobile robotics, and affordable collaboration.  Through our subsidiary, CoroWare delivers custom engineering services, hardware and software products, and subscription services that benefit customers in North America, Europe, Australia, Asia and the Middle East.  Our customers span multiple industry sectors and comprise universities, software and hardware product development companies, and non-profit organizations.
 
Employees
 
As of December 31, 2011, we had twenty (20) employees composed of one (1) full time Officer and CEO, one (1) full time Director of Sales, one (1) full time Finance Administrator, two (2) full time Business Unit Managers, ten (10) full time engineers, and five (5) part time engineers.  Our employees are not represented by a union.  We consider relations with our employees to be positive and productive.
 
COROWARE TECHNOLOGIES, INC.
 
CoroWare Technologies comprises three separately managed lines of business:
 
 
CoroWare Business Solutions
IT and lab management; business intelligence, software architecture, design and development; content delivery; partner and program management.
 
 
Robotics and Automation
Custom engineering such as visualization, simulation and software development; and mobile robot platforms for university, government and corporate researchers.
 
 
Enterprise Collaboration Solutions
Collaboration and conferencing products, solutions and subscription services.
 
CoroWare Business Solutions
 
CoroWare Business Solutions (CBS) offers products, solutions, and IT consulting services that help our customers deliver high quality products, solutions and services.
 
Products and Solutions
 
In 2010, we announced two new products for the cloud service providers and enterprise customers:
·  
CoroWare Usage Reporter for Vidyo, a software package that provides usage statistics for Vidyo brand high-definition video conferencing systems.
·  
Billing Integration Framework™ for MetraTech and Vidyo, a software solution that integrates dynamic usage- and subscription-based billing from MetraTech Corp and high definition videoconferencing systems from Vidyo.
 
In early 2011, we announced CoroWare License Manager™, a software license management solution that offers Cloud Service Providers and on-premise software publishers the ability to remotely enable, monitor, and configure cloud-based applications using a centralized management server.
 
Business Intelligence
 
Our CTI’s solutions development group has created a variety of business intelligence applications to enable our customers to better understand and manage the data surrounding their own products and business services.
 
 
 
-4-

 
 
Release Management
 
Our program managers are experts in Microsoft's product and solution development tools and processes. CTI uses that experience to create product specifications, develop project plans, and perform security and release management audits – with the objective of helping Microsoft deliver its solutions and products efficiently, affordably and on schedule. 
 
Lab Management
 
CTI's team of experienced hardware and software deployment engineers architect, deploy and support state-of-the-art computer lab facilities that include the latest builds of operating systems, developer tools, and servers. CTI employees currently provide lab management and systems engineering support services in three Microsoft data centers and labs.
 
Software Development
 
CTI’s solutions development group has been instrumental in helping product development companies, including MetraTech, design, prototype, develop and test new products and solutions.  CoroWare’s consulting staff comprises a wide range of software architects with over 20 years experience, “user experience” application developers, web service software developers, database consultants, and project managers. 
 
In order to compete with outsourcing software and IT consulting companies in India and China, CoroWare established a near shore consulting services group in 2007 as a low cost alternative with same time zone presence.  CoroWare's Latin America partnerships offer superior cost dynamics and a near time zone alternative to Europe / US businesses requiring Spanish language capability.  CoroWare's Near Shore Consulting Services offer a stable rate against the dollar, as well as close proximity, and a familiarity with US business processes.
 
Robotics and Automation (R&A)
 
We are a mobile robotics solutions integrator in the research community and have expertise in robotics simulation and software development.  Our CoroBot and Explorer product lines are being used by over 50 corporate and academic researchers today.
 
Custom Engineering
 
We offer custom engineering expertise to customers who are looking for product realization, robotics simulation, systems architecture and design, and robotic applications development services. We believe CTI is uniquely positioned with its knowledge of robotics simulation; Player-Stage and Robotic Operating System (ROS) running on Ubuntu Linux systems; Concurrency and Coordination Runtime (CCR) and Decentralized Software Services (DSS) running on Microsoft Windows systems; embedded systems software development; and hardware and software integration services to help its customers deliver innovative product and solutions.
 
Solutions and Products
 
In May 2007, we began shipping the CoroBot Classic, an affordable and flexible mobile robot that was designed to minimize the complexity of robotic development. Combining a powerful PC-class platform with a robust, object-oriented software development system empowers researchers and robotics application developers to rapidly deploy and develop robotic solutions.  Some university customers are deploying CoroBot Classics for use in various lab activities, including the development of swarm robotics applications designed to leverage groups of robots to complete complex tasks.
 
In June 2009, we began shipping the CoroBot Explorer. With more powerful motors, larger payload capacity, articulated suspension and enclosed electronics it is suitable for indoor or outdoor usage.
 
 In 2010 and early 2011, we announced new features for the CoroBot Explorer II platform and support for Robot Operating System, which we believe will improve our sales into the research and education market segments.
 
 
-5-

 
Enterprise Collaboration Solutions (ECS)
 
Vidyo Reseller Business
 
In early 2009, we launched our collaboration – now referred to as Enterprise Collaboration Solutions - initiative in order to address the needs of enterprise customers with distributed business operations that are turning to new technologies to address the cost of doing business in a world that is increasingly dependent on suppliers, partners and customers worldwide.  In order to overcome these challenges, enterprise customers are looking for solutions that are demonstrably effective and operationally affordable.  As a result, small, medium and large sized businesses, including consulting companies, non-profit groups, and distance learning companies, are all giving serious consideration to purchasing affordable high definition videoconferencing solutions.
 
Through our partnership with Vidyo (http://www.vidyo.com), we are deploying high definition video conferencing solutions, including collaboration room systems, and offering CoroCallTM Business Class HD Video Conferencing (http://www.corocall.com), an affordable high definition videoconferencing subscription service that is based on Vidyo’s technology.
 
CoroCall Subscription Services
 
As CoroWare began selling the Vidyo product line in 2009, many customers expressed a desire to mitigate capital expenditures and purchase cloud-based communication services instead.  In response to this customer demand, CoroWare announced its CoroCall Business Class HD Video Conferencing subscription service in 2009, and subsequently upgraded to support improved audio and video conferencing capabilities which are superior to many of our competitors today.
 
In early 2011, we expanded our range of subscription services for enterprise small business customers with the announcement of CoroCall Communications, a cloud-based Internet telephony, conferencing, and communications service. CoroCall Communications Cloud Service is a secure virtual phone system that routes incoming calls to any type of phone, at any place, and at any time. Subscribers may customize their presence with their own professional greeting, phone and fax numbers, conference calls and delivery of voice and fax messages by e-mail.
 
Although this business is still in its early stages of growth, we have won and are pursuing significant customer opportunities with financial consulting organizations, product development/sales companies, religious organizations, and employment recruiters. This also expands the options available to customers of the video conferencing service, providing custom dial in phone numbers.
 
CoroCall Product Line
 
In 2010, we announced our first enhanced collaboration product, CoroWare NameTag, a Windows-based application that lets desktop video conferencing users customize their webcam experience. We have had significant corporate adoption of NameTag.
 
In early 2011, we expanded our range of products when the Company announced the early adopter release of CoroCall Communications, an Internet telephony, conferencing, and communications system.  CoroCall Communications is a standalone appliance server with features that were previously available only to large enterprises at a much higher price, offering customers an integrated Internet telephony solution that includes phone communications, high definition (HD) audio and video conferencing, and advanced call management.
 
Competition
 
Competitors in the IT consulting market comprise a combination of large and well established companies, such as Avanade and Tata Consultancy Services; and smaller, privately held consulting companies with practices in a single vertical arena such as custom software development, telecom billing, multimedia production and many other vertical industries.
 
We have maintained long-term relationships and have been successful in renewing contracts and in signing multi-month or yearlong contracts with key customers - including Microsoft and MetraTech, and are building similar client relationships with new customers.
 
Competitors in the mobile robotics and custom engineering marketplaces have comprised iRobot (IRBT), Adept / MobileRobots (ADEP), and privately held companies such as K-Team Mobile Robotics, RoboSoft, and Evolution Robotics.  New entrants in this marketplace include Aethon, neato robotics, Brock Technologies, and Contineo Robotics.
 
 
-6-

 
Competitors in the collaboration market include:
 
   
Legacy videoconferencing vendors such as Polycom, Tandberg/Cisco and Lifesize/Logitech
   
Legacy videoconferencing service providers, such as AT&T, that deploy and support legacy equipment from Polycom, Tandberg/Cisco and Lifesize/Logitech
   
New entrants in affordable and modest quality videoconferencing services, such as oovoo and Nefsis
 
Customers
 
All three divisions saw growth in their customer bases in 2011 as compared with 2010. CBS added additional contracts with existing customers and added additional large enterprise accounts as well. R&A engaged with a number of additional universities and research facilities. ECS added customers to its hosted solutions as well as securing product and accessory sales to a number of customers.
 
Regulation
 
Our services and products are not uniquely subject to governmental or industry regulations.
 
Research & Development
 
Our research and development activities have primarily been focused on the development of software components, mobile robot platforms such as the CoroBot Explorer, and CoroCall Communications.  We intend to continue developing hardware and software products that we believe will potentially grow CoroWare's collaboration and mobile robotics products, solutions and services.
 
Research and development expenses from continuing operations for the years ended December 31, 2011 and 2010 were $122,221 and $92,959, respectively.
 
Products
 
CoroBot Classic:
 
CoroBot was created to minimize the complexity of robot development. By combining a powerful PC-class platform with a robust, object-oriented software development system, the CoroBot empowers users to rapidly deploy and develop robotic solutions. The CoroBot Classic also assists the hardware developer with additional physical mounting space, ports, sensors and communication devices.
 
CoroBot Explorer:
 
Our CoroBot Explorer mobile robot was created to expand on the capabilities of the CoroBot Classic and deliver a rugged indoor/outdoor platform that can withstand environmental elements such as dirt, dust, leaf debris, sand, gravel and shallow puddles.  Extra ports and surface mounting space make Explorer a robust and expandable research robot.
 
Usage Reporter for Vidyo:
 
Our Usage Reporter for Vidyo is a Windows-based software package that analyzes detailed video conferencing call records, including the number of Vidyo rooms, ports, users, and conference call minutes.   This software product is an affordable and effective way for customers to generate video conferencing usage statistics that can be used to distribute costs and make informed purchasing decisions.
 
CoroCall Communications:
 
CoroCall Communications is a standalone appliance server with features that were previously available only to large enterprises at a much higher price, offering customers an integrated Internet telephony solution that includes phone communications, high definition (HD) audio and video conferencing, and advanced call management.
 
-7-

 
 
ITEM 1A.  RISK FACTORS
 
As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this item.
 
ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this item.
 
ITEM 2.  PROPERTIES
 
Our corporate headquarters is located at 1410 Market Street, Suite 200, Kirkland, Washington 98033.  We occupy 2,988 square feet located on the second floor of a commercial office building that is composed of 9 offices, 3 conference rooms, and a reception area.
 
We entered into a five year term lease from August 1, 2010 to July 31, 2015, at which time our lease expires.  The lease provides that we pay the following monthly rent: (a) year one - $3,735; (b) year 2 - $3,984; (c) year 3 - $4,233; (d) year 4 - $4,482; and (e) year 5 - $4,731.
 
ITEM 3.  LEGAL PROCEEDINGS
 
CoroWare is not currently a party to, nor is any of our property currently the subject of, any pending legal proceeding that will have a material adverse affect on our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
 
ITEM 4.  MINE SAFETY DISCLOSURES
 
Not applicable.
 
 
 
-8-

 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Prices of Common Stock
 
Beginning in February 2002, CoroWare’s common stock was eligible for listing in the OTC Bulletin Board.  Our trading symbol was “SRMW” until such time as our acquisition of Hy-Tech Technology Group, Inc. on January 31, 2003 when our symbol became “HYTT”.  In November 2006, our name was changed to Innova Robotics & Automation, Inc. and the trading symbol was changed to INRA. In April 2008, we became CoroWare, Inc. and our trading symbol was changed to CROE.  In April 2009, in conjunction with a 1-for-300 reverse stock split, our trading symbol was changed to COWI. In January 2012, we revised the par value of our Common Stock from $0.001 to $0.0001.
 
Our common stock is quoted on the OTCQB exchange under the symbol, “COWI”.  Accordingly, there can be no assurance as to the liquidity of any markets that may develop for our common stock, the ability of holders of our common stock to sell our common stock, or the prices at which holders may be able to sell our common stock.
 
The following table sets forth the quarterly high and low sales prices as reported during the last two fiscal years ended December 31, 2011 and December 31, 2010.
 
Common Stock 
Year Ended December 31, 2011
 
High
   
Low
 
First Quarter
 
$
0.0048
   
$
0.0006
 
Second Quarter
 
$
0.0012
   
$
0.0002
 
Third Quarter
 
$
0.0003
   
$
0.0001
 
Fourth Quarter
 
$
0.0002
   
$
0.0001
 
                 
 
Year Ended December 31, 2010
 
High
   
Low
 
First Quarter
 
$
0.0200
   
$
0.2900
 
Second Quarter
 
$
0.0100
   
$
0.0400
 
Third Quarter
 
$
0.0460
   
$
0.0150
 
Fourth Quarter
 
$
0.0020
   
$
0.0195
 
 
These quotations represent interdealer prices, without retail markup, markdown, or commission, and may not reflect actual transactions.  As of April 11, 2012, there were approximately 207 record holders of the Company's common stock.
 
