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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012

or

¨ 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: 333-150332

MACROSOLVE, INC.
(Exact name of registrant as specified in its charter)

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

1717 South Boulder Ave., Suite 700
Tulsa, Oklahoma 74119
(Address of principal executive offices) (zip code)

(918) 280-8693
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes o  No x
Note: The Company is a voluntary filer but has filed all reports it would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months if it was a mandatory filer.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No 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 o
 Smaller reporting company x
(Do not check if a smaller reporting company)
 
                                                                                    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No   x.

As of November 5, 2012 there were 179,831,987 shares of the registrant’s common stock outstanding. 
 
 
 
 


INDEX
       
PART I.
FINANCIAL INFORMATION
 
       
  4
       
   
4
       
   
5
       
   
6
       
   
7-12
       
 
13-20
       
 
21
       
 
21
       
PART II.
OTHER INFORMATION
 
       
 
22
 
23
 
23
 
23
 
23
 
23
 
23
       
 
24

 
 
 
 
 
 
MACROSOLVE, INC.
 
 
Interim Unaudited Financial Statements
 
 
For the Period Ended September 30, 2012
 
 
 
 
 
 
 
 
 
 
           
             
           
             
   
9/30/2012
   
12/31/2011
 
             
ASSETS
           
             
CURRENT ASSETS:
           
     Cash
  $ 314,811     $ 273,132  
     Accounts receivable - trade
    185,257       288,201  
     Prepaid expenses and other
    537,377       240,388  
                 
          Total current assets
    1,037,445       801,721  
                 
PROPERTY AND EQUIPMENT, at cost:
    21,650       285,976  
     Less - accumulated depreciation
    (19,350 )     (188,016 )
                 
          Net property and equipment
    2,300       97,960  
                 
OTHER ASSETS:
               
     Investment in DecisionPoint Systems, Inc.
    642,928       -  
     Note receivable
    -       135,577  
     Software development costs, net of accumulated amortization
               
        of $36,316 as of December 31, 2011
    -       1,280,903  
     Other assets
    60,362       83,329  
                 
          Total other assets
    703,290       1,499,809  
                 
TOTAL ASSETS
  $ 1,743,035     $ 2,399,490  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
     Current maturities of long-term debt
  $ 90,000     $ -  
     Revolving Line of Credit
    90,000       100,000  
     Note Payable - Shareholders
    -       169,306  
     Accounts payable - trade and accrued liabilities
    167,047       631,419  
     Unearned income
    500,000       31,400  
                 
          Total current liabilities
    847,047       932,125  
                 
LONG-TERM DEBT, less current maturities
               
    Note Payable - Shareholders
    533,681       -  
    Oklahoma Technology Commercialization Center
    147,500       237,500  
    Convertible debentures
    150,000       2,621,161  
          Total long-term debt, less current maturities
    831,181       2,858,661  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' EQUITY:
               
Common stock, $.01 par value; authorized 500,000,000 shares;
         
issued and outstanding 178,467,855 and 122,386,894 shares, at
         
        September 30, 2012 and December 31, 2011, respectively
    1,784,678       1,223,869  
     Additional paid-in capital
    13,226,705       10,059,029  
     Accumulated other comprehensive income
    (107,072 )     -  
     Accumulated deficit
    (14,839,504 )     (12,674,194 )
                 
          Total stockholders' (deficit) equity
    64,807       (1,391,296 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 1,743,035     $ 2,399,490  
 
The accompanying notes are an integral part of these statements.
 
 
MACROSOLVE, INC.
                       
                         
                       
   
For the Quarters Ended
   
Year to Date
       
For the Periods Ended September 30,
 
9/30/2012
   
9/30/2011
   
2012
   
2011
 
                         
 
                       
REVENUES:
                       
     Software products and licensing
  $ 558,738     $ 432,095     $ 1,565,579     $ 543,835  
     Solution services
    -       -       415,411       223,691  
                                 
     Net revenues
    558,738       432,095       1,980,990       767,526  
                                 
COST OF REVENUES:
                               
     Software products and licensing
    261,444       175,358       640,808       218,993  
     Solution services
    -       -       218,837       101,779  
                                 
     Total cost of revenues
    261,444       175,358       859,645       320,772  
                                 
     Gross profit
    297,294       256,737       1,121,345       446,754  
                                 
OPERATING EXPENSES:
                               
     Solution services
    -       -       323,208       286,656  
     Depreciation and amortization
    293,742       744       490,361       124,471  
     Marketing and sales
    19,641       21,057       770,883       71,854  
     General and administrative
    422,221       398,336       1,288,499       1,267,631  
                                 
     Total operating expenses
    735,604       420,137       2,872,951       1,750,612  
                                 
     Loss from operations
    (438,310 )     (163,400 )     (1,751,606 )     (1,303,858 )
                                 
OTHER INCOME (EXPENSE):
                               
     Interest income
    25       18       53       104  
     Interest expense
    (21,317 )     (57,664 )     (138,186 )     (94,609 )
     Loss on disposal of asset
    (3,486 )     -       (4,247 )     (235 )
     Stock based compensation
    (17,538 )     (21,747 )     (73,965 )     (74,285 )
                                 
     Total other expense
    (42,316 )     (79,393 )     (216,345 )     (169,025 )
                                 
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    (480,626 )     (242,793 )     (1,967,951 )     (1,472,883 )
                                 
INCOME TAXES
    -       -       -       -  
                                 
NET LOSS FROM CONTINUING OPERATIONS
    (480,626 )     (242,793 )     (1,967,951 )     (1,472,883 )
                                 
DISCONTINUED OPERATIONS (NOTE 11)
                               
    Loss from operations of discontinued Illume Mobile operations,
                               
    (including loss on disposal of $54,538)
    (197,387 )     (371,891 )     (197,387 )     (371,891 )
                                 
NET LOSS
    (678,013 )     (614,684 )     (2,165,338 )     (1,844,774 )
                                 
OTHER COMPREHENSIVE INCOME, net of tax
                               
   Unrealized holding loss arising during the period
    (107,072 )     -       (107,072 )     -  
                                 
COMPREHENSIVE INCOME
  $ (785,085 )   $ (614,684 )   $ (2,272,410 )   $ (1,844,774 )
                                 
LOSS ALLOCABLE TO COMMON STOCKHOLDERS:
                               
     Net loss
  $ (678,013 )   $ (614,684 )   $ (2,165,338 )   $ (1,844,774 )
                                 
     Loss allocable to common stockholders
  $ (678,013 )   $ (614,684 )   $ (2,165,338 )   $ (1,844,774 )
                                 
Basic and diluted loss per share
  $ (0.01 )   $ (0.01 )   $ (0.01 )   $ (0.01 )
 
The accompanying notes are an integral part of these statements.
 
 
 
MACROSOLVE, INC.
           