Dividend Policy
 
We have never declared or paid any cash dividends on our common stock. We anticipate that any earnings will be retained for development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Additionally, as of December 31, 2011, we have issued and outstanding 159,666 shares of Series B Preferred Stock all of which is entitled, prior to the declaration of any dividends on common stock, to a 5% dividend, payable in either cash or common stock.  The board of directors has sole discretion to declare dividends based on our financial condition, results of operations, capital requirements, contractual obligations and other relevant factors.  As of December 31, 2011, $28,304 of Series B Preferred dividends had been converted into common stock.  At December 31, 2011 and 2010, there were accrued unpaid dividends of $15,969 and cumulative undeclared dividends to Preferred Series B shareholders of $39,917 and $31,933, respectively, the obligation for which is contingent on declaration by the board of directors.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
The following tables set forth the information as of December 31, 2011 with respect to compensation plans under which our equity securities are authorized for issuance:
 
EQUITY COMPENSATION PLAN INFORMATION
 
DECEMBER 31, 2011
 
Plan Category
 
Number of shares to be issued upon exercise of outstanding options and warrants
   
Weighted average exercise price of outstanding options and warrants
   
Number of securities available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
   
(a)
   
(b)
   
(c)
 
Equity compensation plans approved by security holders:
                 
      2003 Stock Option Plan
    -       n/a       -  
      2004 Stock Option Plan
    -       n/a       -  
      2005 Stock Option Plan
    38,164     $ 2.97       38,164  
Equity Stock Compensation plan not approved by security holders:
                       
      2006 Employee Compensation Plan
    n/a       n/a       -  
      2008 Amended Incentive Stock Plan
    n/a       n/a       2,890  
      2008 SIP – SEC File #333-151258
    n/a       n/a       -  
      2009 Incentive Stock Plan
    n/a       n/a       374,900  
Total
    38,164               415,954  
 
 
-9-

 
Stock Plans
 
As of December 31, 2011, CoroWare had four stock compensation plans which provided for the issuance of 206,270,000 shares to employees of CoroWare or our subsidiaries as follows:
Plan Description
 
Authorized Shares
   
Remaining Shares
 
      2006 Employee Compensation Plan
   
3,333
     
-
 
      2008 Incentive Stock Plan
   
666,667
     
2,890
 
      2009 Incentive Stock Plan
   
500,000
     
33,300
 
      2010 Incentive Stock Plan (333-165768)
   
5,000,000
     
248,250
 
      2011 Incentive Stock Plan (333-171325)
   
200,000,000
     
470,515
 
      2012 Incentive Stock Plan (333-179968)
   
300,000,000
     
140,000,000
 
         Total
   
506,170,000
     
140,754,955
 
 
Stock Options
 
As of December 31, 2011, we had one active Stock Option Plan known as the 2005 Stock Option Plan. The Plan was approved by our stockholders on November 3, 2006 and authorized the issuance of 66,667 shares of common stock. The Board of Directors on December 31, 2007 cancelled options for 26,367 shares previously granted to current employees prior to that date which were exercisable at various prices and issued 26,367 options to these employees at the closing price as of December  31, 2007 or $3.00.  The number of options issued and outstanding under the 2005 plan on December 31, 2011 is 34,831.
 
In addition to the options issued under the 2005 Stock Option Plan, 26,560 options were issued outside of the Plan. For services rendered, 443 options were issued at a purchase price of $51 per share, 3,833 options were issued at $39 per share, 4,040 options were issued at $15 per share 14,909 options were issued at $33 per share and 3,333 options were issued at $1.86 per share.   The only options that remain outstanding are the 3,333 options that were issued at $1.86 per share.
 
ITEM 6.  SELECTED FINANCIAL DATA.
 
As a smaller reporting company, as defined in Rule 12-b-2 of the Exchange Act, we are not required to provide the information required by this item.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Cautionary and Forward Looking Statements
 
This section and other parts of this Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and CoroWare’s actual results may differ significantly from the results discussed in the forward-looking statements. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this Form 10-K. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
 
There is no assurance that we will be profitable, we may not be able to successfully develop, manage or market our products and services, we may not be able to attract or retain qualified executives and technology personnel, our products and services may become obsolete, government regulation may hinder our business, additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of warrants and stock options, and other risks inherent in the our businesses.
 
We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the factors described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q and Annual Report on Form 10-K filed by us in 2011 and any Current Reports on Form 8-K filed by us.
 
 
-10-

 
CRITICAL ACCOUNTING POLICIES
 
General
 
consolidated financial statements and notes included in our quarterly and annual financial statements contain information that is pertinent to this management's discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities, and affect the disclosure of any contingent assets and liabilities. We believe these accounting policies involve judgment due to the sensitivity of the methods, assumptions, and estimates necessary in determining the related asset and liability amounts. The significant accounting policies are described in the notes to our financial statements and notes included elsewhere in this Form 10-K.
 
Revenue Recognition
 
We derive our software system integration services revenue from short-duration, time and material contracts. Generally, such contracts provide for an hourly-rate and a stipulated maximum fee. Revenue is recorded only on executed arrangements as time is incurred on the project and as materials, which are insignificant to the total contract value, are expended. Revenue is not recognized in cases where customer acceptance of the work product is necessary, unless sufficient work has been performed to ascertain that the performance specifications are being met and the customer acknowledges that such performance specifications are being met. We periodically review contractual performance and estimate future performance requirements. Losses on contracts are recorded when estimable. No contractual losses were identified during the periods presented.
 
We recognize revenue for our software and software professional services when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is probable. Product sales are recognized by us generally at the time product is shipped. Shipping and handling costs are included in cost of goods sold.
 
We account for arrangements that contain multiple elements in accordance with FASB ASC 605-25, Revenue Recognition, Multiple Element Arrangements. When elements such as hardware, software and consulting services are contained in a single arrangement, or in related arrangements with the same customer, we allocate revenue to each element based on its relative fair value, provided that such element meets the criteria for treatment as a separate unit of accounting. The price charged when the element is sold separately generally determines fair value. In the absence of fair value for a delivered element, we allocate revenue first to the fair value of the underlying elements and allocate the residual revenue to the delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a delay of revenue recognition for the delivered elements until the undelivered elements are fulfilled. We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on future delivery of products or services or subject to customer-specified return or refund privileges.
 
We recognize revenue from the sale of manufacturer’s maintenance and extended warranty contracts in accordance with FASB ASC 605-45, Revenue Recognition, Principal Agent Considerations net of its costs of purchasing the related contracts.
 
Our ECS revenue is comprised of both services and products.  ECS subscription service revenues are generated through the sale of CoroCallTM, a managed video conferencing service and CoroCall Communications, a managed telephone service.  Our contracts provide for usage pricing or when paid for pre-paid service.  We recognize this revenue in the period that the services or minutes are used and prepaid.  Product revenues are realized partly through the sale of Vidyo’s product line, including room systems and back-end infrastructure, partly through the sale of CoroWare collaboration products, including CoroWare Usage Reporter for Vidyo, a software package that provides usage statistics for Vidyo brand high-definition video conferencing systems, and partly through the sales of related accessories.  Revenues for these products are recognized upon delivery to the customer.
 
Share-based payment
 
Stock based compensation expense is recorded in accordance with FASB ASC 718, Compensation – Stock Compensation, for stock and stock options awarded in return for services rendered.  The expense is measured at the grant-date fair value of the award and recognized as compensation expense on a straight line basis over the service period, which is the vesting period.  We estimate forfeitures that we expect will occur and record expense based upon the number of awards expected to vest.
 
There were no options issued during the years ending December 31, 2011 and 2010.
 
 
-11-

 
Derivative Financial Instruments
 
Derivative financial instruments, as defined in FASB ASC 815, Derivatives and Hedging, consist of financial instruments or other contracts that contain a notional amount and one or more underlying variables (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. The caption Derivative Liability consists of (i) the fair values associated with derivative features embedded in various convertible note financings and (ii) the fair values of the detachable warrants that were issued in connection with those financing arrangements.
 
We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by FASB ASC 815, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.
 
We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes-Merton option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to value these instruments. For complex derivative instruments, such as embedded conversion options, we generally use the Flexible Monte Carlo valuation technique because it embodies all of the requisite assumptions (including credit risk, interest-rate risk and exercise/conversion behaviors) that are necessary to value these more complex instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.
 
PLAN OF OPERATION  
 
CoroWare is well positioned for managed growth in Fiscal Year 2012 through continued growth of our CoroWare Business Solutions and Robotics & Automation business units, and rapid growth of our Enterprise Collaboration Solutions business unit.
 
The CoroWare Business Solutions (CBS) business unit anticipates growing its revenues by delivering business intelligence, software development, IT consulting, lab management and release management professional services through its long term clients, including Microsoft and MetraTech.   As well, it anticipates growing its revenues more rapidly through the sales of products and solutions – such as CoroWare Billing Integration Framework and CoroWare License Manager - that help cloud service providers recognize revenues by delivering conferencing and application services.
 
The Robotics & Automation (R&A) business unit expects to achieve its revenue objectives by offering affordable mobile robotics platforms, products and custom solutions to researchers in the university, commercial and homeland security market segments.  As well, the Robotics & Automation group is well positioned to pursue custom engineering opportunities with clients who are developing innovative software services, solutions and products that leverage our expertise in simulation, visualization, mobile robotics, and product realization.
 
The Enterprise Collaboration Solutions (ECS) business unit plans to rapidly grow its revenues by selling a combination of services and products.  Collaboration service revenues are generated through the sale of CoroCallTM, a managed business class HD video conferencing service that small, medium and large sized businesses - including consulting companies, non-profit groups, and distance learning companies – are considering as an alternative to purchasing and operating videoconferencing equipment and infrastructure.  Product revenues are being realized partly through the sale of Vidyo’s product line – including room systems and back-end infrastructure – partly through the sale of CoroWare collaboration products, including CoroWare NameTag and CoroCall Communications appliance servers, partly through the sales of related accessories, and partly through the sales of VidyoCast products and services.
 
In order to achieve revenue and margin objectives in an increasingly global and competitive market, all of CoroWare’s business units offer their customers the option of using CoroWare’s near-shore resources, which comprise a team of highly capable IT architects, developers and testers with experience in software application development and integration, rich internet applications development (including Microsoft Silverlight), partner management portal development, IT infrastructure, and Quality Assurance.
 
We do not expect to sell any of CoroWare’s fixed assets, including property or equipment in the next twelve months, nor do we expect to purchase any real property in the next twelve months. During the next twelve months we expect to purchase certain equipment to support software development, testing and continued deployment of CoroWare technologies. Additionally, we expect to purchase office equipment, computer equipment and laboratory development and testing equipment to support our planned personnel increase.
 
We are internally developing an investor relations program that will help the company communicate more effectively and actively with CoroWare shareholders, and generate greater awareness of CoroWare and our services, solutions and products.
 
 
-12-

 

Recent Financing Transactions
 
(a)  
$27,500 Asher financing:
 
On February 1, 2011, the Company consummated an unsecured Securities Purchase Agreement with an unrelated third party for the sale by the Company of its 8% secured convertible debentures in the aggregate principal amount of $27,500, net of deferred financing costs of $2,500.
 
The holder of the debenture may, at any time, convert amounts outstanding under the debenture into shares of common stock of the Company at a conversion rate equal to 51% of the market price, which is defined as the lowest 3 trading prices for the Company’s common stock during the 10 trading days prior to conversion.
 
In the Company’s original evaluation of this instrument in accordance with ASC 815 Derivatives and Hedging, based on the variable conversion price and lack of authorized shares, it was determined that the conversion feature was not afforded the exemption as a conventional convertible instrument and did not otherwise meet the conditions for equity classification.  As such, the conversion and other features were compounded into one instrument, bifurcated from the debt instrument and carried as a derivative liability, at fair value.  The Company estimated the fair value of the bifurcated derivative instruments using the Monte Carlo valuation model because this methodology provides for all of the necessary assumptions necessary for fair value determination; including assumptions for credit risk, interest risk and conversion/redemption behavior. Significant assumptions underlying this methodology were: effective term (using the remaining term of the host instrument); effective volatility (145.01% - 130.17%); and effective risk adjusted yield (12.5%).  As a result of these estimates, the valuation model resulted in a compound derivative balance of $36,729 at inception.  Derivative expense of $9,229 was recognized at inception.
 
This convertible debenture matured in November 2011 and is currently in default.  In order to estimate a value for the embedded conversion feature for financial statement presentation at December 31, 2011, management needed to make certain assumptions about the estimated maturity date of this debt.  It was estimated that this debt would not be called prior to November 1, 2012.
 
During 2011, Asher converted $2,000 of the convertible debenture into 33,333,333 shares of the Company’s common stock.  The Company recognized a loss on redemption of $114.
 
(b)  
$10,750 Barclay financing:
 
On January 28, 2011, the Company consummated an unsecured convertible promissory note with an unrelated third party for $10,750, net of deferred financing costs of $2,500.
 
The holder of the debenture may, at any time, convert amounts outstanding under the debenture into shares of common stock of the Company at a conversion rate equal to 50% of the fair market value, but not to exceed $0.05/share or be less than $0.0001/share.  Fair market value is defined as the lower of i) the closing bid price for the date immediately preceding the date of conversion (excluding trades that are not arms-length) or ii) the average of last 5 trading days volume weighted average price.  The Company's obligations under the convertible promissory note are secured by substantially all of the assets of the Company and those of its wholly owned subsidiary, CoroWare Technologies, Inc. 
 
In the Company’s original evaluation of this instrument in accordance with ASC 815 Derivatives and Hedging, based on the variable conversion price and lack of authorized shares, it was determined that the conversion feature was not afforded the exemption as a conventional convertible instrument and did not otherwise meet the conditions for equity classification.  As such, the conversion and other features were compounded into one instrument, bifurcated from the debt instrument and carried as a derivative liability, at fair value.  The Company estimated the fair value of the bifurcated derivative instruments using the Monte Carlo valuation model because this methodology provides for all of the necessary assumptions necessary for fair value determination; including assumptions for credit risk, interest risk and conversion/redemption behavior. Significant assumptions underlying this methodology were: effective term (using the remaining term of the host instrument); effective volatility (155.39% - 117.57%); and effective risk adjusted yield (12.5%).  As a result of these estimates, the valuation model resulted in a compound derivative balance of $12,369 at inception.  Derivative expense of $1,619 was recognized at inception.
 
This convertible debenture matured July 28, 2011 and is currently in default.  In order to estimate a value for the embedded conversion feature for financial statement presentation at December 31, 2011, management needed to make certain assumptions about the estimated maturity date of this debt.  It was estimated that this debt would not be called prior to November 1, 2012.
 
As of December 31, 2011, there have been no conversions on this convertible debenture.
 
 
 
-13-

 

(c)  
$9,750 Mackie financing:
 
On February 3, 2011, the Company consummated an unsecured convertible promissory note with an unrelated third party for $9,750.
 
The holder of the debenture may, at any time, convert amounts outstanding under the debenture into shares of common stock of the Company at a conversion rate equal to 85% of the 5 day average closing price using the 5 trading days prior to the conversion date.
 
In the Company’s evaluation of this instrument in accordance with ASC 815 Derivatives and Hedging, based on the variable conversion price and lack of authorized shares, it was determined that the conversion feature was not afforded the exemption as a conventional convertible instrument and did not otherwise meet the conditions for equity classification.  As such, the conversion and other features were compounded into one instrument, bifurcated from the debt instrument and carried as a derivative liability, at fair value.  The Company estimated the fair value of the bifurcated derivative instruments using the Monte Carlo valuation model because this methodology provides for all of the necessary assumptions necessary for fair value determination; including assumptions for credit risk, interest risk and conversion/redemption behavior. Significant assumptions underlying this methodology were: effective term (using the remaining term of the host instrument); effective volatility (155.39% - 117.57%); and effective risk adjusted yield (12.5%).  As a result of these estimates, the valuation model resulted in a compound derivative balance of $3,491 at inception.  The remaining balance of $6,259 was allocated to the carrying value of the debenture.
 
This convertible debenture matured February 18, 2011 and is currently in default.  In order to estimate a value for the embedded conversion feature for financial statement presentation at December 31, 2011, management needed to make certain assumptions about the estimated maturity date of this debt.  It was estimated that this debt would not be called prior to November 1, 2012.
 
As of December 31, 2011, there have been no conversions on this convertible debenture.
 
(d)  
 $ 170,562 Ratzker financing:
 
Yorkville Advisors transferred a 46.3% portion of Tranche 1 of the $2,825,000 debenture to a third party (“Ratzker”) effective December 31, 2010.  The assignment aggregated $568,263, representing $341,123 of unpaid principal and $227,140 of accrued interest.  At that time, there was no accounting impact for CoroWare as it was merely an assignment between debt holders.  On March 18, 2011, Ratzker modified the terms of the debenture such that the interest rate was lowered from 14% to 5% and the maturity date was extended until March 18, 2013.  Simultaneously, the conversion rate on the debenture was modified from 85% of the 30 day Volume Weighted Average Price (“VWAP”) to 65% of the 30 day VWAP.
 
The modification was analyzed in accordance with current accounting standards and was determined not to be a troubled debt restricting or an extinguishment of debt.  As such, it was accounted for as a modification and no gain or loss was recognized on the transaction.  A debt discount of $236,779 was recognized for the difference in the fair value of the embedded conversion feature before and after the modification date.  A new effective rate was calculated for the new debenture and the related debt discount is being amortized using the effective interest rate over the new 2 year term of the underlying loan.  Amortization for the year ended December 31, 2011 was $32,864.
 
On March 21, 2011, Ratzker transferred 50% of his ownership interest in this debenture to another unrelated party (“Redwood”).  The terms of the debenture did not change with that transfer.  As such, this transfer was also considered an assignment between debt holders and did not have an accounting impact on the Company.  See discussion below in Note 9(q) for Redwood financing.
 
With the extension of the maturity date, this debenture is no longer in default and has been reclassified to long-term liabilities on the accompanying balance sheet.
 
As of December 31, 2011, there have been no conversions on this convertible debenture.
 
(e)  
$67,042 Harvey financing:
 
On April 2, 2011, the Company entered into an unsecured convertible promissory note with a vendor.  The vendor converted $67,042 of outstanding payables into this convertible note. The note calls for interest at 10% through the maturity date of May 2, 2011 and default interest at 15% thereafter.
 
 
-14-

 
The holder of the debenture may, at any time, convert amounts outstanding under the debenture into shares of common stock of the Company at a conversion rate equal to the average closing bid price for the 5 trading days prior to, but not including, the conversion date.  The number of shares of common stock to be issued upon each conversion shall be determined by dividing that portion of the principal to be converted by the conversion price then multiplying by 115%.
 
In the Company’s evaluation of this instrument in accordance with ASC 815 Derivatives and Hedging, based on the variable conversion price and lack of authorized shares, it was determined that the conversion feature was not afforded the exemption as a conventional convertible instrument and did not otherwise meet the conditions for equity classification.  As such, the conversion and other features were compounded into one instrument, bifurcated from the debt instrument and carried as a derivative liability, at fair value.  The Company estimated the fair value of the bifurcated derivative instruments using the Monte Carlo valuation model because this methodology provides for all of the necessary assumptions necessary for fair value determination; including assumptions for credit risk, interest risk and conversion/redemption behavior. Significant assumptions underlying this methodology were: effective term (using the remaining term of the host instrument); effective volatility (132.38%); and effective risk adjusted yield (12.5%).  As a result of these estimates, the valuation model resulted in a compound derivative balance of $30,011 at inception. 
 
This convertible debenture matured May 2, 2011 and is currently in default.  In order to estimate a value for the embedded conversion feature for financial statement presentation at December 31, 2011, management needed to make certain assumptions about the estimated maturity date of this debt.  It was estimated that this debt would not be called prior to November 1, 2012.
 
As of December 31, 2011, there have been no conversions on this convertible debenture.
 
(f)  
$89,383 Cariou financing:
 
On April 4, 2011, the Company entered into unsecured convertible promissory note with an employee.  The employee converted $56,700 of outstanding principal on related party notes payable and $32,683 of accrued interest into this convertible note.  The note calls for interest at 10% through the maturity date of May 4, 2011 and default interest at 15% thereafter.
 
The holder of the debenture may, at any time, convert amounts outstanding under the debenture into shares of common stock of the Company at a conversion rate equal to the average closing bid price for the 5 trading days prior to, but not including, the conversion date.  The number of shares of common stock to be issued upon each conversion shall be determined by dividing that portion of the principal to be converted by the conversion price then multiplying by 115%.
 
In the Company’s original evaluation of this instrument in accordance with ASC 815 Derivatives and Hedging, based on the variable conversion price and lack of authorized shares, it was determined that the conversion feature was not afforded the exemption as a conventional convertible instrument and did not otherwise meet the conditions for equity classification.  As such, the conversion and other features were compounded into one instrument, bifurcated from the debt instrument and carried as a derivative liability, at fair value.  The Company estimated the fair value of the bifurcated derivative instruments using the Monte Carlo valuation model because this methodology provides for all of the necessary assumptions necessary for fair value determination; including assumptions for credit risk, interest risk and conversion/redemption behavior. Significant assumptions underlying this methodology were: effective term (using the remaining term of the host instrument); effective volatility (132.38%); and effective risk adjusted yield (12.5%).  As a result of these estimates, the valuation model resulted in a compound derivative balance of $44,720 at inception. 
 
This convertible debenture matured May 4, 2011 and is currently in default.  In order to estimate a value for the embedded conversion feature for financial statement presentation at December 31, 2011, management needed to make certain assumptions about the estimated maturity date of this debt.  It was estimated that this debt would not be called prior to November 1, 2012.
 
As of December 31, 2011, there have been no conversions on this convertible debenture.
 
(g)  
$25,000 Tangiers financing:
 
In May and June 2011, an unrelated third party (“Tangiers”) purchased a $25,000 note payable from one of CoroWare’s note holders.  The transaction was completed in 2 Tranches of $10,000 and $15,000.  The terms of the note were changed such that the conversion rate was changed from a fixed $1 per share to a variable rate of 65% of the lowest trading price during the 7 days prior to conversion.  The interest rate was changed from 8% to 10% and the maturity date was extended from June 2003 to March 19, 2012, thus taking the note out of default.
 
The modification was analyzed in accordance with current accounting standards and was determined not to be a troubled debt restricting but rather an extinguishment of debt as there was a substantial difference in terms on the new debt.  As the old debt was being carried at face value, there was no gain or loss recognized on the extinguishment.
 
 
-15-

 
In the Company’s evaluation of this instrument in accordance with ASC 815 Derivatives and Hedging, based on the variable conversion price and lack of authorized shares, it was determined that the conversion feature was not afforded the exemption as a conventional convertible instrument and did not otherwise meet the conditions for equity classification.  As such, the conversion and other features were compounded into one instrument, bifurcated from the debt instrument and carried as a derivative liability, at fair value.  The Company estimated the fair value of the bifurcated derivative instruments using the Monte Carlo valuation model because this methodology provides for all of the necessary assumptions necessary for fair value determination; including assumptions for credit risk, interest risk and conversion/redemption behavior. Significant assumptions underlying this methodology were: effective term (using the remaining term of the host instrument); effective volatility (132.38%); and effective risk adjusted yield (12.5%).  As a result of these estimates, the valuation model resulted in a compound derivative balance of $11,662 and $10,800, respectively, at inception for the $10,000 tranche and the $15,000 tranche. 
 
During 2011, the entire $25,000 was converted into 96,153,846 shares of CoroWare common stock.  CoroWare recognized a loss of $16,923 and $13,846, respectively, on the conversion of the $10,000 tranche and the $15,000 tranche.
 
(h)  
$10,000 Tangiers financing:
 
On May 16, 2011, the Company entered into a $10,000 Convertible Note Agreement with an unrelated third party (“Tangiers”).  The note calls for interest at 10% through the maturity date of May 16, 2012 and default interest at 20% thereafter.  Loan fees of $1,300 were withheld at closing.  These have been classified as deferred finance costs and are being amortized over the term of the loan on a straight line basis.
 
The holder of the debenture may, at any time, convert amounts outstanding under the debenture into shares of common stock of the Company at a conversion rate equal to 65% of the lowest trading price in the 7 days prior to the conversion date. Upon default, the conversion price changes to 40% of the lowest trading price in the 7 days prior to the conversion date.
 
In the Company’s original evaluation of this instrument in accordance with ASC 815 Derivatives and Hedging, based on the variable conversion price and lack of authorized shares, it was determined that the conversion feature was not afforded the exemption as a conventional convertible instrument and did not otherwise meet the conditions for equity classification.  As such, the conversion and other features were compounded into one instrument, bifurcated from the debt instrument and carried as a derivative liability, at fair value.  The Company estimated the fair value of the bifurcated derivative instruments using the Monte Carlo valuation model because this methodology provides for all of the necessary assumptions necessary for fair value determination; including assumptions for credit risk, interest risk and conversion/redemption behavior. Significant assumptions underlying this methodology were: effective term (using the remaining term of the host instrument); effective volatility (132.38%); and effective risk adjusted yield (12.5%).  As a result of these estimates, the valuation model resulted in a compound derivative balance of $5,877 at inception. 
 
As of December 31, 2011, there have been no conversions on this convertible debenture.
 
(i)  
 $15,000 Tangiers financing:
 
On June 10, 2011, the Company entered into a $15,000 Convertible Note Agreement with an unrelated third party (“Tangiers”).  The note calls for interest at 10% through the maturity date of May 16, 2012 and default interest at 20% thereafter.  Loan fees of $1,300 were withheld at closing.  These have been classified as deferred finance costs and are being amortized over the term of the loan on a straight line basis.
 