             
           
             
For the Periods Ended September 30,
 
9/30/2012
   
9/30/2011
 
             
             
OPERATING ACTIVITIES:
           
     Net loss
  $ (2,165,338 )   $ (1,844,814 )
     Adjustments to reconcile net loss to net cash
               
       provided by (used in) operating activities:
               
          Depreciation and amortization
    516,693       186,246  
          Stock based compensation
    80,068       73,002  
          Issuance of stock for services
    223,500       672,000  
          Changes in current assets and liabilities:
               
          Decrease (Increase) in accounts receivable - trade
    115,419       (86,826 )
          Decrease in inventory
    -       11,840  
          Decrease (Increase) in prepaid expenses and other
    222,744       (232,749 )
          Decrease in note receivable
    135,577       -  
          (Decrease) Increase in accounts payable - trade and
               
                accrued liabilities
    (290,394 )     326,102  
          Increase in accrued debenture interest
    107,641       -  
          Increase in unearned income
    5,571       26,285  
                 
          Net cash (used in) operating activities
    (1,048,519 )     (868,914 )
                 
INVESTING ACTIVITIES:
               
     Cash received from sale of Illume Mobile
    250,000       -  
     Software development costs
    (233,390 )     (459,576 )
     Purchase of equipment
    (8,580 )     (25,643 )
     Disposal of equipment
    4,246       237  
                 
          Net cash provided (used in) by investing activities
    12,276       (484,982 )
                 
FINANCING ACTIVITIES:
               
     Net Proceeds from debenture financing
    500,000       1,250,000  
     Common stock issued for debenture conversions
    -       50,000  
     Reduction of accrued debenture interest
    (233,782 )     -  
     Common stock issued for accrued debenture interest
    216,330       -  
     Proceeds from shareholder loans, including accrued interest
    790,621       156,240  
     Repayment of shareholder loans, including accrued interest
    (115,247 )     (51,062 )
     Shareholder loans converted to debentures
    (320,000 )     -  
     Proceeds from sale of common stock
    250,000       -  
     Repayments of notes payable
    -       (34,176 )
     Deferred offering costs
    -       (8,170 )
     Proceeds from bank line of credit
    -       300,000  
     Repayment of bank line of credit
    (10,000 )     (100,000 )
                 
          Net cash provided by financing activities
    1,077,922       1,562,832  
                 
NET INCREASE IN CASH
    41,679       208,936  
                 
CASH, beginning of period
    273,132       187,025  
                 
CASH, end of period
  $ 314,811     $ 395,961  
 
The accompanying notes are an integral part of these statements.
 
 
MacroSolve, Inc.

For the Period Ended September 30, 2012

 
1.  
BASIS OF PRESENTATION

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  The information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements not misleading.  The financial statements as of December 31, 2011 have been audited by an independent registered public accounting firm. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s 10K for the calendar year ended December 31, 2011.
 
2.
DESCRIPTION OF BUSINESS

MacroSolve, Inc. is an Oklahoma corporation formed on January 17, 1997, under the laws of the State of Oklahoma and conducted business as Illume Mobile, engaged in the design, delivery and integration of custom solutions for the application of mobile technology in business processes. The Company is currently empowering a new era of mobile innovators seeking advisory services and IP services.

3.
NOTE RECEIVABLE
 
Note receivable at September 30, 2012 and December 31, 2011
Consist of the following
    Sept 30, 2012        Dec 31, 2011  
                 
Convertible promissory note with a customer negotiated as part of a strategic alliance. Under the Master Services Agreement, customer may borrow up to $150,000 to finance development work with interest accrued monthly at prime rate plus 5% (8.25% at September 30, 2009), due June 30, 2011. The Company has written the note off as uncollectible due to collection costs, its change in business strategy and the unavailability of key personnel due to the sale of Illume Mobile in July 2012.   $  -     $ 135,577  
 
4.  
INVESTMENT IN DECISIONPOINT SYSTEMS, INC.

As further described in Note #11, on July 31, 2012, the Company sold the Illume Mobile assets and operations to DecisionPoint Systems, Inc. (DPSI) for $250,000 cash and 617,284 shares of DPSI stock valued at $1.215 per share or a total of $750,000. In accordance with ASU 2011-05, the stock is classified as available-for-sale equity and the unrealized market gains or losses are recorded as Other Comprehensive Income. Due to the volatility and thin trading of DPSI shares, the Company has determined that the fair market value on the measurement date will be computed from the volume-weighted average trading price for the entire quarter. The unrealized loss of the investment consists of the following:
 
DPSI stock
 
FMV
   
Number of Shares
   
September 30, 2012
   
December 31, 2011
 
                         
Basis at acquisition July 31, 2012
  $ 1.215       617,284     $ 750,000     $ -  
Quarter ended September 30, 2012
  $ 1.042       617,284     $ 642,928     $ -  
Unrealied market loss
                  $ 107,072     $ -  
                                 

 
 
5.  
DEBENTURES AND NOTES PAYABLE
 
Note receivable at September 30, 2012 and December 31, 2011
Consist of the following:
  Sept 30, 2012     Dec 31, 2011  
             
On July 17, 2011, the Company began offering its Convertible Debentures Series 2011 and Series B Warrants to purchase common stock to accredited investors. The Debentures mature on December 31, 2016. The Company did not establish a minimum or maximum offering size; its goal was $1,000,000 in aggregate subscriptions exclusive of the exchange of previously issued debentures. The $725,000 proceeds from this offering have been used by the Company for working capital to increase its market share from the sale of mobile apps in dining and other vertical markets and may include working capital for acquired companies. On December 31, 2011, three Directors converted a total of $171,161 in short term promissory notes to the offering. The offering was closed as of December 31, 2011.
               
                 
The 2011 Debentures earn interest at the annual rate of 12% which will be paid quarterly exclusively from the Debenture Account. Principal on the Debentures will be prepaid quarterly as the Debenture Account permits. The Debenture Account will be set up with a financial institution for the deposit of 25% of any recovery it receives from any judgment or settlement in any infringement case or claim it prosecutes. The Debentures may be converted to common stock by the holder into the number of shares that could have been purchased with 200% of the principal amount of the Debenture, together with accrued and unpaid interest and the shares valued using the weighted average price for a five-day trading period preceding the Debenture investment provided however, that the conversion price shall not be less than ten cents per share at any time and the conversion price shall not be more than ten cents per share for investments made prior to October 1, 2011. By resolution of the Board on December 16, 2011, the ten cent conversion price per share was extended to investments made after October 1, 2011. The Investors also acquired Common Stock Series B Warrants in an amount equal to the shares of common stock that could be purchased at the Debenture conversion price. Each warrant has a term of five years.                
                 
During the nine months of 2012, eighteen of the nineteen investors elected to convert a total of $846,161 Debenture Series 2011 plus Series B Warrants into 16,923,227 shares of common stock. A total of $45,941 in accrued interest on the converted debentures was settled with 459,412 shares of common stock. Accrued interest as September 30, 2012 is $5,688   $  50,000     $  -  
                 
On April 11, 2011, the Company began offering its Convertible Debentures Series 2011 and Series A Warrants to purchase common stock to accredited investors. The Debentures mature on December 31, 2016. The Company did not establish a minimum or maximum offering size; its goal was $1,000,000 in aggregate subscriptions exclusive of the exchange of previously issued debentures. The proceeds from this offering were used by the Company for working capital to increase its market share from the sale of mobile apps in dining and other vertical markets and may include working capital for acquired companies. The offering was closed on July 13, 2011 with a total of $950,000 in new investments and $725,000 in converted investments.                
                 
The 2011 Debentures earn interest at the annual rate of 12% which will be paid quarterly exclusively from the Debenture Account. Principal on the Debentures will be prepaid quarterly as the Debenture Account permits. The Debenture Account will be set up with a financial institution for the deposit of 25% of any recovery it receives from any judgment or settlement in any infringement case or claim it prosecutes. The Debentures may be converted to common stock by the holder into the number of shares that could have been purchased with 200% of the principal amount of the Debenture, together with accrued and unpaid interest and the shares valued using the weighted average price for a five-day trading period preceding the Debenture investment. The Investors also acquired Common Stock Series A Warrants in an amount equal to the shares of common stock that could be purchased at 50% of the Debenture conversion price. Each warrant has a term of five years.                
                 
During the first nine months of 2012, fifteen of the sixteen investors elected to convert a total of $1,575,000,000 Debenture Series 2011 plus Series A Warrants into 16,831,553 shares of common stock. A total of $179,312 in accrued interest on the converted debentures was settled, $16,167 in cash and $163,145 with 870,543 shares of common stock. Accrued interest as of September 30, 2012 is $15,363.   $  100,000     $  -  
                 
On November 8, 2010, the Company began selling Convertible Debentures Series 2010 plus Series B Warrants. The Company did not establish a minimum or maximum offering size; however, it exceeded its goal of $750,000 in aggregate subscriptions.   The debentures accrue interest at 2.0% per annum with interest paid at maturity. The offering was closed on November 17, 2010.                
                 