The holder of the debenture may, at any time, convert amounts outstanding under the debenture into shares of common stock of the Company at a conversion rate equal to 65% of the lowest trading price in the 7 days prior to the conversion date. Upon default, the conversion price changes to 40% of the lowest trading price in the 7 days prior to the conversion date.
 
In the Company’s evaluation of this instrument in accordance with ASC 815 Derivatives and Hedging, based on the variable conversion price and lack of authorized shares, it was determined that the conversion feature was not afforded the exemption as a conventional convertible instrument and did not otherwise meet the conditions for equity classification.  As such, the conversion and other features were compounded into one instrument, bifurcated from the debt instrument and carried as a derivative liability, at fair value.  The Company estimated the fair value of the bifurcated derivative instruments using the Monte Carlo valuation model because this methodology provides for all of the necessary assumptions necessary for fair value determination; including assumptions for credit risk, interest risk and conversion/redemption behavior. Significant assumptions underlying this methodology were: effective term (using the remaining term of the host instrument); effective volatility (132.38%); and effective risk adjusted yield (12.5%).  As a result of these estimates, the valuation model resulted in a compound derivative balance of $10,800 at inception. 
 
As of December 31, 2011, there have been no conversions on this convertible debenture.
 
(j)  
$65,000 Panache financing:
 
 
-16-

 
On June 2, 2011, an unrelated third party (“Panache”) purchased an aggregate $65,000 (representing $30,000 of outstanding principal and $35,000 accrued interest) from one of CoroWare’s note holders.  The terms of the note were changed such that the conversion rate was changed from a fixed $1 per share to a variable rate of an agreed to discount to market not to fall below a 50% discount to the average of the 3 lowest trading prices during the 20 days prior to conversion.  The interest rate was changed from 8% to 15% and the maturity date was extended from June 2003 to June 1, 2012, thus taking the note out of default.
 
The modification was analyzed in accordance with current accounting standards and was determined not to be a troubled debt restricting but rather an extinguishment of debt as there was a substantial difference in terms on the new debt.  As the old debt was being carried at face value, there was no gain or loss recognized on the extinguishment.
 
In the Company’s evaluation of this instrument in accordance with ASC 815 Derivatives and Hedging, based on the variable conversion price and lack of authorized shares, it was determined that the conversion feature was not afforded the exemption as a conventional convertible instrument and did not otherwise meet the conditions for equity classification.  As such, the conversion and other features were compounded into one instrument, bifurcated from the debt instrument and carried as a derivative liability, at fair value.  The Company estimated the fair value of the bifurcated derivative instruments using the Monte Carlo valuation model because this methodology provides for all of the necessary assumptions necessary for fair value determination; including assumptions for credit risk, interest risk and conversion/redemption behavior. Significant assumptions underlying this methodology were: effective term (using the remaining term of the host instrument); effective volatility (132.38%); and effective risk adjusted yield (12.5%).  As a result of these estimates, the valuation model resulted in a compound derivative balance of $100,880 at inception.  Derivative expense of $35,880 was recognized at inception.
 
During 2011, Panache converted $8,400 of principal into 42,000,000 shares of the Company’s common stock.
 
(k)  
 $15,000 Panache financing:
 
On April 2, 2011, the Company entered into a $15,000 Convertible Note Agreement with an unrelated third party (“Panache”).  The note calls for interest at 8% through the maturity date of June 29, 2012.  The note can be renewed for an additional 10 years under 6 month extensions at $100 per extension.
 
The holder of the debenture may, at any time, convert amounts outstanding under the debenture into shares of common stock of the Company at a conversion rate equal to an agreed to discount to market not to fall below a 15% discount to the average of the 3 lowest trading prices during the 20 days prior to conversion.
 
In the Company’s evaluation of this instrument in accordance with ASC 815 Derivatives and Hedging, based on the variable conversion price and lack of authorized shares, it was determined that the conversion feature was not afforded the exemption as a conventional convertible instrument and did not otherwise meet the conditions for equity classification.  As such, the conversion and other features were compounded into one instrument, bifurcated from the debt instrument and carried as a derivative liability, at fair value.  The Company estimated the fair value of the bifurcated derivative instruments using the Monte Carlo valuation model because this methodology provides for all of the necessary assumptions necessary for fair value determination; including assumptions for credit risk, interest risk and conversion/redemption behavior. Significant assumptions underlying this methodology were: effective term (using the remaining term of the host instrument); effective volatility (132.38%); and effective risk adjusted yield (12.5%).  As a result of these estimates, the valuation model resulted in a compound derivative balance of $13,500 at inception. 
 
As of December 31, 2011, there have been no conversions on this convertible debenture.
 
(l)  
 $567,200 Westmount financing:
 
On January 12, 2011, Yorkville assigned 100% of Tranche 2 of its $2,825,000 debenture (aggregating $567,200 in principal and $317,510 in interest) to an unrelated third party (“Westmount”).  The terms of the note did not change.    As such, there was no accounting impact for CoroWare as it was merely an assignment between debt holders.  The note calls for interest at 14%.  This note matured August 22, 2009 and is currently in default.
 
The holder of the debenture may, at any time, convert amounts outstanding under the debenture into shares of common stock of the Company at a conversion rate equal to the lower of $0.02 per share or 85% of the lowest volume weighted average price in the 30 days prior to the conversion date.  The Company's obligations under the purchase agreement are secured by substantially all of the assets of the Company and those of its wholly owned subsidiary, CoroWare Technologies, Inc. 
 
In order to estimate a value for the embedded conversion feature for financial statement presentation at December 31, 2011, management needed to make certain assumptions about the estimated maturity date of this debt.  It was estimated that this debt would not be called prior to November 1, 2012.
 
 
-17-

 
During 2011, $29,882 of principal was converted into 66,682,665 shares of the Company’s common stock.
 
(m)  
  $170,561 Redwood financing:
 
On March 21, 2011, Ratzker (see Note 9(h)) transferred 50% of his ownership interest in his convertible debenture to another unrelated party (“Redwood”).  The terms of the note did not change.   As such, there was no accounting impact for CoroWare as it was merely an assignment between debt holders.  The note calls for interest at 5% through the maturity date of March 18, 2013.
 
The holder of the debenture may, at any time, convert amounts outstanding under the debenture into shares of common stock of the Company at a conversion rate equal to 65% of the volume weighted average price for the Company’s stock for the 30 trading days prior to conversion.  The Company's obligations under the purchase agreement are secured by substantially all of the assets of the Company and those of its wholly owned subsidiary, CoroWare Technologies, Inc. 
 
During 2011, Redwood converted $36,700 of principal into 101,666,663 shares of the Company’s common stock.
 
(n)  
 $21,962 Premier financing:
 
On October 5, 2011, the Company entered into a $21,962 Convertible Note Agreement with an unrelated third party (“Premier”).  The note calls for interest at 10% through the maturity date of March 5, 2012.
 
The holder of the debenture may, at any time, convert amounts outstanding under the debenture into shares of common stock of the Company at a conversion rate equal the average closing bid prices for the Company’s common stock for  the 5 trading days prior to but not including the date of conversion.
 
In the Company’s evaluation of this instrument in accordance with ASC 815 Derivatives and Hedging, based on the variable conversion price and lack of authorized shares, it was determined that the conversion feature was not afforded the exemption as a conventional convertible instrument and did not otherwise meet the conditions for equity classification.  As such, the conversion and other features were compounded into one instrument, bifurcated from the debt instrument and carried as a derivative liability, at fair value.  The Company estimated the fair value of the bifurcated derivative instruments using the Monte Carlo valuation model because this methodology provides for all of the necessary assumptions necessary for fair value determination; including assumptions for credit risk, interest risk and conversion/redemption behavior. Significant assumptions underlying this methodology were: effective term (using the remaining term of the host instrument); effective volatility (288.54%); and effective risk adjusted yield (6.25%).  As a result of these estimates, the valuation model resulted in a compound derivative balance of $10,844 at inception. 
 
As of December 31, 2011, there have been no conversions on this convertible debenture.
 
RESULTS OF OPERATIONS
 
YEAR ENDED DECEMBER 31, 2011 COMPARED TO YEAR ENDED DECEMBER 31, 2010:
 
During the year ended December 31, 2011 (the "2011 Period") revenues were $1,799,352 compared to revenues of $2,009,563 during the year ended December 31, 2010 (the "2010 Period").  Revenues in the 2011 period were lower compared to the 2010 period as customers spent conservatively on software development, video conferencing, infrastructure deployments, and mobile robotics projects.  Revenues were comparatively stronger in the second quarter of 2011 as enterprise customers increased spending on business intelligence professional services, and in the second quarter as customers deployed HD videoconferencing equipment and purchased mobile robotics products and professional services.
 
Cost of goods sold was $1,214,737 and $1,502,230 for the 2011 Period and the 2010 Period, respectively.  Cost of goods sold primarily represents labor and labor-related costs in addition to overhead costs.
 
Gross Profits increased to $584,615 during the 2011 Period compared to $507,333 during the 2010 Period.  Gross profits improved during the 2011 Period as CoroWare improved utilization of its IT and business intelligence consulting resources, further reduced the cost of goods sold for mobile robots, and complemented its videoconferencing equipment sales with premium deployment and support services.
 
Operating expenses were $1,321,480 for the 2011 Period compared to $1,427,925 for the 2010 Period.  General and administrative expenses amounted to $863,299 during the 2011 Period compared to $954,001 for the 2010 Period, and represented mostly labor and related compensation costs, legal & professional fees, outside services, travel expenses, rental expense and related office expenses. Sales and marketing expenses were $314,195 for the 2011 Period compared to $339,032 for the 2010 Period.  Depreciation and amortization costs were $21,765 for the 2011 Period compared to $41,933 for the 2010 Period.

 
-18-

 
 
Loss from operations was $736,865 for the 2011 Period compared to $920,592 for the 2010 Period.  This continued decline in the loss was due to a modest decrease in Cost of Goods Sold, a decrease in sales and marketing expenses, and modest decrease in General and Administrative expenses throughout the 2011 Period.
 
Other income (expense) was ($1,291,730) during the 2011 Period compared to ($88,292) in the 2010 Period.  Other income (expense) is comprised primarily of derivative income (expense) and amortization of debt discount and deferred finance costs.  The derivative expense for the 2011 Period was $(485,772) compared to income of $453,921for the 2010 Period.  The embedded conversion features associated with our convertible debentures are valued based on the number of shares that are indexed to that liability. Keeping the number of shares constant, the liability associated with the embedded conversion features increases as our share price increases and, likewise, decreases when our share price decreases.  Derivative income (expense) displays the inverse relationship.  The derivative (income) expense is primarily the result of the change in our stock price.  For the 2011 Period, a decrease in our stock price on the measurement dates at the beginning and end of the year ($0.0038 at December 31, 2010 versus $0.0001 at December 31, 2011) resulted in a decreased value of the embedded conversion feature (using the Monte Carlo calculation) which resulted in derivative income.  However, this derivative income was offset by derivative expense which occurred with the change in conversion terms on 2 of the largest debentures.    Interest expense for the 2011 Period was $804,893 compared to $624,204 for the 2010 Period.  This increase in interest expense is principally a result of the amortization of debt discount on the new convertible debentures.  The debt discount is being amortized using the effective interest method.  Under this method, the amount of amortization increases exponentially as the underlying carrying value of the amortized debt increases.
 
Net loss for the 2011 Period was $2,028,596 compared to net loss of $1,008,884 for the 2010 Period.
 
LIQUIDITY AND CAPITAL RESOURCES
 
During the year ended December 31, 2011 (the "2011 Period") we used $71,268 net cash from operating activities versus a reduction of $84,651 for the year ended December 31, 2010 (the "2010 Period").
 
Cash outflows from the Company's investing activities in the 2011 Period were $3,626, compared with $0 in the 2010 Period.
 
In the 2011 Period, the Company generated $ 75,416 in cash from financing activities.  This primarily reflects borrowings on convertible debentures.  The Company's financing activities generated $81,158 of cash during the 2010 Period.
 
At December 31, 2011, we had current assets of $141,261, current liabilities of $11,366,110, negative working capital of $11,224,849 and an accumulated deficit of $27,466,565.
 
We presently do not have any available credit, bank financing or other external sources of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding. We will still need additional capital in order to continue operations until we are able to achieve positive operating cash flow. Additional capital is being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity, or capital expenditures.

 
-19-

 
CONTRACTUAL OBLIGATIONS 
 
The following table sets forth the contractual obligations of the Company as of December 31, 2011:
 
   
Payments due by Period
 
Contractual Obligations
 
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
                         
Convertible debt
 
$
2,355,354
   
$
2,206,247
   
$
149,107
   
$
-
   
$
-
 
Notes payable
   
202,232
     
202,232
     
-
     
-
     
-
 
Notes payable, related parties
   
208,913
     
208,913
     
-
     
-
     
-
 
Small Business Administration loan
   
980,450
     
980,450
     
-
     
-
     
-
 
Operating leases
   
189,240
     
49,053
     
140,187
     
-
     
-
 
                                 
  Total
 
$
3,936,189
   
$
3,646,895
   
$
289,294
   
$
-
   
$
-
 
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.
 
ITEM 8.  FINANCIAL STATEMENTS
 
All financial information required by this Item is attached hereto at the end of this report beginning on page F-1 and is hereby incorporated by reference.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
 
None.
 
ITEM 9A-(T).  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures:
 
As of December 31, 2011, our principal executive officer and principal financial officer evaluated the effectiveness of the company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). This evaluation of the disclosure controls and procedures included controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Such disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Act is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the company's principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2011.
 

 
-20-

 
Changes in Internal Control over Financial Reporting
 
During 2010, the Company engaged an external consultant to assist in reviewing and improving its existing internal control over financial reporting with the intent of improving the design and operating effectiveness of controls and procedures.  The Company believes that these changes have improved its internal control over financial reporting.
 
Limitations on Controls
 
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
 
Management’s Report on Internal Control over Financial Reporting
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements.
 
The Company’s management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011.  In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework   Based on its assessment our management believes that, as of December 31, 2011, our internal control over financial reporting is effective.
 
Auditor’s Attestation
 
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report. 
 
ITEM 9B.  OTHER INFORMATION
 
On November 11, 2011, shareholders holding in the aggregate a majority of the total voting power of the Company, by written consent in lieu of a shareholders meeting, authorized an increase in the number of authorized shares of common stock from nine hundred million (900,000,000) shares of common stock to three billion (3,000,000,000) shares of common stock.  In addition, the par value of common stock changed from par value $0.001 per share to par value $0.0001 per share.   This change was effective January 3, 2012.
 
 

 
-21-

 
 
PART III
 
ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
 
Our directors, principal executive officers and significant employees as of December 31, 2011 are as specified on the following table:
 
Name
 
Age
 
Position
Lloyd Spencer
 
55
 
Chief Executive Officer, Interim Chief Financial Officer, Director, Treasurer
Shanna Gerrard
 
55
 
Secretary
Martin Nielson
 
60
 
Director
John Kroon
 
71
 
Chairman, Director
 
The principal occupations for each of our current executive officers and directors are as follows:
 
 
LLOYD T. SPENCER became our Chief Executive Office on January 28, 2008, interim Chief Financial Officer on November 17, 2008 and a member of the board of directors and Vice President since September 20, 2007.  Beginning in May 2006, Mr. Spencer has served as President and CEO of our subsidiary, CoroWare Technologies, Inc.  Beginning in October 2004, Mr. Spencer was co-founder and President of CoroWare, Inc., a Washington State private company that was acquired by Innova Holdings, Inc., which is now known as CoroWare, Inc.  From June 2002 to September 2004, Mr. Spencer was Vice President of Sales at Planet Technologies, a systems integration company based in Germantown, MD.  From November 1996 to August 2001, Mr. Spencer was Solutions Unit Manager and Group Product Manager at Microsoft in Redmond, Washington.  Prior to Microsoft, Mr. Spencer served as Assistant Vice-President and Business Unit Manager at Newbridge Networks; and Product Line Manager at Sun Microsystems.  He is an active contributor to the robotics community in the Seattle area through his participation in the Seattle Robotics Society.  He is also instrumental in initiating and fostering 4H robotics clubs and programs in Washington State.  Mr. Spencer received his Bachelors degree from Cornell University in 1980 with a major in Biology and Animal Science and with an emphasis in Immunogenetics.
 
MARTIN NIELSON was the Company's Chief Executive Officer and Chairman of the Board of Directors from May 2003 until he resigned as Chairman effective June 1, 2004.  Mr. Nielson is still on our Board of Directors. Mr. Nielson is a principal of Altos Bancorp, Inc., serving as its Chairman and Chief Executive Officer since November 2002. He has also served as Chief Executive Officer and director of Inclusion Inc. since September, 2000. Mr. Nielson and Altos were instrumental in assisting the Company in the negotiations that led to the Company's settlement of its litigation with SunTrust Bank and in securing the financing that funded that settlement. Mr. Nielson will continue as a director of the Company. Mr. Nielson is a senior executive with extensive experience in operations and finance. He has been a business builder for 30 years with such companies as Gap, Businessland, and Corporate Express.  Altos, which is an outgrowth of Nielson's M&A practice during his ten years in London is engaged in providing investment banking and business development services to growth oriented, emerging companies throughout the United States and Europe. Altos was retained by the Company to act as its business advisor, but that contract was concluded to coincide with the acquisition of RWT. Mr. Nielson is also a director of Advanced Communications Technologies, Inc.
 
JOHN C. KROON became our Director in April 2007 and became our Chairman of the Board in September 2010.  Dr. Kroon was born in the Netherlands and his family emigrated from Amsterdam to Ottawa, Canada in 1957. He is a dual citizen of the US and Canada.   He is a Life Senior Member of the Institute of Electrical & Electronics Engineers (IEEE).  Dr. Kroon began his career in 1958 in Ottawa as a Tech. and then Chemist for Eldorado Mining & Refining (now Cameco Corp.), engaged in Uranium mining and processing.  Dr. Kroon received both his B.Sc. (1966) and PhD degrees (1972) in Nuclear Physics from the University of Ottawa in Canada.  From 1971 he worked as a Research Scientist in Candu Reactor Instrumentation at Atomic Energy of Canada in Chalk River, Ontario, Canada and joined a start-up company Reuter Stokes Canada in Cambridge, Ontario in1972.  In 1974, Dr. Kroon transferred to Reuter-Stokes Electronic Components in Cleveland, Ohio as the VP of Applied Technology developing radiation sensor systems for oil-well logging, thickness gauging and in-core sensors for commercial and government nuclear reactors.  General Electric acquired Reuter-Stokes in 1984 and Dr. Kroon became the President of Reuter-Stokes in 1986.  This position led to a varied 17-year career with GE as a Senior Executive that included a 4-year assignment as President of GEFanuc Europe’s Industrial Automation Business in 1991, headquartered in Frankfurt and Luxembourg.  He became Vice-President of Corporate Strategies and Business Development in 1995 for GEFanuc North America in Charlottesville, Virginia and laid the groundwork for several acquisitions to further product diversification and top line growth.  From June 2002 to May 2004, Dr. Kroon was the President of ImageGuide, Inc., a medical device start-up company in Baltimore, Maryland.
 
SHANNA GERRARD has been with CoroWare since 2010 and assumed the position of Corporate Secretary in April 2011. She has over 20 years of management experience and is certified in product management and marketing.  Before coming to CoroWare, she worked in product management positions with The Church of Jesus Christ of Latter-day Saints and Intel, managing product launch and deployment of various conferencing and collaboration solutions. She has worked with information technology in a variety of industries including non-profit, semi-conductor, medical and medical technology, and legal. She has her Masters Degree in Management from Worcester Polytechnic Institute and her Bachelor’s Degree from Dartmouth University.
 
Our directors will serve until the next annual meeting of stockholders. Our executive officers are appointed by our Board of Directors and serve at the discretion of the Board of Directors.

 
-22-

 
Section 16(a) of the Securities and Exchange Act of 1934
 
Section 16 (a) of the Securities and Exchange Act of 1934 requires the Company’s officers and directors and persons who beneficially own more than 10% of the Company’s common stock (collectively, “Reporting Persons”) to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. We believe that all Reporting Persons complied with all applicable reporting requirements, except for the late filings of Form 3 (Initial Statement of Beneficial Ownership of Securities), and 4 (Statement of Changes of Beneficial Ownership of Securities) filings of John Kroon, Lloyd Spencer, Shanna Gerrard, and Martin Nielson.
 
CODE OF ETHICS DISCLOSURE COMPLIANCE
 
CoroWare has adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer and other employees performing similar functions. The Code of Ethics was revised and updated in 2007 and approved by the board on December 6, 2007. The Code of Ethics is in the investor section of our website at www.coroware.com.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
Summary Compensation Table
 
The following table sets forth the cash compensation (including cash bonuses) paid or accrued and equity awards granted by CoroWare for years ended December 31, 2011 and 2010 to our Chief Executive Officer and our two most highly compensated officers other than the Chief Executive Officer at December 31, 2011 whose total compensation exceeded $100,000.
Name & Principal Position
 
Year
 
Salary
   
Bonus
   
Stock Awards
   
Option Awards
   
Non-equity Incentive Plan Compensation
   
Change in Pension Value and Non-Qualified Deferred Compensation Earnings
   
All other Compensation
   
Totals
 
Lloyd Spencer (1)
 
2011
   
$59,542
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
59,542
 
   
2010
 
$
150,000
                                                     
$150,000
 
Jon Mandrell (2)
 
2010
 
$
110,000
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
$110,000
 
 
Notes:
 
(1)  Lloyd Spencer has served as CEO since January 28, 2008 and interim CFO since November 17, 2008. Prior to that, he was Vice President of Business Development and Director. Mr. Spencer is President of our subsidiary, CoroWare Technologies, Inc. with an annual salary of $150,000.  On May 16, 2006, Mr. Spencer entered into an employment agreement which granted him 1,667 stock options to purchase restricted shares of CoroWare’s common stock at $54 which were cancelled on December 31, 2007 and converted into restricted common stock one-for-one and issued in lieu thereof by action of the Board of Directors.  Mr. Spencer was granted 1,667 options to purchase restricted shares of CoroWare common stock at $12 on May 16, 2006. These options have a ten year term and vest ratably over three years.  On December 31, 2007 the options were re-priced from $12 to $3.  In February 2008, these options were converted to 1,667 shares of CoroWare common stock.  On September 12, 2007, Mr. Spencer was granted options to purchase restricted shares of the CoroWare common stock at $12 per share.  On December 31, 2007, the options were re-priced from $12 to $3.  As of December 31, 2010, all 5,000 of these options have vested.
 
 (2) Jon Mandrell was appointed Corporate Secretary of CoroWare on July 2, 2008 and was appointed to the Board of Directors in March 2009.  Mr. Mandrell resigned from his position as Vice President on November 12, 2010 and from his position as Corporate Secretary and from the Board of Directors on April 8, 2011.  Mr. Mandrell worked for our subsidiary, CTI, as Director and Business Unit Manager for the Robotics and Automation team for 3 years.  On January 29, 2007, CoroWare entered into a three year employment agreement with Mr. Mandrell calling for an annual salary of $110,000.  The agreement also granted Mr. Mandrell 1,333 options to purchase restricted shares of CoroWare common stock at $51 per share.  At its September 12, 2007 meeting, our board of directors approved a reduction in the exercise price of all outstanding options to $12 per share.  On December 31, 2007 the options were again re-priced from $12 to $3.  At December 31, 2010, all of those options are vested.  On September 12, 2007, Mr. Mandrell was granted options to purchase 2,000 restricted shares of CoroWare’s common stock at $12 per share.  On December 31, 2007, the options were re-priced from $12 to $3.  At December 31, 2010, all 2,000 of those options are vested.
 

 
-23-

 
Stock Option Plans
 
CoroWare’s 2005 Stock Option Plan was ratified by the Stockholders of the Corporation at a Special Meeting of the Stockholders on November 3, 2006. The plan is presently administered by our board of directors, which selects the eligible persons to whom options shall be granted, determines the number of common shares subject to each option, the exercise price therefore and the periods during which options are exercisable, interprets the provisions of the plan and, subject to certain limitations, may amend the plan. Each option granted under the plan shall be evidenced by a written agreement between the company and the optionee.  Options may be granted to employees (including officers) and directors and certain consultants and advisors.  Options granted under the plan are not transferable, except by will and the laws of descent and distribution.
 
Name
Number of Shares Underlying Options
% of Total Options Granted to Employees
Exercise Price
Expiration Date
Lloyd Spencer
(See Note 1)
5,000
14.2%
$        3.00
  9/12/2017
David Hyams
(see Note2)
5,000
14.2%
$        3.00
9/12/2017
 
Notes:
 
(1)  Lloyd Spencer has served as CEO since January 28, 2008 and interim CFO since November 17, 2008. Prior to that, he was Vice President of Business Development and Director. Mr. Spencer is President of our subsidiary, CoroWare Technologies, Inc. with an annual salary of $150,000.  On May 16, 2006, Mr. Spencer entered into an employment agreement which granted him 1,667 stock options to purchase restricted shares of CoroWare, Inc.’s common stock at $54 which were cancelled on December 31, 2007 and converted into restricted common stock one-for-one and issued in lieu thereof by action of the Board of Directors.  Mr. Spencer was granted 1,667 options to purchase restricted shares of our. common stock at $12 on May 16, 2006. These options have a ten year term and vest ratably over three years.  On December 31, 2007 the options were re-priced from $12 to $3.  In February 2008, these options were converted to 1,667 shares of our common stock.  On September 12, 2007, Mr. Spencer was granted options to purchase restricted shares of our common stock at $12 per share.  On December 31, 2007, the options were re-priced from $12 to $3.  As of December 31, 2011, all 5,000 of these options have vested. 
 