The Debentures may be converted into Common Stock by the holders after June 30, 2011. Upon conversion the holder will be entitled to receive the number of shares of Common Stock that could be purchased with two hundred percent (200%) of the face amount of the Debentures together with accrued interest and with the Common Stock valued using the weighted average price for the five-day trading period before the notice of conversion.                
                 
Investors acquired common stock purchase warrants, designated by the Company as Class B Warrants, in an amount equal to fifty percent (50%) of the shares of common stock that would be issued upon conversion of the Debentures upon issue. The Warrants have a termination date of December 31, 2015 and have an initial exercise price equal to the weighted average price of the common stock upon grant of the Warrants.                
 
 
During the first nine months of 2012, the remaining investor elected to convert a total of $50,000 Debenture Series 2010 plus Series B Warrants into 940,734 shares of common stock.  Accrued interest of $1,285 was settled in full during September, 2012.   $  -     $ 925,000  
                 
Advancing term loan with a financial institution of up to $100,000 with interest only payable monthly at the greater of 5.75% or prime rate plus 1.0% (4.25% at September 30, 2012), until September 2012, and secured by substantially all assets of the company and the personal guarantees of a company director. In exchange for the guaranty, the director receives a $3,000 commitment fee and a five year warrant to purchase $100,000 of stock with a strike price of ten cents ($0.10) per share. The loan was repaid in October 2012 and was not renewed.     $  90,000     $  -  
                 
Note from the State of Oklahoma Technology Business Finance Program (OTCC loan) represented by a $150,000 refundable award to be repaid at two times the amount of the award.  The balance includes accrued interest (imputed at 14.27%), through September 2007.  The repayment terms were modified in September, 2007 to require 24 equal monthly installments of $12,500, consisting of principal only, beginning May, 2008.  The monthly payments were suspended in October 2008. Monthly repayments of $7,500 recommenced in October 2012.    $  237,500     $ 237,500  
                 
As of September 30, 2012, maturities of long-term debt are:  $180,000 in 2012 and $822,181 thereafter, including the Shareholder loans.                
 
6.
SHAREHOLDER LOANS

In May and June, 2012, four directors loaned the Company a total of $449,300 for working capital. In July, 2012, three directors loaned a total of $50,000 for working capital. The notes were secured by the unencumbered 75% of patent settlement license fees secondary to the security interest of a financial institution and provided for accrued interest at 12% payable on maturity at September 30, 2012. The total accrued interest on shareholder loans which matured September 30, 2012 was $25,381. Two directors were owed $9,000 for guaranteeing the advancing term loans in 2011 and 2012. The total amount due to the four directors of $533,681, including accrued interest and loan guarantees, was rolled over into new notes dated September 30, 2012. The new notes are secured by the unencumbered 75% of patent settlement license fees and provide for accrued interest at 6% payable on maturity at January 1, 2015. The accrued interest at September 30, 2012 is $-0-.
 
 
7. 
EMPLOYEE STOCK PLANS

A summary of activity under the Employee Stock Plans as of September 30, 2012 and changes during the period then ended is presented below:
                                                                                                                                            
    Stock Options    
Restricted
Stock
 
                   
   
 
Options
   
Weighted
Average
Exercise Price
   
 
 Shares
 
 
Outstanding – June 30, 2012
    33,336,613     $ 0.31        5,712,010  
 
Exercisable – June 30, 2012
    5,761,013     $ 0.52        -  
 
Granted
     -     $ 0.00       2,713,170  
 
Exercised or Vested
     -     $ 0.00       (3,120,833 )
 
Forfeited or Expired
    (17,894,910 )   $ 0.33       ( - )
 
Outstanding – September 30, 2012
    15,441,703     $ 0.35       5,304,347  
 
Exercisable –  September 30, 2012
    5,394,503     $ 0.51        -  

The weighted-average grant-date calculated value of options granted during the period ended September 30, 2012 is not applicable.  Options outstanding at September 30, 2012 had an aggregate intrinsic value of $0 and a weighted-average remaining contractual term of 2.2 years. Options that were exercisable at September 30, 2012 had an aggregate intrinsic value of $-0- and a weighted-average remaining contractual term of 2.0 years.

A summary of the status of the Company’s nonvested options and restricted stock as of and for the Quarters Ended September 30, 2012 June 30, 2012 and March 31, 2012 is presented below:
 
    Stock Options        
                   
 
 
Nonvested Shares
 
 
 
 Options
   
Weighted-
Average Grant
Date.Calculated Value
   
 
Restricted
Stock
 
 
Nonvested - Beginning of Year 2012
    6,028,450     $ -       2,990,356  
 
Granted
     -     $ -       3,120,833  
 
Vested
    (49,600 )   $ -       (1,206,933 )
 
Forfeited
    (1,250 )   $ -       ( 30,000 )
 
Nonvested–Quarter Ended March 31, 2012
     5,977,600     $ -       4,874,256  
 
Granted
     27,700,000     $ -       1,833,986  
 
Vested
    (202,000 )   $ -       (996,232 )
 
Forfeited or cancelled
    (5,900,000 )   $ -        -  
 
Nonvested–Quarter Ended June 30, 2012
    27,575,600     $ -       5,712,010  
 
Granted
    -     $ -       2,713,170  
 
Vested
    -     $ -       (3,120,833 )
 
Forfeited or cancelled
    (17,528,400 )   $ -        -  
 
Nonvested–Quarter Ended Sept 30, 2012
    10,047,200     $ -       5,304,347  

As of September 30, 2012, there was $-0- unrecognized compensation cost related to nonvested share-based compensation arrangements under the stock bonus plan. The weighted-average remaining vesting period is 5.9 months.

 
8. 
SHAREHOLDERS’ EQUITY
 
The Company issued a total of 3,515,105 common shares in the quarter ended September 30, 2012, described further as follows:
 
The Company’s independent directors annual compensation is $16,000 to be paid quarterly in restricted stock. The Company issued the directors 280,700 shares of restricted stock on July 1, 2012 for their second quarter 2012 compensation.
 
The Company issued 3,234,405 shares of common stock to management employees in lieu of $141,938 cash compensation for services rendered in the second quarter of 2012 which had been recorded at a value of $2,713.17 in stock based compensation based upon individual tax elections made by each recipient. The shares vest six months after issuance and are subject to forfeiture upon voluntary termination of employment.
 
9. 
EARNINGS (LOSS) PER SHARE

The Company has calculated the loss allocable to the common shareholders for the periods ended September, 2012 and 2011:
 
   
For the Quarters Ended
   
For the Nine Months Ended
 
   
September 30, 2012
   
September 30, 2011
   
September 30, 2012
   
September 30, 2011
 
Numerator:
                       
Net Loss
  $ (480,626 )   $ (242,793 )   $ (1,967,951 )   $ (1,472,883 )
Numerator for basic and diluted
  $ (480,626 )   $ (242,793 )   $ (1,967,951 )   $ (1,472,883 )
                                 
Denominator:
                               
Weighted-average number of
                               
common shares outstanding
    176,710,333       108,419,466       162,690,085       104,962,483  
                                 
    $ (0.01 )   $ (0.01 )   $ (0.01 )   $ (0.01 )

10.
RELATED PARTY TRANSACTION

The Company wrote down as impaired $293,000 in MoBiz360 net capitalized development costs. In May 2012, MoBiz360, an incomplete prototype website marketplace, was conveyed to Clint Parr, the Company’s former president and CEO, as consideration for an undetermined equity interest in Mr. Parr’s new company. As of September 30, 2012, Mr. Parr’s company is still not operational. At such time as it becomes operational, the Company will record the value of its investment associated with the conveyance of MoBiz360.