(2) Mr. Hyams entered into an employment agreement and was granted 1,667 options to purchase restricted shares of the Company’s common stock at a purchase price of $54, expiring in ten years, and vesting ratably over three years.  The Board of Directors voted to re-price these options to $12 at September 12, 2007 and again to $3 at December 31, 2007.  On February 4, 2008 these options were converted into 1,667 share of the Company’s common stock as per a directive from our board of directors.  On September 12, 2007 Mr. Hyams was grated 5,000 options to purchase restricted shares of CoroWare common stock at $12 per share.  On December 31, 2007 the options were re-priced $3.  At December 31, 2011, all 5,000 of those options are vested.
 
Except as described above no other equity awards were made in 2011 and 2010 to any of the Executive Officers.
 
Outstanding Equity Awards at Year End
 
The following table sets forth information for the named executive officers regarding the number of options and stock awards, as well as the exercise prices and expiration dates thereof, as of December 31, 2011.
 
Option Awards
   
Stock Awards
 
Name
 
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
   
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable (1)
   
Equity
Incentive
Plan
Awards:
Number
of
Securities Underlying
Unexercised
Unearned
Options
(#)
   
Option
Exercise
Price
($)
   
Option
Expiration
Date
   
Number
of Shares
or Units
of Stock
That Have
Not
Vested
(#)
   
Market
Value of
Shares or
Units of
Stock
That Have
Not
Vested
($)
   
Equity
Incentive
Plan Awards:
Number
of
Unearned
Shares,
Units or
Other Rights
That Have
Not
Vested
(#)
   
Equity Incentive
Plan Awards:
Market or Payout
Value
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
($)
 
Lloyd Spencer
   
5,000
     
-
     
-
   
$
3
     
9/2017
     
-
     
-
     
-
     
-
 
David Hyams
   
5,000
     
-
     
-
   
$
3
     
9/2017
     
-
     
-
     
-
     
-
 
 
(1) These awards rest ratably over three years from the date of grant and are exercisable for ten years.

 
-24-

 
 
Director's Compensation
 
CoroWare, Inc. has not paid and does not presently propose to pay cash compensation to any director for acting in such capacity.  For 2011 and 2010 services, each director was awarded 4,500,000 restricted shares of our common stock.  In addition, the chairman was awarded 2,250,000 shares.  Neither director has received his shares for 2011 services.  A liability has been established for $9,374 for the remaining board fees that have yet to be paid.
 
The directors received the following common stock issuances for their service in 2011 and 2010:
 
Director
 
Restricted Common Stock Issued in 2011 for services
   
Value
   
Restricted Common Stock Issued in 2010 for services
   
Value
 
Martin Nielson
   
-
   
$
-
     
803,592
   
$
2,250
 
John Kroon
   
-
     
-
     
-
     
-
 
                         
  Total
   
-
   
$
-
     
803,592
   
$
2,250
 
 
Employment Agreements with Executive Officers
 
Currently there is an employment agreement with Lloyd Spencer, CEO and interim CFO of CoroWare, Inc., and President and CEO of CoroWare Technologies, Inc.  We entered into a five year employment agreement with Mr. Spencer on May 16, 2006.  Under the terms of this agreement, Mr. Spencer is to serve as the President of CoroWare and to provide services as needed.  His salary is $150,000 per annum, of which $125,281 was deferred in 2010.  During 2011, Mr. Spencer reduced his annual salary to 59,541, of which $40,000 was deferred.  An annual bonus may be awarded at the discretion of the board of directors.  At the inception of the agreement, Mr. Spencer was awarded 16,667 stock options to purchase CoroWare, Inc. common stock at $5.40 per share.  These options vest annually over three years and terminate on the tenth anniversary of the date of grant.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 31, 2011 by each person or entity known by us to be the beneficial owner of more than 5% of any class of our voting securities, each of our directors and named executive officers, and all of our directors and executive officers as a group. Beneficial ownership has been determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended. Generally, a person is deemed to be the beneficial owner of a security if he has the right to acquire voting or investment power within 60 days.
 
Percentage ownership in the following table is based on 2,153,324,939 shares of common stock outstanding and 100,000 shares of Series D Convertible Preferred Stock outstanding as of April 11, 2012. A person is deemed to be the beneficial owner of securities that can be acquired by that person within 60 days from April 11, 2012 upon the exercise of options, warrants or convertible securities, or other rights. Each beneficial owner's percentage ownership is determined by dividing the number of shares beneficially owned by that person by the base number of outstanding shares, increased to reflect the shares underlying options, warrants, convertible securities, or other rights included in that person's holdings, but not those underlying shares held by any other person.
 
-25-

 
Name and Address of Beneficial Owner
 
Amount and Nature of Common Stock Beneficial Ownership
 
Percent of Class
Lloyd Spencer
       
18529 NE 184th Street
 
10,842,917
 
0.504%
Woodinville, WA  98072
       
Shanna Gerrard
       
131 Wildwood Dr
 
1,000,000
 
  0.046%
Prescott AZ 86305
       
Martin Nielsen
       
12111 Hilltop Drive
 
2,317,412
 
0.108%
Los Altos, CA 94024
       
John Kroon
       
PO Box 3846
 
28,739
 
0.001%
Rancho Santa Fe, CA 92067
       
         
Directors and Officers as a Group (4 persons)
 
14,189,068
 
0.659%
         
 
Name of Series D Stockholder
 
 
 
Number of Shares of Common Stock Held
Number of Shares of Series D Preferred held
   
Number of Votes held by such Series D Stockholder(1)
   
Number of Votes
   
Percentage of the Voting Equity
 
Lloyd Spencer
 
 
10,842,917
 
60,000
     
6,000,000,000
     
6,010,841,917
     
48.9
%
Shanna Gerrard
 
 
1,000,000
 
20,000
     
2,000,000,000
     
2,001,000,000
     
16.3%
 
Jared Robert
 
 
103,448,276
 
20,000
     
2,000,000,000
     
2,103,448,276
     
17.1%
 
 
(1)  
Each share of Series D Convertible Preferred Stock (“Series D Preferred”) has the equivalent of one hundred thousand (100,000) votes of common stock. Currently, there are 3 holders of Series D Preferred Stock, namely Lloyd Spencer (60,000 shares), Shanna Gerrard (20,000 shares) and Jared Robert (20,000 shares)_ (together, the “ Series D Stockholders”), collectively holding 100,000 shares of Series D Preferred, resulting in the Series D Stockholders holding in the aggregate a majority of the total voting power of all issued and outstanding voting shares of the Company.
 
 
 
-26-

 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
No director, executive officer or nominee for election as a director of our company, and no owner of five percent or more of our outstanding shares or any member of their immediate family has entered into or proposed any transaction in which the amount involved exceeds $60,000 except as set forth below.
 
During October 2007, several current directors and officers invested $35,000 in Series C preferred stock, which is described in Note 12 in the notes to financial statements.  In April 2008, all of the Series C preferred shareholders converted their investments into CoroWare common stock.
 
We also entered into short-term debt obligations other than in the ordinary course of business.  The following table sets forth the pertinent information relating to the obligations:
 
Lender
 
Interest Rate
   
Original Amount of Loan
   
Outstanding Balance at December 31, 2011
 
Date of Loan
Due Date
Rick Wynns
   
5
%
 
$
27,500
   
$
-
 
Jul 22, 2005
Dec 31, 2007
Rick Wynns
   
21
%
 
$
25,000
   
$
25,000
 
Jul 27, 2010
Jan 23, 2011
Amy Spencer
   
18
%
 
$
50,000
   
$
50,000
 
Jul 3, 2008
Dec 20, 2008
                             
Raphael Cariou
   
18
%
 
$
87,900
   
$
-
 
Jul 3–Dec 19, 2008
Various dates thru Jun 30, 2009
John Kroon
   
18
%
 
$
10,000
   
$
10,000
 
Mar 17, 2010
Sep 13, 2010
Lloyd Spencer
   
18
%
 
$
223,629
   
$
118,913
 
Feb 2 – Aug 14, 2009
Various dates thru Mar 16, 2010
                             
                             
 
On July 22, 2005 CoroWare borrowed $30,000 from a beneficial shareholder and then-director, Rick Wynns, and entered into a short term note requiring interest at the annual rate of 5%, maturing in six months, and principal and accrued interest are convertible into CoroWare common stock at $0.15 per share. A payment of $2,500 was made during the 4th quarter of 2006.  The due date of the note was extended to December 31, 2008.  To date there have been no conversions.  In addition in October 2005 we entered into a second short-term obligation with Mr. Wynns for $30,000.  The note bears interest at 10% and matured in April 2006.  A $20,000 principal payment was made on this note in May 2006.  The due date of the note was extended to December 31, 2007.   In October 2005, we entered into a third short-term obligation with Mr. Wynns for $30,000.  This note bears interest at 10% and also matured in April 2006.  This note was also extended through December 31, 2007.  During the 4th quarter of 2010, Mr. Wynns sold $40,000 of these notes to an outside third party and then made an additional loan to the Company of $25,000 bearing interest at 21% and maturing January 23, 2011.  That note is currently in default.
 
In July 2008 CTI entered into a short-term debt obligation totaling $50,000 with Amy Spencer.  The entire balance of the loan plus accrued interest at 1.5% per month was due on December 20, 2008.  The note was not paid at maturity and is currently accruing late fees of 0.5% per month in addition to the interest.
 
During 2008, CoroWare borrowed an aggregate $62,900 from Raphael Cariou, a shareholder and employee of CoroWare.  The notes bear interest at 18% and mature on various dates beginning December 20, 2008 and running through June 30, 2009.  Cash payments of $6,200 were made during 2010.  All of the notes are currently in default and accruing late fees of 0.5% per month in addition to the interest.
 
During 2009, CoroWare borrowed an aggregate $223,629 from Lloyd Spencer, our CEO and a shareholder.  The notes bear interest at 18% and mature on various dates from July 2009 through March 2010.  During 2010, the Company made cash payments of $40,018 towards these loans and issued 10,000,000 shares of stock valued at $50,000.   All of the remaining notes are currently in default and accruing late fees of 0.5% per month in addition to the interest.
 
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
(1) Audit Fees
 
The aggregate fees billed for professional services rendered by LBB & Associates Ltd., LLP and Lake & Associates CPAs LLC for the audit of the Registrant's annual financial statements and review of the financial statements included in the Registrant's Forms 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for fiscal years 2011 and 2010, were $70,848 and $68,000, respectively.

 
-27-

 
(2) Audit Related Fees
 
The aggregate fees billed for professional services rendered by LBB & Associates Ltd., LLP and Lake & Associates CPAs LLC for audit related fees for fiscal years 2011 and 2010 were $0 and $2,000, respectively.
 
(3) Tax Fees
 
The aggregate fees billed for professional services rendered by LBB & Associates Ltd., LLP and Lake & Associates CPAs LLC for the preparation of the Registrant's tax returns, including tax planning for fiscal years 2011 and 2010 were $0 and $0, respectively.
 
(4) All Other Fees
 
No other fees were paid to LBB & Associates Ltd., LLP and Lake & Associates CPAs LLC for fiscal years 2011 and 2010.
 
(5) Audit Committee Policies and Procedures
 
The Registrant does have an audit committee. The Board of Directors of the Registrant approved all of the services rendered to the Registrant by LBB & Associates Ltd., LLP and Lake & Associates for fiscal years 2011 and 2010.
 
(6) Audit Work Attributed to Persons Other than LBB & Associates Ltd., LLP and Lake & Associates CPAs LLC
 
Not applicable.

 
-28-

 
PART IV
 
ITEM 15.  EXHIBITS
 
Exhibit
 
Description
     
2.4
 
Agreement and Plan of Merger among the Company, RWT Acquisition, Inc and Robotic Workspace Technologies, Inc. dated July 21, 2004. (5)
     
3.1
 
Articles of Incorporation (2)
     
3.1.1
 
Amendment to Articles of Incorporation as of January 3, 2012
     
3.2
 
Bylaws (2)
 
 4.1
 
4.2
 
 
  Certificate of Designation of Series D Convertible Preferred Stock dated November 10, 2011 (  )
 
Certificate of Designation of Series E Convertible Preferred Stock dated March 9, 2012 (  )
 
10.17
 
Registration Rights Agreement with Cornell Capital Partners, LP dated June 14, 2005 (10)
     
10.18
 
Escrow Agreement with Cornell Capital Partners, LP and David Gonzalez, Esq. dated June 14, 2005 (10)
     
10.19
 
Promissory Note for $300,000 issued to Cornell Capital Partners, LP dated June 14, 2005 (10)
     
10.21
 
Securities Purchase Agreement with Cornell Capital Partners, LP dated October 7, 2005 (11)
     
10.22
 
Registration Rights with Cornell Capital Partners, LP dated October 7, 2005 (11)
     
10.23
 
Convertible Debenture issued to Cornell Capital Partners, LP dated October 7, 2005 (11)
     
10.24
 
Security Agreement with Cornell Capital Partners, LP dated October 7, 2005 (11)
     
10.25
 
Escrow Agreement with David Gonzalez and Cornell Capital Partners, LP dated October 7, 2005 (11)

 
-29-

 
10.28
 
Stock Option Plan adopted on April 12, 2005 and amended on April 12, 2006 (14)
     
10.29
 
Amended and Restated Stock Option Plan amended on July 24, 2006 (15)
     
10.30
 
Convertible Debenture dated July 21, 2006 (16)
     
10.31
 
Form of $0.05 Warrant (16)
     
10.32
 
Form of $0.10 Warrant (16)
     
10.33
 
Form of $0.025 Warrant (16)
     
10.34
 
Form of $0.065 Warrant (16)
     
10.35
 
Form of $0.075 Warrant (16)
     
10.36
 
Securities Purchase Agreement dated July 21, 2006 between the Company and Cornell (16)
     
10.37
 
Investor Registration Rights Agreement dated July 21, 2006 between the Company and Cornell (16)
 
10.38
 
Security Agreement dated July 21, 2006 by and between the Company and Cornell (16)
     
 10.39
 
Subsidiary Security Agreement dated July 21, 2006 by and between CoroWare Technologies, Inc. and Cornell (16)
     
10.41
 
Asset Purchase Agreement by and among Innova Holdings, Inc., CoroWare Technologies Inc. and CoroWare, Inc. dated May 12, 2006. (18)
     
10.42
 
Form of Executive Employment Agreement. (18)

 
-30-

 
10.44
 
Conversion Agreement dated as of October 19, 2007, by and between Innova Robotics and Automation, Inc. and Jerry Horne (22)
     
10.45
 
Securities Purchase Agreement, dated October 25t, 2007 (22)
     
10.46
 
Secured Convertible Debenture, dated October 25th, 2007 (22)
     
10.47
 
Redemption Warrant, dated October 25th , 2007 (22)
     
10.48
 
Registration Rights Agreement, dated October 25th, 2007 (22)
     
10.49
 
Security Agreement, dated October 25th, 2007 (22)
     
10.50
 
Robotic Workspace Technologies, Inc. Patent and Trademark Agreement, dated October 25th, 2007 (22)
     
10.51
 
Form of Series C Convertible Preferred Stock Subscription Agreement, dated October 13, 2007 (22)
     
10.52
 
Form of Warrant, dated October 13, 2007 (22)
     
10.53
 
Certificate of Designation (22)
 
 10.54
 
Employment Termination and Retirement Agreement, dated December 18, 2007 (21)
     
10.55
 
Consulting Agreement, dated December 18, 2007 (21)
     
10.56
 
 Securities Purchase Agreement, dated March 20th, 2008 (23)
     
10.57
 
 Secured Convertible Debenture, dated March 20th, 2008 (23)
     
10.58
 
Warrant, dated March 20th, 2008 (23)
     
10.59
 
Registration Rights Agreement, dated March 20th, 2008 (23)
     
10.60
 
Security Agreement, dated November 2nd, 2007 (23)
     
10.61
 
Patent and Trademark Security Agreement, dated October 29th, 2007 (23)
     
10.62
 
Amendment Agreement, dated March 20th, 2008 (23)
     
10.63
 
Amendment to Articles of Incorporation dated April 23, 2008

 
-31-

 
10.64
 
2008 Incentive Stock Plan
     
10.65
 
Amended 2008 Incentive Stock Plan
     
10.66
 
Amendment to Articles of Incorporation dated January 23, 2009
     
10.67
 
Joint Venture Agreement
     
14.1
 
Code of Ethics
     
21.1
 
List of Subsidiaries *
 
31
 
Rule 13(a) -14(a)/15d-14(a) Certification of Principal Executive Officer and Principal Financial Officer*
     
32
 
Section 1350 Certification of Chief Executive Officer  and Principal Financial Officer*
 
* Filed herewith
 
(1)
Incorporated by reference to the Form 8-K filed on February 4, 2003.
 
(2)
Incorporated by reference to the Form SB-2 filed on August 7, 2001.
 
(3)
Incorporated by reference to the Form 10-KSB filed on April 24, 2003.
 
(4)
Incorporated by reference to the Form 8-K filed on May 13, 2003.
 
(5)
Incorporated by reference to the Form 8-K filed on August 8, 2004.
 
(6)
Incorporated by reference to the Form 14C filed on June 30, 2004.
 
(7)
Incorporated by reference to the Form 8-K filed on September 28, 2004.
 
(8)
Incorporated by reference to the Form 8-K filed on January 11, 2005.
 
(9)
Incorporated by reference to the Form 10-KSB filed on April 19, 2005.
 
(10)
Incorporated by reference to the Form 8-K filed on June 16, 2005.
 
(11)
Incorporated by reference to the Form 8-K filed on October 19, 2006.
 
(12)
Incorporated by reference to the Form 8-K filed on July 6, 2005.
 
(13)
Incorporated by reference to the Form 8-K filed on January 27, 2006.
 
(14)
Incorporated by reference to the Form 10-KSB filed on April 19, 2006.

 
-32-

 
(15)
Incorporated by reference to Amendment 1 to the Schedule 14A filed on July 31, 2006.
 
(16)
Incorporated by reference to the Form 8-K filed on July 25, 2006.
 
(17)
Incorporated by reference to the Form 8-K filed on June 22, 2006.
 
(18)
Incorporated by reference to the Form 8-K filed on May 22, 2006.
 
 (19)
Incorporated by reference to the Form 8-K filed on May 3, 2006.
 
(20)
Incorporated by reference to the Registration Statement on Form SB-2 filed on November 9, 2007.
 
(21)
Incorporated by reference to the Form 8-K filed on December 26, 2007.
 
(22)
Incorporated by reference to the Registration Statement on Form S-1 filed on February 13, 2008
 
(23)
Incorporated by reference to the Form 8-K filed on March 26, 2008.
   
 (24)
Incorporated by reference to the Form 10-KSB filed April 15, 2008
   
 (25)
Incorporated by reference to the Form 8-K filed on May 14, 2008.
   
 (26)
Incorporated by reference to the Form 10-Q filed on May 20, 2008.
   
 (27)
Incorporated by reference to the Form S-8 filed on May 29, 2008.
   
 (28)
Incorporated by reference to the Form S-8 filed on July 30, 2008.
   
 (29)
Incorporated by reference to the Form 10-Q filed on August 19, 2008.
   
 (30)
Incorporated by reference to the Form 8-K filed on November 19, 2008.
   
 (31)
Incorporated by reference to the Form 10-Q filed on November 19, 2008.
   
 (32)
Incorporated by reference to the Form 8-K filed on March 18, 2009.
   
(33)
Incorporated by reference to the Form 8-K filed on April 7, 2009.
   
(34)
Incorporated by reference to the Form 5 filed on May 12, 2009.

 
-33-

 
   
(35)
Incorporated by reference to the Form 10-K filed on May 18, 2009.
   
(36)
Incorporated by reference to the Form 10Q filed on May 20, 2009.
   
(37)
Incorporated by reference to the Form 8-K filed on August 7, 2009.
   
(38)
Incorporated by reference to the Form 10Q filed on August 19, 2009.
   
(39)
Incorporated by reference to the Form 8-K filed on August 28, 2009.
   
(40)
Incorporated by reference to the Form 8-K filed on October 22, 2009.
   
(41)
Incorporated by reference to the Form 10Q filed on November 23, 2009.
   
(42)
Incorporated by reference to the Form S-8 filed on December 16, 2009.
   
(43)
Incorporated by reference to the Form 8-K filed on January 10, 2010.
   
(44)
Incorporated by reference to the Form S-8 filed on March 29, 2010.
 
(45)
Incorporated by reference to the Form 10K filed on May 12, 2010.
   
(46)
Incorporated by reference to the Form 10Q filed on May 24, 2010.
   
(47)
Incorporated by reference to the Form 10Q filed on August 23, 2010.
   
(48)
Incorporated by reference to the Form 8K filed on September 17, 2010.
   
(49)
Incorporated by reference to the Form 10Q filed on November 22, 2010.
   
(50)
Incorporated by reference to the Form SC 13G filed on December 2, 2010.
   
(51)
Incorporated by reference to the Form S-8 filed on December 21, 2010.
   
(52)
Incorporated by reference to the Form 10K/A filed on January 5, 2011.
   
(53)
Incorporated by reference to the Form S-8 POS filed on February 22, 2011.
   
(54)
Incorporated by reference to the Form 8K filed on March 16, 2011.
   

 
-34-

 
(55)
Incorporated by reference to the Form NT 10-K filed on March 30, 2011.
   
(56)
Incorporated by reference to the Form 8K filed on April 14, 2011.
   
(57)
Incorporated by reference to the Form 10K filed on April 15, 2011.
   
(58)
Incorporated by reference to the Form NT 10-Q filed on May 16, 2011.
   
(59)
Incorporated by reference to the Form 10-Q filed on June 6, 2011.
   
(60)
Incorporated by reference to the Form Pre 14C filed on June 24, 2011.
   
(61)
Incorporated by reference to the Form Def 14A filed on July 29, 2011.
   
(62)
Incorporated by reference to the Form NT 10-Q filed on August 15, 2011.
   
(63)
Incorporated by reference to the Form Defr 14A filed on August 18, 2011.
   
(64)
Incorporated by reference to the Form 10-Q filed on August 19, 2011.
   
(65)
Incorporated by reference to the Form 10-Q/A filed on September 22, 2011.
   
(66)
Incorporated by reference to the Form 8K filed on September 23, 2011.
   
(67)
Incorporated by reference to the Form 3 filed on October 3, 2011.
   
(68)
Incorporated by reference to the Form 4 filed on October 3, 2011.
   
(69)
Incorporated by reference to the Form 8K filed on November 9, 2011.
   
(70)
Incorporated by reference to the Form 8KA filed on November 14, 2011.
   
(71)
Incorporated by reference to the Form NT 10-Q filed on November 14, 2011.
   
(72)
Incorporated by reference to the Form 8K filed on November 16, 2011.
   
(73)
Incorporated by reference to the Form Pre 14C filed on November 16, 2011.
   
(74)
Incorporated by reference to the Form 10-Q filed on November 21, 2011.
   
(75)
 
   
(76)
 
   
(77)
 
   
(78)
Incorporated by reference to the Form 8K/A filed December 12, 2011.
   
(79)
Incorporated by reference to the Form 8K/A filed on December 12, 2011.
   
(80)
Incorporated by reference to the Form Pre 14C filed on December 12, 2011.
   
(81)
Incorporated by reference to the Form Def 14C filed on December 12, 2011
   
(82)
Incorporated by reference to the Form 8K/A filed on December 13, 2011.
   
(83)
Incorporated by reference to the Form S-8 filed on March 7, 2012.
   
(84)
Incorporated by reference to the Form 8-K filed on March 7, 2012.
   
(85)
Incorporated by reference to the Form NT-10K filed on March 30, 2012.
   
   
   

 
-35-

 
 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Dated:  April 16, 2012
 
 
COROWARE, INC.
 
       
 
By:
/s/ Lloyd T. Spencer
 
   
Lloyd T. Spencer
 
   
Chief Executive Officer and
Interim Chief Financial Officer
(Principal Executive Officer and Principal Accounting and Financial Officer)
 
       
 
In accordance with the Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
         
/s/ Lloyd T. Spencer
       
Lloyd T. Spencer
 
Chief Executive Officer and Interim Chief Financial Officer, Director (Principal Executive Officer and Principal Accounting and Financial Officer),
 
April 16, 2012
         
/s/ John Kroon
       
John Kroon
 
Chairman of the Board of Directors
 
April 16, 2012
         
/s/ Martin Nielson
       
Martin Nielson
 
Director
 
April 16, 2012
         
         
         
 
 

 
-36-

 
 
Index to Financial Statements
 
   
Page
 
Report of Independent Registered Public Accounting Firm
   
F-2
 
         
Consolidated Balance Sheets as of December 31, 2011 and December 31, 2010
   
F-3
 
         
Consolidated Statements of Operations for the Years Ended December 31, 2011 and December 31, 2010
   
F-4
 
         
Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 2011 and December 31, 2010
   
F-5 – F-6
 
         
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 and December 31, 2010
   
F-7 – F-8
 
         
Notes to Consolidated Financial Statements
   
F-9 – F-32
 

 
F-1

 
 
 

LBB & ASSOCIATES LTD., LLP
10260 Westheimer Road, Suite 310
Houston, TX 77042
Phone: (713) 800-4343 Fax: (713) 456-2408

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
CoroWare, Inc.
Kirkland, WA

We have audited the accompanying consolidated balance sheet of CoroWare, Inc. (the “Company”) as of December 31, 2010 and the related consolidated statements of operations, stockholders' deficit, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoroWare, Inc. as of December 31, 2010 and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company’s recurring losses from operations, and its need for additional financing in order to fund its projected loss in 2011 raise substantial doubt about its ability to continue as a going concern. The 2010 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ LBB & Associates Ltd., LLP
LBB & Associates Ltd., LLP

Houston, Texas
April 14, 2011

 
 
F-2

 
 

 
COROWARE, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2011 and 2010

ASSETS
 
   
2011
   
2010
 
   
Current assets:
           