11.
DISCONTINUED OPERATIONS PURSUANT TO THE SALE OF ILLUME MOBILE ASSETS

In July 2012, the Company began negotiations with DecisionPoint Systems, Inc. to sell the Illume Mobile assets and operations. On July 31, 2012 (the “Closing Date”), MacroSolve, Inc. (the "Company”) entered into an asset purchase agreement (the “Purchase Agreement”) with DecisionPoint Systems, Inc. (the “Buyer”). Pursuant to the Purchase Agreement, effective on the Closing Date, the Company sold substantially all of the assets relating to its Illume Mobile business, for a purchase price of $1,000,000, of which $250,000 was paid in cash and $750,000 was paid in the form of 617,284 shares of the Buyer’s common stock (valued at $1.215 per share based on the 20 day volume weighted average price agreed between the parties).

The Company has the right to receive an earn-out payment from the Buyer (the “Earn-Out Payment”) of up to $500,000 (of which 50% will be paid in cash, and 50% will be paid in shares of common stock of the Buyer, valued at the last closing price of the Buyer’s common stock on the one year anniversary of the Closing Date). The Earn-Out Payment is incremental based upon net revenues. If net revenue is $3,000,000 or more, the entire Earn-Out Payment will be due. The Company has determined that the $3,000,000 net revenue is feasible and has recorded the total potential earn-out as a $500,000 account receivable offset by an equal amount of deferred revenue.

In connection with the Purchase Agreement, on the Closing Date, the Company and the Buyer entered into a patent license agreement (the “License Agreement”), pursuant to which the Company granted the Buyer a non-exclusive license under a patent held by the Company pertaining to information collection using mobile computers (the “Licensed Patent”) to make, have made, sell, offer for sale or import any product or service which in the absence of the License Agreement would infringe at least one claim of the Licensed Patent (including specifically the Company’s ReForm™ Development Platform) in and into the United States and to practice the Licensed Methods (as defined in the License Agreement), in the United States, during the term of the Licensed Patent. The Buyer agreed to pay the Company a licensing fee/royalty payment of (i) 7.5% of Net Revenues (as defined in the License Agreement) received from the sale of Software Products (as defined in the License Agreement) and/or Licensed Methods, and (ii) 5% of Net Revenues from the sale of Custom Development Services (as defined in the License Agreement). The Company also granted the Buyer an option to purchase a non-exclusive perpetual license under the Licensed Patent at a purchase price of $500,000. The Company has accrued an estimated $9,656 in other receivables.

In connection with the Purchase Agreement, on the Closing Date, the Company and the Buyer entered into a non-competition and non-solicitation agreement (the “Non-Competition Agreement”). Pursuant to the Non-Competition Agreement, for a period of three years commencing on the Closing Date, the Company agreed not to engage in activities in the United States and Canada competitive with the products sold by the Company’s Illume Mobile business as of July 31, 2012, and the Buyer agreed not to engage in activities in the United States and Canada competitive with the products sold by the Company (not related to the assets sold pursuant to the Purchase Agreement). The Company also agreed, for a period of three years, commencing on the Closing Date, not to solicit or hire (unless such employee has been terminated by the Buyer) employees of the Buyer, and the Buyer agreed, for a period of three years commencing on the Closing Date, not to solicit employees of the Company (except as contemplated by the Purchase Agreement).
 
 
12.
SUBSEQUENT EVENTS

The Company issued 1,016,304 shares of compensation shares to management employees in lieu of $46,750 cash compensation for services rendered during the third quarter of 2012 which had been recorded at a value of $1,016 in stock based compensation based upon individual tax elections made by each recipient. The shares were awarded on Restricted Stock Agreements which have a six month time lapse restriction and are subject to forfeiture upon voluntary termination of employment.
 
The Company’s independent directors annual compensation is $16,000 to be paid quarterly in restricted stock. The Company issued each director 86,957 shares of restricted stock on October 1, 2012 for their third quarter 2012 compensation. The Company recorded $4,000 in stock based compensation for each of its four independent directors.

Director Resignations and Appointment of Officers

On October 3, 2012, David Humphrey, Dale Schoenefeld and Steve Signoff each resigned for personal reasons as a Company director. None of the directors expressed any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. On October 3, 2012, the Board of Directors appointed James C. McGill as Chairman of the Board of Directors, President and Chief Executive Officer and Kendall Carpenter as Executive Vice President, Chief Financial Officer and Secretary.
 
13.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
Cash paid during Nine Months ended September 30, 2012 and 2011 are:
 
   
2012
   
2011
 
             
Interest
  $ 46,631     $ 14,351  
                 
Income taxes
  $ -     $ -  
 
Noncash activities are as follows for the Nine Months ended September 30, 2012 and 2011 are:
 
   
 
2012
    2011  
             
Stock based compensation
  $ 80,068     $ 73,002  
                 
Stock issued for services
  $ 223,500     $ 672,000  
                 
Stock issued for debenture interest
  $ 216,330     $ 50,000  
                 
Stock received from DecisionPoint Systems
               
  for sale of Illume Mobile assets, less unrealized
               
  accumulated market loss of $107,072
  $ 642,928     $ -  


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

Certain statements in Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “would,” “expect,” “intend,” “could,” “estimate,” “should,” “anticipate,” or “believe.” and similar expressions.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight including changes in the trends of the mobile computing industry, formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.  Readers should carefully review the risk factors and related notes included under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on March 13, 2012.

Business Overview

MacroSolve, Inc. (“MacroSolve,” “we,” “us,” or the “Company”) is an Oklahoma corporation formed on January 17, 1997, under the laws of the State of Oklahoma.  We are focused on intellectual property licensing and enforcement of our patent in the mobile app market development space.  We also offer consulting services related to mobile app development, marketing and financing of mobile app businesses. Our principal executive offices are located at 1717 South Boulder, Tulsa, Oklahoma 74119.

Since March 2011, we have been protecting our intellectual property rights against entities we have identified as potentially infringing our rights. In October 2010, we received U.S. patent #7,822,816, which addresses mobile information collection systems across all wireless networks, smart phones, tablets, and rugged mobile devices, regardless of carrier and manufacturer. To date, complaints have been filed against 71 defendants and we are continuously identifying potential infringers with numerous potential infringers identified as of the date of this report. Out of these lawsuits, we have received 38 settlements in the form of non-exclusive, perpetual paid-up licenses for licensed products or for royalties based on a percentage of revenue.  

Recent Transactions

On July 31, 2012 (the “Closing Date”), the Company entered into an asset purchase agreement (the “Purchase Agreement”) with DecisionPoint Systems, Inc. (the “Buyer”). Pursuant to the Purchase Agreement, effective on the Closing Date, the Company sold substantially all of the assets relating to its Illume Mobile business, for a purchase price of $1,000,000, of which $250,000 was paid in cash and $750,000 was paid in the form of 617,284 shares of the Buyer’s common stock (valued at $1.215 per share based on the 20 day volume weighted average price). The Company has the right to receive an earn-out payment from the Buyer (the “Earn-Out Payment”) of up to $500,000 (of which 50% will be paid in cash, and 50% will be paid in shares of common stock of the Buyer, valued at the last closing price of the Buyer’s common stock on the one year anniversary of the Closing Date), within 30 days of the one year anniversary of the Closing Date, which will be determined as follows:

(a)  If Net Revenue (as defined in the Purchase Agreement) attributable to the assets purchased under the Purchase Agreement, during the one year period commencing on the Closing Date) is $1,500,000 or less, the Earn-Out Payment will be $0;

(b)   If Net Revenue is greater than $1,500,000 but less than $2,000,000, the Earn-Out Payment will be $100,000;

(c)  If Net Revenue is at least $2,000,000 but less than $3,000,000, the Earn-Out Payment will be equal to the sum of (i) $100,000 plus (ii) 40% of the amount that the Net Revenue amount exceeds $2,000,000; and

(d) If Net Revenue is $3,000,000 or more, the Earn-Out Payment will be $500,000.
 

In connection with the Purchase Agreement, on the Closing Date, the Company and the Buyer entered into a patent license agreement (the “License Agreement”), pursuant to which the Company granted the Buyer a non-exclusive license under a patent held by the Company pertaining to information collection using mobile computers (the “Licensed Patent”) to make, have made, sell, offer for sale or import any product or service which in the absence of the License Agreement would infringe at least one claim of the Licensed Patent (including specifically the Company’s ReForm™ Development Platform) in and into the United States and to practice the Licensed Methods (as defined in the License Agreement), in the United States, during the term of the Licensed Patent. The Buyer agreed to pay the Company a licensing fee/royalty payment of (i) 7.5% of Net Revenues (as defined in the License Agreement) received from the sale of Software Products (as defined in the License Agreement) and/or Licensed Methods, and (ii) 5% of Net Revenues from the sale of Custom Development Services (as defined in the License Agreement). The Company also granted the Buyer an option to purchase a non-exclusive perpetual license under the Licensed Patent at a purchase price of $500,000.

In connection with the Purchase Agreement, on the Closing Date, the Company and the Buyer entered into a non-competition and non-solicitation agreement (the “Non-Competition Agreement”). Pursuant to the Non-Competition Agreement, for a period of three years commencing on the Closing Date, the Company agreed not to engage in activities in the United States and Canada competitive with the products sold by the Company’s Illume Mobile business as of July 31, 2012, and the Buyer agreed not to engage in activities in the United States and Canada competitive with the products sold by the Company (not related to the assets sold pursuant to the Purchase Agreement). The Company also agreed, for a period of three years, commencing on the Closing Date, not to solicit or hire (unless such employee has been terminated by the Buyer) employees of the Buyer, and the Buyer agreed, for a period of three years commencing on the Closing Date, not to solicit employees of the Company (except as contemplated by the Purchase Agreement).

Accordingly, all operating results disclosed in this quarterly report only include the results from continuing operations, and exclude the results for the Illume Mobile business, which are presented as discontinued operations.  

Results of Operations

Quarter Ended September 30, 2012 compared to Quarter Ended September 30, 2011 (all references are to the Quarter Ended September 30)
 
Net Revenues:  Net revenues increased $127,000 or 29%, to $559,000 in the quarter ended September 30, 2012 from $432,000 for the same period in 2011.   Sources of revenue were derived from our IP licensing and software products.  

Cost of Revenues and Gross Profit:  Cost of revenues for the quarter ended September 30, 2012 increased $86,000, or 49%, from $175,000 for the quarter ended September 30, 2011 to $261,000 in 2012. Costs include contingent legal fees and other costs associated with enforcing our intellectual property. The resulting gross profit for the quarter ended September 30, 2012 of $297,000 was up $40,000, or 16%, over the gross profit for the quarter ended September 30, 2011 of $257,000.  Gross profit margins were 53% and 59% for the third quarters of 2012 and 2011, respectively.

Operating Expenses:  Operating expenses primarily consist of general and administrative expenses and depreciation and amortization expenses.  G&A expenses increased by $24,000 of 6%, to $422,000 in the quarter ended September 30, 2012 from $387,000 for the same period in 2011. Corporate branding and awareness expenses decreased $96,000. We wrote off as uncollectible $135,000 in note receivables from a former customer due to collection and legal costs, our change in business strategy and the unavailability of key personnel to substantiate damages. Financial advisory services paid in cash increased $32,000 as the result of payment of $55,000 to two former executives as partial consideration of their separation agreements offset by a $23,000 reduction in payments for investor relations. Non-cash financial advisory services decreased by $38,000 as stock compensation for services was fully amortized. The remaining $9,000 decrease is attributable to lower occupancy costs as a result of the sale of Illume Mobile assets and operations.  We amortized $293,000 in MoBiz360 net capitalized development costs. In May 2012, MoBiz360, an incomplete prototype website marketplace, was conveyed to Clint Parr, our former president and CEO, as consideration for an equity interest in Mr. Parr’s new company. As of September 30, 2012, Mr. Parr’s company is still not operational. At such time as it becomes operational, we will record the value of our investment associated with the conveyance of MoBiz360. The ownership of Mr. Parr’s company will be determined by the carried value of MoBiz360 on our books divided by the value per unit of ownership in his company.  If Mr. Parr’s company is a C corporation, the value per unit will be the price per common share. Depreciation and amortization expense unrelated to the MoBiz360 write down and attributable to assets retained for continuing operations was approximately $1,000 for the quarters ended September 30, 2012 and 2011.
 

Loss from Operations:  Loss from operations for the quarter ended September 30, 2012 of $438,000 was up $275,000, or 169%, from the loss from operations in 2011 of $163,000, primarily due to the $293,000 amortization of MoBiz360 offset by cost savings related to the reduction in corporate overhead following the sale of Illume Mobile assets.

Other Income and Expense:  Total other expenses of $42,000 in the third quarter of 2012 decreased $37,000, or 47%, over the total of $79,000 in 2011.  This decrease is due to a $37,000 decrease in interest expense associated with 2011 debentures that were converted to stock in 2012.
 
Net Loss from Operations: Net loss of $481,000 as of September 30, 2012 was up $238,000, or 98%, from the net loss for the same quarter in 2011 of $243,000, primarily as a result of the factors described above.

Nine Months Ended September 30, 2012 compared to Nine Months Ended September 30, 2011 (all references are to the Nine Months Ended September 30)

Net Revenues: Net revenues from operations increased $1,213,000 or 158%, to $1,981,000 in the nine months ended September 30, 2012 from $768,000 for the same period in 2011.  Sources of revenue were derived from our intellectual property licensing, software products, and services.  Licensing revenues represented a significant increase in net revenues with an increase of $1,022,000 or 188%, for the period to $1,566,000 from $544,000 for the same period in 2011, which increase is primarily attributable to the licensing of our products and intellectual property. Services revenue increased $191,000, or 85%, in 2012 to $415,000 from $224,000 for the same period in 2011.  This was primarily due revenues generated by custom mobile app development through July 31, 2012, when the Illume Mobile operating division was sold.

Cost of Revenues and Gross Profit:  Cost of revenues for the nine months ended September 30, 2012 increased $539,000, or 151%, from $321,000 in the first nine months of 2011 to $860,000 in 2012. Legal costs associated with licenses sold were $618,000, or 52%, of the first nine months of 2012 cost of revenues. The resulting gross profit from operations for the nine months ended September 30, 2012 of $1,121,000 was up $674,000, or 151%, over the gross profit for the first nine months of 2011 of $447,000.  Gross profit margins were 57% and 58% for the first nine months of 2012 and 2011, respectively.

Operating Expenses:  Operating expenses from operations include marketing and sales expenses, general and administrative expenses and depreciation and amortization expenses. Marketing, sales and unabsorbed operating expenses increased by $735,000, depreciation and amortization increased by $366,000 and G&A expenses increased by $20,000 for a net increase of $1,122,000, or 64%, in the first nine months of 2012 to $2,873,000 from $1,751,000 in 2011. The increase in sales, marketing and unabsorbed operations expenses is primary due to payroll and benefits for 11 additional employees hired in 2012 to support growth. The G&A increase is primarily due to the $135,000 note receivable write down and $58,000 increase in salaries and benefits associated with a new CEO employed in August 2011 offset by a $168,000 decrease in corporate branding and awareness expenses in 2012, a $26,000 decrease in 2012 financial advisory services and $14,000 in tax rebates received in 2012 from the Oklahoma Quality Jobs program. Amortization expense primarily increased by $337,000 for MoBiz 360, including its one-time amortization of net capitalized development costs of $293,000 and amortization of Illume Mobile products including DineInsight, ReForm iPhone, Blackberry and Android of $161,000 in 2012 compared to $129,000 in 2011, an increase of $32,000.