Cash
 
$
522
   
$
-
 
Accounts receivable, net
   
129,438
     
188,988
 
Inventory
   
3,783
     
4,818
 
Other current assets
   
7,518
     
3,673
 
Total current assets
   
141,261
     
204,479
 
Property and equipment, net
   
24,333
     
31,391
 
Intangible assets, net
   
-
     
11,081
 
Other assets, net
   
6,927
     
4,731
 
 TOTAL ASSETS     172,521       251,682  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
Current liabilities:
               
Lines of credit
 
$
125,456
   
$
124,991
 
Obligations collateralized by receivables
   
107,730
     
102,389
 
Accounts payable and accrued expenses
   
4,442,905
     
3,811,415
 
Accrued expenses, related parties
   
111,466
     
150,536
 
Notes payable
   
202,232
     
263,133
 
Notes payable, related parties
   
208,913
     
292,812
 
Derivative liability
   
2,798,366
     
1,825,216
 
Current maturities of convertible debt, net of discount
   
2,206,247
     
2,292,410
 
Redeemable preferred stock, Series B, $.001 par value, 525,000
               
     shares authorized, 159,666 shares issued and outstanding     
   
106,443
     
260,958
 
Redeemable preferred stock, Series D, $.001 par value, 500,000
               
     shares authorized, 100,000 shares issued and outstanding     
   
75,901
     
-
 
Small business administration loan
   
980,450
     
982,450
 
Total current liabilities
   
11,366,110
     
10,106,310
 
                 
Convertible debentures, net of current maturities
   
149,107
     
 
                    Total liabilities
   
11,515,217
     
10,106,310
 
Commitments
               
                 
Stockholders’ deficit:
               
Common stock, $.001 par value, 900,000,000 shares authorized,
               
    796,117,874 and 88,590,637 shares issued and 796,117,040 and 88,589,803
               
    outstanding at December 31, 2010 and 2009, respectively
   
796,118
     
88,591
 
Additional paid-in capital
   
15,363,451
     
15,530,450
 
Accumulated deficit
   
(27,466,565
)
   
(25,437,969
)
Treasury stock
   
(35,700
)
   
(35,700
)
Total stockholders’ deficit
   
(11,342,696
)
   
(9,854,629
)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
$
172,521
   
$
251,682
 


The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-3

 
 

COROWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2011 and 2010

   
2011
   
2010
 
             
Revenues
 
$
1,799,352
   
$
2,009,563
 
                 
Cost of revenues
   
1,214,737
     
1,502,230
 
                 
Gross profit
   
584,615
     
507,333
 
                 
Operating expenses:
               
General and administration
   
863,299
     
954,001
 
Sales and marketing
   
314,195
     
339,032
 
Research and development
   
122,221
     
92,959
 
Depreciation and amortization
   
21,765
     
41,933
 
                 
Total operating expenses
   
1,321,480
     
1,427,925
 
                 
Loss from operations before other income (expense)
   
(736,865
)
   
(920,592
)
                 
Other income (expense):
               
Gain on sale of patents
   
-
     
-
 
Interest expense
   
  (804,893)
     
(624,204
)
Derivative income (expense)
   
(485,772)
     
453,921
 
Other income
           
31,265
 
Gain (loss) on debt redemptions
   
(76,582)
     
50,726
 
Gain (Loss) on extinguishment of debt
   
75,517
         
         Total other income (expense)
   
(1,291,730
)
   
(88,292
)
                 
Net loss
 
$
(2,028,596
)
 
$
(1,008,884
)
Net loss per share:
               
Basic and diluted
  $
(0.00)
    $
(0.05)
 
Weighted average shares outstanding – Basic and diluted
   
43,152,766,014
     
22,266,735
 
                 
                 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-4

 
 
COROWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
For the Year Ended December 31, 2011

   
Common Stock
 
 Additional
       
   
Shares
   
Amount
 
Paid-in Capital
Accumulated Deficit
Treasury Stock
 
Total
                         
Balances, December 31, 2010
   
88,590,637
   
$
88,591
 
$
15,530,450
$
(25,437,969
)
 
$
(35,700
)
$
(9,854,628)
                                       
Common stock issued in satisfaction of payables
   
196,789,147
     
196,789
   
84,062
 
-
       
-
 
280,851
 
Common stock issued for services and compensation
   
1,000,000
     
1,000
   
2,300
   
-
     
-
 
3,300
 
Common stock issued for redemption of convertible debenture
   
436,373,253
     
436,373
   
(184,308)
   
-
     
-
 
252,065
                                       
                                       
 
Common stock issued for notes payable
   
73,364,837
     
73,365
   
5,239
 
-
     
-
   
78,604
                                       
                                       
Transfer preferred stock to liability
                 
(74,292)
               
(74,292) 
                                       
Net loss
                     
(2,028,596)
       
 
(2,028,596)
                                       
Balances, December 31, 2011
   
796,118,874
   
$
796,118
 
$
15,363,451
$
($27,466,565)
   
$
(35,700
)
$
(11,342,696)
                                       
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-5

 
 
COROWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
For the Year Ended December 31, 2010

   
Common Stock
             
   
Shares
   
Amount
 
Additional
Paid-in Capital
Accumulated
Deficit
   
Treasury
Stock
   
Total
 
                               
Balances, December 31, 2009
   
4,506,191
   
$
4,506
 
$
14,901,673
$
(24,429,085
)
 
$      (35,700
)
  $
( 9,558,606
)
                                         
Common stock issued in satisfaction of payables
   
50,541,118
     
50,541
   
310,787
 
-
   
-
     
361,328
 
Common stock issued for services and compensation
   
11,432,471
     
11,433
   
130,220
 
-
   
-
     
141,653
 
Common stock issued for redemption of convertible
  debenture
   
20,360,857
     
20,361
   
162,386
 
-
   
-
     
182,747
 
Stock option expense
   
-
     
-
   
20,134
 
-
   
-
     
20,134
 
Common stock issued for investment in joint venture
   
1,750,000
     
1,750
   
5,250
 
-
   
-
     
7,000
 
Net loss
   
-
     
-
   
-
 
(1,008,884
)
 
-
     
(1,008,884
)
                                         
Balances, December 31, 2010
   
88,590,637
   
$
88,591
 
$
15,530,450
$
(25,437,969
)
 
$      (35,700
)
  $
(9,854,628
)


The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
F-6

 
 
COROWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2011 and 2010

   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
 
$
(2,028,596
)
 
$
(1,008,884
)
Adjustments to reconcile net loss to cash flows from
               
operating activities:
               
Depreciation and amortization
   
21,765
     
41,933
 
Stock issued for services and compensation
   
3,300
     
141,653
 
Stock option expense
           
20,134
 
Amortization of debt discount
   
297,209
     
62,005
 
Amortization of deferred financing costs
   
6,805
     
6,250
 
Derivative (income) loss
   
485,772
     
(453,921)
 
(Gain) loss on debt redemptions
   
(75,516)
     
(50,726)
 
Changes in operating assets and liabilities:
               
    Accounts receivable, net
   
59,550
     
127
 
    Inventory
   
1,035
     
1,939
 
    Other assets
   
2,155
     
25,305
 
    Accounts payable and accrued expenses
   
1,161,640
     
1,067,436
 
    Accrued expenses, related parties
   
(6,387)
     
62,098
 
NET CASH FLOWS FROM OPERATING ACTIVITIES
   
(71,268
)
   
(84,651
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Additions to property and equipment
   
(3,626)
     
-
 
NET CASH FLOWS FROM INVESTING ACTIVITIES
   
(3,626)
     
-
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net proceeds from obligations collateralized by receivables
   
5,341
     
102,389
 
Net proceeds from lines of credit
   
465
     
1,295
 
Proceeds from convertible debt financings
   
80,000
     
-
 
Payments on long-term debt
   
(2,000)
     
-
 
Payments on notes payable
   
(8,692
)
   
(101,948
)
Payments on notes payable, related parties
   
(14,698
)
   
(46,218
)
Proceeds from notes payable
   
15,000
     
80,640
 
Proceeds from notes payable, related parties
   
-
     
45,000
 
NET CASH FLOWS FROM FINANCING ACTIVITIES
   
75,416
     
81,158
 
                 
NET CHANGE IN CASH
   
522
     
(3,493
)
Cash, beginning of year
   
-
     
3,493
 
Cash, end of year
 
$
522
   
$
-
 
                 
 
Continued.
 
 
F-7

 
 
COROWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31, 2011 and 2010
 
   
2011
   
2010
 
SUPPLEMENTAL CASH FLOW INFORMATION
           
Interest paid
 
$
   
$
500
 
                 
Income taxes paid
 
$
   
$
-
 
                 
NON CASH INVESTING AND FINANCING TRANSACTIONS
               
                 
Common stock issued for joint venture contribution
 
$
-
   
$
7,000
 
Common stock issued in satisfaction of accounts and notes payable
 
$
280,849
   
$
361,328
 
Common stock issued for redemption of convertible debentures
 
$
330,669
   
$
182,747
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
F-8

 

 
COROWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2010

NOTE 1 - NATURE OF THE COMPANY, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation and consolidation policy:

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, CoroWare Technologies, Inc. (“CTI”), Innova Robotics, Inc. (“IR”), Robotic Workspace Technologies, Inc. (“RWT”), and Robotics Software Services, Inc. (“RSS”) (Herein are referred to as the “Subsidiaries”). All significant inter-company balances and transactions have been eliminated in the consolidated financial statements.

Nature of the Company:

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

COROWARE TECHNOLOGIES, INC.

CoroWare Technologies comprises three separately managed lines of business:
·
CoroWare Business Solutions: (CBS) IT and lab management; business intelligence, software architecture, design and development; content delivery; partner and program management.
·
Robotics and Automation:   (R&A) Custom engineering such as visualization, simulation and software development; and mobile robot platforms for university, government and corporate researchers.
·
Enhanced Collaboration Solutions: (ECS) High definition video conferencing and communications products, solutions and subscription services.
 
 
F-9

 
NOTE 1 - NATURE OF THE COMPANY, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Summary of significant accounting policies:

Cash and cash equivalents:

Cash and cash equivalents include cash and all highly liquid financial instruments with original purchased maturities of three months or less.

Accounts receivable:

The Company’s accounts receivable are exposed to credit risk. During the normal course of business, the Company extends unsecured credit to its customers with normal and traditional trade terms. Typically credit terms require payments to be made by the thirtieth day following the sale.  The Company regularly evaluates and monitors the creditworthiness of each customer.  The Company provides an allowance for doubtful accounts based on our continuing evaluation of its customers’ credit risk and its overall collection history. At December 31, 2011 and December 31, 2010, no allowance was deemed necessary.

Property and equipment:

Property and equipment are stated at cost less accumulated depreciation. Major renovations, renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over the estimated useful lives which are generally five to ten years.

Intangible assets:

The Company’s intangible assets, which are recorded at cost, consist primarily of the unamortized cost basis of employment contracts and customer lists.  These assets were amortized on a straight line basis over the estimated useful lives ranging from 3 to 5 years and are fully amortized as of December 31, 2011.

Impairment of long-lived assets:

The Company evaluates the carrying value and recoverability of its long-lived assets when circumstances warrant such evaluation by applying the provisions of FASB ASC 360-35, Property, Plant and Equipment, Subsequent Measurement. FASB ASC 360-35 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
 
Deferred finance costs:

Deferred finance costs are associated with the convertible debenture financings (see Note 9) and are being amortized on a straight line basis over the term of the underlying debt instrument.  Upon conversion, the deferred finance cost associated with the converted amount is amortized.

Income taxes:

Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. Additionally, taxes are calculated and expensed in accordance with applicable tax code.

 
 
F-10

 
NOTE 1 - NATURE OF THE COMPANY, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Financial instruments:

Financial instruments, as defined in FASB ASC 825, Financial Instruments, consist of cash, accounts receivable, accounts payable, accrued expenses, notes payable, derivative financial instruments, and debt.

The Company carries cash, accounts receivable, accounts payable and accrued expenses at historical costs; their respective estimated fair values approximate carrying values due to their current nature.  The Company also carries notes payable and convertible debt.  The fair values of these notes payable and convertible debt instruments approximate carrying values based on the comparable market interest rates applicable to similar instruments.

Derivative financial instruments, as defined in FASB ASC 815, Derivatives and Hedging, consist of financial instruments or other contracts that contain a notional amount and one or more underlying variables (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. The caption Derivative Liability consists of (i) the fair values associated with derivative features embedded in the convertible debt financings and (ii) the fair values of the detachable warrants that were issued in connection with those financing arrangements.

The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by FASB ASC 815, these instruments are required to be carried as derivative liabilities, at fair value, in its financial statements.

Share-based payments:

Stock based compensation expense is recorded in accordance with FASB ASC 718, Compensation – Stock Compensation, for stock and stock options awarded in return for services rendered.  The expense is measured at the grant-date fair value of the award and recognized as compensation expense on a straight line basis over the service period, which is the vesting period.  The Company estimates forfeitures that it expects will occur and records expense based upon the number of awards expected to vest.