Loss from Operations:  Loss from operations for the first nine months of 2012 was $1,752,000, an increase of $448,000, or 34%, from the loss from operations in 2011 of $1,304,000 as a result of the one-time $293,000 non-cash write down of the MoBiz360 business and a $135,000 uncollectible note receivable.

Other Income and Expense:  Total other expense of $216,000 in 2012 represented an increase of 28%, or $47,000, from $169,000 in 2011. This increase is due a $43,000 increase in interest expense associated with 2011 debentures that were converted to stock in 2012 and a $4,000 expense related to the net book value of computers that were given to three corporate executives not retained after the sale of Illume Mobile.
  
Net Loss from Operations:  Net loss from operations of $1,968,000 for the first nine months of 2012 was up $495,000, or 34%, than the net loss of $1,476,000 for the same period in 2011 as a result of the factors described above.
 

Liquidity and Capital Resources

As of September 30, 2012, the Company had total current assets of $1,037,445 and total current liabilities of $856,046 resulting in working capital of $181,399. As of September 30, 2012, the Company had cash and cash equivalents of $314,811 and an accumulated deficit of $14,873,454 since operations commenced in 1997.  It is the Company’s intention to raise additional working capital from licensing revenues, royalties and consulting fees.

As a result of working capital deficiency and a significant accumulated deficit at December 31, 2011 and a net loss of $2,534,444 in the prior year of 2011, the Company's independent registered public accounting firm's audit report for the year ended December 31, 2011, included herein, contains a qualified opinion and an explanatory paragraph regarding the Company's ability to continue as a going concern.  For the three and nine months ended September 30, 2012, the Company continued its net losses.  The accompanying financial statements have been prepared assuming that the Company continues as a going concern and contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The ability of the Company to continue as a going concern on a long-term basis will be dependent upon its ability to raise working capital to finance its operations.

We finance our operations primarily through operating revenues, shareholder loans and sales of equity and debt securities to accredited investors. 

2010 Debenture Financing

In November 2010, the Company sold Convertible Debentures Series 2010 (the “2010 Debentures”) for gross proceeds of $925,000, which were used for general corporate purposes. The 2010 Debentures accrue interest at 2.0% per annum with interest paid at maturity on December 31, 2015. The 2010 Debentures may not be prepaid before the maturity date. Repayment of the 2010 Debentures may be made in cash or shares of Common Stock at the option of the Company.
 
The 2010 Debentures may be converted into shares of Common Stock at the option of the holder. Upon conversion, the holder will be entitled to receive the number of shares of Common Stock that equal to two hundred percent (200%) of the face amount of the Debentures, together with accrued but unpaid interest, divided by the conversion price, which is the weighted average price for the five-day trading period before the notice of conversion. On July 1, 2011, two investors converted an aggregate of $50,000 in 2010 Debentures into 757,576 shares of restricted common stock. On October 20, 2011, one investor converted $100,000 in 2010 Debentures for 1,546,627 shares of restricted common stock. In March 2012, the remaining $50,000 principal amount of 2010 Debentures outstanding was converted into 940,734 shares of restricted common stock.

The 2010 Debenture investors also received common stock purchase warrants, designated by the Company as Class B Warrants, which expire on December 31, 2015.  As of September 30, 2012, there were Class B Warrants outstanding to purchase an aggregate of 343,591 shares of common stock at exercise prices ranging between $0.2618 and $0.3276.

2011 Debenture Financing

Between April and June 2011, the Company sold Convertible Debentures Series 2011 (the “2011 Class A Debentures”) with Class A Warrants for gross proceeds of $950,000 and the conversion of $725,000 of 2010 Debentures into 2011 Debentures. Between September and October 2011, the Company sold Convertible Debentures Series 2011 (the “2011 Class B Debentures” and together with the 2011 Class A Debentures, the “2011 Debentures”) with Class B Warrants for gross proceeds of $700,000 and the conversion of $25,000 in accrued compensation.

The 2011 Debentures, which mature on December 31, 2016, earn interest at an annual rate of 12%, which will be paid quarterly exclusively from the Debenture Account. Principal on the 2011 Debentures will be paid quarterly at management’s discretion and as the Debenture Account permits. A Debenture Account has been established with a financial institution for the deposit of 25% of the net funds the Company receives from licensing its intellectual property.

The 2011 Class A Debentures may be converted into shares of Common Stock at the option of the holder. Upon conversion, the holder will be entitled to receive the number of shares of Common Stock that equal to two hundred percent (200%) of the face amount of the 2011 Class A Debentures, together with accrued and unpaid interest, divided by the conversion price, which is the weighted average price for the five-day trading period preceding the 2011 Class A Debenture investment. Any 2011 Class A Debentures that are outstanding on the maturity date that have not been repaid from the Debenture Account will be repaid by the issuance of shares of Common Stock at the conversion price. As of September 30, 2012, fifteen of the sixteen investors elected to convert $1,575,000 in debentures to 16,831,553 shares of common stock. The accrued interest on the converted debentures of $179,312 was settled with $16,167 cash and the issuance of 870,543 shares of common stock. As of September 30, 2012, there was $100,000 principal amount of 2011 Class A Debentures outstanding that were convertible into approximately 1,587,302 shares of common stock.
 

The 2011 Class A Debenture investors also received common stock purchase warrants, designated by the Company as Class A Warrants, which expire on December 31, 2016.  As of September 30, 2012, there were Class A Warrants outstanding to purchase an aggregate of 18,475,827 shares of common stock at exercise prices ranging between $0.063 and $0.109.

The 2011 Class B Debentures may be converted into shares of Common Stock at the option of the holder. Upon conversion, the holder will be entitled to receive the number of shares of Common Stock that equal to two hundred percent (200%) of the face amount of the 2011 Class B Debentures, together with accrued and unpaid interest, divided by the conversion price, which is the weighted average price for the five-day trading period preceding the 2011 Class B Debenture investment, however the conversion price shall not be less than ten cents per share at any time and the conversion price shall not be more than ten cents per share for investments made prior to October 1, 2011. Any 2011 Class B Debentures that are outstanding on the maturity date that have not been repaid from the Debenture Account will be repaid by the issuance of shares of Common Stock at the conversion price. As of September 30, 2012, eighteen of the nineteen investors elected to convert $846,161,000 in debentures to 16,923,227 shares of common stock. The accrued interest on the converted debentures of $45,941 was settled with the issuance of 459,412 shares of common stock.  As of September 30, 2012, there were $50,000 principal amount of 2011 Class B Debentures outstanding that were convertible into approximately 1,000,000 shares of common stock.

The investors in 2011 Class B Debentures also received common stock purchase warrants, designated by the Company as Class B Warrants, which expire on December 31, 2016.  As of September 30, 2012, there were Class B Warrants outstanding to purchase an aggregate of 8,961,614 shares of common stock at exercise prices of $0.10.

2012 Debenture Financing

On February 17, 2012, the Company issued (i) convertible debentures in the aggregate principal amount of $500,000 (the “2012 Debentures”) and (ii) Series C warrants (the “2012 Warrants”) to purchase shares of Common Stock to certain investors (the “2012 Investors”) for aggregate cash proceeds of $180,000 and the exchange of $320,000 in previously issued promissory notes.  There were four Investors, who are all directors of the Company.

The 2012 Debentures accrue interest at an annual rate of 8%, which will be paid quarterly exclusively from the Debenture Account. Principal on the 2012 Debentures will be paid quarterly, on a pro rata basis with all 2012 Debentures, as the Debenture Account permits, but only after all accrued interest has been paid.

The 2012 Debentures mature on December 31, 2019, to the extent not previously repaid.  Any 2012 Debentures that are outstanding on the maturity date that have not been repaid from the Debenture Account will be repaid by the issuance of such number of shares of Common Stock equal to the outstanding principal and/or accrued interest divided by the volume weighted average price per share of the Company’s Common Stock for the three trading days prior to the maturity date (the “2012 Conversion Price”).

The 2012 Investors have the right, at any time after December 31, 2017, to require the 2012 Debentures to be repaid in full by cash from the Debenture Account, and to the extent such cash is not available, by shares of Common Stock at the 2012 Conversion Price.  The Company has the right, at any time after December 31, 2018, to require the 2012 Debentures to be repaid in full by cash, shares of Common Stock at the 2012 Conversion Price, or a combination of cash and shares of Common Stock.

The 2012 Warrants are exercisable at an exercise price of $0.10 per share until the earlier of December 31, 2019 or when the Investor no longer holds any 2012 Debentures. The 2012 Warrants are also exercisable on a cashless basis at any time.  The number of shares of Common Stock issuable upon exercise of the 2012 Warrants is equal to 50% of the then outstanding principal amount of the 2012 Debenture held by such 2012 Investor divided by the 2012 Conversion Price.

On April 23, 2012, the directors converted $500,000 of debentures and $7,243 in accrued interest into 5,790,452 shares of restricted common stock and the associated warrants were cancelled.

2012 Common Stock Private Offering

In the first half of 2012, the Company issued an aggregate of ten units (“Units”) to certain investors (the “Purchasers”) for aggregate cash proceeds of $250,000 (the “Financing”). Each Unit had a purchase price of $25,000 per Unit and consisted of Two Hundred Fifty Thousand (250,000) shares of the Company’s common stock, $0.01 par value (the “Common Stock”) and Series C Warrant to purchase Two Hundred Fifty Thousand (250,000) shares of Common Stock (the “Warrants”). The Warrants have an exercise price of $0.15 per share of Common Stock and will be exercisable until December 31, 2017. The Warrants may be exercised by the Purchasers by cashless exercise. In connection with the Financing, the Company granted each Purchaser registration rights upon the occurrence of a specified event.  
 
 
Other

In May and June 2012, four directors loaned the Company a total of $449,300 for working capital. In July 2012, three directors loaned a total of $50,000 for working capital. The notes were secured by the unencumbered 75% of patent settlement license fees secondary to the security interest of a financial institution and provided for accrued interest at 12% payable on maturity at September 30, 2012. The total accrued interest on shareholder loans which matured September 30, 2012 was $25,381. The total amount due to the four directors of $524,681, including accrued interest, was rolled over into new notes dated September 30, 2012. The new notes are secured by the unencumbered 75% of patent settlement license fees and provide for accrued interest at 6% payable on maturity at January 1, 2015. The accrued interest at September 30, 2012 is $-0-.

On July 31, 2012, the assets of the Illume Mobile operations were sold to DecisionPoint Systems, Inc.  Management believes that the divestiture of this cash-dilutive operation will enable the Company to pursue its patent licensing strategy from internally generated funds as the Company is now cash flow positive. As previously discussed, the operating losses in the third quarter included significant one-time non-cash charges and ongoing operating expenses have been significantly scaled back. However, if we are unable to obtain sufficient patent licensing revenues to support the greatly reduced operating burden, we will not be able to implement our patent licensing strategy.

To lower its required cash expenditures for the first nine months of 2012, the Company issued 2,800,000 shares of common stock to vendors and 8,965,068 shares of common stock to directors and employees for compensation for services.

Sources and Uses of Cash

   
Nine Months ended September 30,
 
(In thousands)
 
 
2012
   
2011
 
Cash flow data:
           
Net cash (used in) operating activities
 
$
(1,048
)
 
$
(869
)
Net cash provided by (used in) investing activities
   
12
     
(485
)
Net cash provided by financing activities
   
1,078
     
1,563
 
Net increase in cash and cash equivalents
   
42
 
   
209
 
Cash and cash equivalents, beginning of period
   
 273
     
187
 
Cash and cash equivalents, end of period
 
$
315
   
$
396
 

Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2012 was $1,048,000, an increase of $179,000 from the same period in 2011. More cash was used in operating activities primarily due to the workforce growth from 11 employees in the first half of 2011 to 38 employees in the first half of 2012.
 

Investing Activities

Cash provided by investing activities for the nine months ended September 30, 2012 was $12,000, an increase of $497,000 from the $485,000 cash used in investing activities during the same period in 2011, which increase was primarily due to the $250,000 cash received from the sale of Illume Mobile assets and $226,000 reduction in software development costs in 2012.
 
Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2012 was $1,078,000 compared with $1,563,000 for the same period in 2011, a decrease of $485,000. In the first nine months of 2012, the Company raised $750,000 in debenture financing and sale of stock to accredited investors, $500,000 less than was raised in 2011 from the sale of debentures. 

Critical Accounting Policies

Accounts Receivable and Credit Policies:

Trade accounts receivable consist of amounts due from the sale of patent licenses, software licenses and solution services.  Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days of receipt of the invoice.  The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts based on historical collection experience and a review of the current status of trade accounts receivable.  In many instances, customers make a substantial prepayment for services before rendered; therefore the Company is extending trade terms to customers who have already proven to be credit worthy.

At the quarter ending September 30, 2012 and at fiscal year ending December 31, 2011, the Company deems all trade receivable amounts recorded as collectible and, thus has not provided an allowance for uncollectible amounts.

Property and Equipment:

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

Revenue Recognition and Unearned Income:

Revenues from intellectual property licenses are recognized upon receipt. When intellectual property licenses are received under a contingent fee agreement with the law firm of Antonelli, Harrington & Thompson LLP, and the applicable contingent legal expense is recorded as a cost of sale. In the event a non-exclusive intellectual property license is granted within the scope of a contracted project, ten percent (10%) of the contract amount is deemed to be payment for the license.  Revenue from software product licensing is recognized ratably over the license period.  Unearned income associated with Illume Mobile contracts of $36,971 was transferred to DecisionPoint Systems as part of the Illume Mobile asset sale in July 2012. The $500,000 in unearned income at September 30, 2012 consists of the total potential earn-out payment from DecisionPoint Systems from the sale of Illume Mobile assets.

Solution services revenues consist primarily of professional services contracted to third party customers under contract for specific projects. Contracted projects that are fixed price are accounted for under the percentage-of-completion method of accounting. Revenue from contracted projects that are for provision of services is recognized at the time the service is provided. Revenue from setup fees, marketing and other services is recognized at the time the service is provided.  The Company no longer offers solutions services after the sale of Illume Mobile in July 2012.
 

Software Development Costs:

The Company accounts for software development costs in accordance with ASC 985-20, “Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”.  Costs incurred prior to the establishment of technological feasibility are expensed as incurred as research and development costs.  Costs incurred after establishing technological feasibility and before the product is released for sale to customers are capitalized.  These costs are amortized over three years and are reviewed for impairment at each period end. The Company sold a total of $1,213,550 in gross capitalized software development costs and associated $194,070 in accumulated amortization, or a net of $1,019,480, to DecisionPoint Systems in July 2012. The Company is not presently developing software.
 
Long-Lived Assets:

The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35, “Impairment or Disposal of Long-lived Assets”.  This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.  No impairment charges were incurred during the periods ended September 30, 2012 and December 31, 2011.

Stock-Based Compensation:

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

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

Effect of Recently Issued Accounting Pronouncements
 
In December 2011, the FASB issued Accounting Standards Update No. 2011-11, “Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. The Boards initially proposed a joint model describing when it is appropriate to offset financial assets and liabilities on the balance sheet that would have been close to the more restrictive IFRS approach, but instead decided to focus on developing common disclosure requirements. New disclosures are required to enable users of financial statements to understand significant quantitative differences in balance sheets prepared under U.S. GAAP and IFRS related to the offsetting of financial instruments. The existing U.S. GAAP guidance allowing balance sheet offsetting, including industry-specific guidance, remains unchanged. The Company does not offset financial instruments and therefore does not expect the adoption of ASU 2011-11 to have a material effect on our financial statements.
 
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income”. In December 2011, the FASB issued Accounting Standards Update No. 2011-12 deferring the effective date of ASU 2011-05. ASU 2022-05 amends the guidance in ASC 220 “Comprehensive Income” by eliminating the option to present components of other comprehensive income (OCI) in the statement of stockholders’ equity. Instead, the new guidance now requires entities to present all non owner changes in stockholders’ equity either as a single continuous statement of comprehensive income or as two separate but consecutive statements.
 

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement”. This guidance amends the application of the “highest and best use” concept to be used only in the measurement of fair value of nonfinancial assets, clarifies that the measurement of the fair value of equity-classified financial instruments should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity that manages a group of financial assets and liabilities on the basis of its net risk exposure can measure those financial instruments on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring fair value. The fair value disclosure requirements also were amended.
 
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required under Regulation S-K for “smaller reporting companies.”

ITEM 4 - CONTROLS AND PROCEDURES

a) Evaluation of disclosure controls and procedures.
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
 
Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2012, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.
 
Effective August 1, 2012, Mr. Steve Signoff resigned as our President and Chief Executive Officer and Mr. Randy Ritter resigned as our Chief Operating Officer.  As a result of the resignations of Messrs. Signoff and Ritter, we only had one executive officer, Ms. Kendall Carpenter, our Chief Financial Officer, until October 3, 2012, when James McGill was appointed as President and Chief Executive Officer. Other than the resignations of Messrs. Signoff and Ritter, there were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.  We are not currently aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

We are currently a party to 16 legal proceedings we initiated in the United States District Court Eastern District of Texas against 20 alleged infringers of our United States Patent #7,822,816. In each action, we claimed that each of defendants, directly or through intermediaries, made, has made, used, imported, provided, supplied, distributed, sold, and/or offered for sale products and/or systems that infringed one or more claims of United States Patent #7,822,816. We asked the Court for relief, including permanent injunctions, damages and costs we incurred because of the infringing activities, including interest and attorney fees. Any resulting litigation, however, will be subject to inherent uncertainties and the favorable outcome of any litigation is inestimable.

A summary of the legal proceedings initiated by the Company that are still outstanding and the status of legal proceedings that have been resolved since last reported is as follows:
 
Filing Date
Defendant
Case Number
Status
Date of Disposition (if any)
8-Jun-11
BizSpeed, Inc.
6:11-CV-287
(a)
10/23/2012
8-Jun-11
Environmental Systems Research Institute, Inc.
6:11-CV-287
(a)
9/28/2012
8-Jun-11
Spira Data Corp.
6:11-CV-287
(a)
10/16/2012
8-Jun-11
TrueContext Mobile Solutions Corporation
6:11-CV-287
(a)
9/27/2012
8-Jun-11
Invensys Systems, Inc. (d/b/a Invensys Operations Management)
6:11-CV-287
(b)
8/9/2012
8-Jun-11
Agilis Systems, LLC
6:11-CV-287
(b)
10/31/2012
8-Jun-11
RealTime Results, LLC
6:11-CV-287
(b)
10/31/2012
8-Jun-11
Ventyx Inc.
6:11-CV-287
(b)
11/1/2012
8-Jun-11
General Data Company, Inc.
6:11-CV-287
(c)
12/5/2011
8-Jun-11
Millennium Information Technology, Inc. (d/b/a MIT Systems, Inc.)
6:11-CV-287
(c)
12/5/2011
8-Jun-11
Air2Web Inc.
6:11-CV-287
Open
N/A
8-Jun-11
Xora, Inc.
6:11-CV-287
Open
N/A
8-Jun-11
Spring Wireless USA, Inc.
6:11-CV-287
Open
N/A
8-Jun-11
The DataMax Software Group Inc.
6:11-CV-287
Open
N/A
15-Sep-11
Citigroup Inc.
6:11-CV-490
Open
N/A
3-Oct-11
Whoop, Inc.
6:11-CV-523
Open
N/A
21-Dec-11
American Airlines, Inc.
6:11-CV-685
Open
N/A
21-Dec-11
Avis Rent A Car System, LLC
6:11-CV-686
Open
N/A
21-Dec-11
Continental Airlines, Inc.
6:11-CV-687
(b)
8/20/2012
21-Dec-11
United Air Lines, Inc.
6:11-CV-694
(b)
8/20/2012
30-Jan-12
Facebook, Inc.
6:12-CV-44
Open
N/A
30-Jan-12
Hyatt Corporation
6:12-CV-45
(b)
10/1/2012
30-Jan-12
Newegg Inc.
6:12-CV-46
Open
N/A
30-Jan-12
Wal-Mart Stores, Inc.
6:12-CV-47
(b)
10/31/2012
17-Feb-12
GEICO Casualty Company and Government Employees Insurance Company
6:12-CV-74
Open
N/A
17-Feb-12
GEICO Insurance Agency, Inc.
6:12-CV-74
Open
N/A
17-Feb-12
Marriott International, Inc.
6:12-CV-76
(b)
11/2/2012
27-Feb-12
AOL INC.
6:12-CV-91
(b)
8/20/2012
27-Feb-12
Inter-continental Hotels Corporation
6:12-CV-92
(b)
10/5/2012
27-Feb-12
Six Continents Hotels, Inc.
6:12-CV-92
(b)
10/5/2012
23-Mar-12
MovieTickets.com
6:12-CV-194
Open
N/A
18-Jun-12
JPMorgan Chase & Co, JPMorgan Chase Bank, N.A.
6:12-CV-384
(b)
8/15/2012
18-Jun-12
LinkedIn Corporation
6:12-CV-385
Open
N/A
19-Jun-12
Jetblue Airways Corporation
6:12-CV-387
Open
N/A
19-Jun-12
Kayak Software Corporation
6:12-CV-388
(b)
7/27/2012
19-Jun-12
Cumulus Media, Inc.
6:12-CV-389
Open
N/A
26-Jun-12
Fareportal, Inc.
6:12-CV-416
Open
N/A
26-Jun-12
LQ Management L.L.C.
6:12-CV-417
(b)
10/4/2012
26-Jun-12
Target Corporation
6:12-CV-418
Open
N/A
5-Oct-12
American Express Company
6:12-CV-743
Open
N/A
5-Oct-12
Redbox Automated Retail, LLC
6:12-CV-744
Open
N/A
 
(a)  Lawsuit dismissed without prejudice
(b)  Lawsuit dismissed with prejudice pursuant to a settlement agreement
(c)  Default judgment entered
 
 
 
 
Not required under Regulation S-K for “smaller reporting companies.”
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
The Company issued 3,234,405 shares of compensation shares to employees in lieu of $141,938 cash compensation for services rendered during the second quarter of 2012 which had been recorded at a value of $2,713 in stock based compensation based upon individual tax elections made by each recipient. The shares were awarded on Restricted Stock Agreements which have a six month time lapse restriction and are subject to forfeiture upon voluntary termination of employment.

The Company’s independent directors annual compensation is $16,000 to be paid quarterly in restricted stock. The Company issued the directors 280,700 shares of restricted stock on July 1, 2012 for their second quarter 2012 compensation. The Company recorded $4,000 in stock based compensation for each of its five independent directors.
 
 Item 3. Defaults Upon Senior Securities
 
None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information.
 
None.

 
31.01 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.02 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.01 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101 INS XBRL Instance Document*
   
101 SCH XBRL Schema Document*
   
101 CAL XBRL Calculation Linkbase Document*
   
101 LAB XBRL Labels Linkbase Document*
   
101 PRE XBRL Presentation Linkbase Document*
   
101 DEF XBRL Definition Linkbase Document*
 

*
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 
 
 

 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  MACROSOLVE, INC.  
       
Date: November 13, 2012
By:
/s/ JAMES C. MCGILL  
    James C. McGill  
    Chief Executive Officer (Principal Executive Officer)  
 
       
Date: November 13, 2012
By:
/s/ KENDALL CARPENTER  
    Kendall Carpenter  
    Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)  
       
 
 
 

 
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