COROWARE, INC, - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may" "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those in the forward-looking statements as a result of various important factors. Although we believe that the expectations reflected in the forward-looking statements are reasonable, they should not be regarded as a representation by CoroWare, Inc., or any other person, that such expectations will be achieved. The business and operations of CoroWare, Inc. are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this report.

BACKGROUND 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 telepresence. Through its subsidiary, the Company delivers custom engineering services, hardware and software products, and subscription services that benefit customers in North America, Europe, Asia, Australia and the Middle East. Their customers span multiple industry sectors and are comprised of 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.

CTI is a software professional services company with a strong focus on Information Technology integration and robotics integration, business automation solutions, and unmanned systems solutions to its customers in North America and Europe.

CTI's expertise includes the deployment and integration of computing platforms and applications, as well as the development of unmanned vehicle software and solutions for customers in the research, commercial, and homeland security market segments. CTI shall continue to offer its high value software systems development and integration services that complement the growing trend in outsourced software development services in Asia, Latin America, and Eastern Europe.

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..

· Enhanced Collaboration Solution: Collaboration and conferencing products, solutions and subscription services.

The Company's revenues are principally derived from standing contracts that include Microsoft (partner management and IT professional services), a European auto manufacturer (simulation software custom development), and other customers whose product development groups require custom software development and consulting companies. Existing contract revenues vary month by month based on the demands of the clients. The Company's collaboration effort is in the early stages of growth and will require additional working capital to compete effectively against new entrants in this rapidly growing market.

16 --------------------------------------------------------------------------------RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2011: During the three-month period ended September 30, 2012 (the "2012 Period") revenues were $224,136 compared to revenues of $389,089 during the three-month period ended September 30, 2011 (the "2011 Period"). Our revenues were 42.4% lower compared to the previous year as customers continued to delay spending on software development projects. As well, a significant number of videoconferencing and mobile robot product shipments were postponed in the third quarter of 2012 until the fourth quarter of 2012.

Cost of revenues was $179,098 for the 2012 Period compared to $289,945 for the 2011 Period. Cost of revenues represents primarily labor and labor-related costs in addition to overhead costs. Gross profit on these 2012 revenues amounted to $45,038 (20.1% gross profit percentage) compared to $99,144 (25.5% gross profit percentage) for the 2011 Period.

Research and development was $12,309 (5.5% of gross revenues) for the 2012 Period compared to $20,372 (5.2% of gross revenues) in the 2011 Period, and comprised development of mobile robot and billing mediation application software.

Operating expenses were $250,181 during the 2012 Period compared to $274,784 during the 2011 Period. General and Administration expenses were reduced by 2.7% to $177,636 in the 2012 Period compared to $182,588 for the 2011 Period as the Company continued to reduce its executive compensation and public company expenses. Sales and marketing expenses were reduced by 16.8% to $57,236 in the 2012 Period compared to $68,824 for the 2011 Period as the Company further refined sales compensation plans to bring them in line with the Company's cost of sales objectives. Loss from operations was $205,143during the 2012 Period compared to $175,640 in the 2011 Period.

Total other expense was $6,294,769 during the 2012 Period compared to Total other expense of $2,760,329 in the 2011 Period. Other income (expense) is comprised primarily of derivative income and amortization of debt discount and deferred finance costs. Derivative expense in the 2012 Period was $6,228,894 compared to Derivative expense of $2,561,925 in the 2011 Period. Keeping the number of shares constant, the liability associated with the embedded conversion features increases as our share price and volatility increases and, likewise, decreases when our share price and share price volatility decreases. Derivative income (expense) displays the inverse relationship. During the 2012 Period, the share price decreased ($.0028 at September 30, 2012 versus $0.02 at June 30, 2012) with consistent volatility, which resulted in a significant change in the calculated Monte Carlo values. The derivative expense in the 2012 Period is primarily due to fair value adjustments to the embedded conversion features. Interest expense for the three month 2012 Period is $157,303 compared to $198,518 for the three month 2011 Period. The debt discount was 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 2012 Period was $6,499,912 compared to a net loss of $2,935,969 for the 2011 Period.

Basic weighted average shares outstanding were 23,689,883 shares during the 2012 Period compared to 4,705,474 shares in the 2011 Period. There is no fully diluted calculation for the 2012 Period or the 2011 Period as the effect would be anti-dilutive.

NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2011: During the nine-month period ended September 30, 2012 (the "2012 Period"), revenues were $910,655 compared to revenues of $1,277,358 during the nine-month period ended September 30, 2012 (the "2011 Period"). Our revenues were 28.7% lower compared to the previous year as customers delayed spending on software development projects, IT consulting engagements, software development projects, and capital expenditures until later in the calendar year. As well, a significant number of videoconferencing and mobile robot product shipments were postponed in the third quarter of 2012 until the fourth quarter of 2012.

Cost of revenues was $595,459 for the 2012 Period compared to $849,347 for the 2011 Period. Cost of revenues represents primarily labor and labor-related costs in addition to overhead costs. Gross profit on these 2012 revenues amounted to $ 315,196 (34.6% gross profit percentage) compared to $428,011 (33.5% gross profit percentage) for the 2011 Period.

17 --------------------------------------------------------------------------------Research and development was $57,391 (6.3% of gross revenues) for the 2012 Period compared to $106,562 (8.3% of gross revenues) in the 2011 Period.

Operating expenses were $775,375 during the 2012 Period compared to $1,036,048 during the 2011 Period. General and Administration expenses were reduced by 21.6% to $516,109 in the 2012 Period compared to $658,083 for the 2011 Period as the Company reduced its executive compensation and public company auditing expenses. Sales and marketing expenses were reduced by 23.3% to $192,875 in the 2012 Period compared to $251,322 for the 2011 Period as the Company further adjusted sales compensation plans to bring them in line with the Company's cost of sales objectives. Loss from operations was $460,179during the 2012 Period compared to $608,037 in the 2011 Period.

Total other expense was $7,497,690 during the 2012 Period compared to other expense of $3,590,548 in the 2011 Period. Other income (expense) is comprised primarily of derivative income and amortization of debt discount and deferred finance costs. Derivative expense in the 2012 Period was $6,568,388 compared to derivative expense of $3,021,883 in the 2011 Period. Keeping the number of shares constant, the liability associated with the embedded conversion features increases as our share price and volatility increases and, likewise, decreases when our share price and share price volatility decreases. Derivative income (expense) displays the inverse relationship. During the 2012 Period, the share price decreased ($.0028 at September 30, 2012 versus $0.02 at December 31, 2011) with consistent volatility, which resulted in a significant change in the calculated Monte Carlo values. The derivative expense in the 2012 Period is primarily due to expense recognized in connection with redemptions on various debentures during the Period. Interest expense for the nine month 2012 Period is $527,021 compared to $567,600 for the nine month 2011 Period. The debt discount was 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 2012 Period was $ ($7,497,690) compared to a net loss of $4,198,586 for the 2011 Period.

Basic weighted average shares outstanding were 14,126,220 during the 2012 Period compared to 2,503,438 in the 2011 Period. There is no fully diluted calculation for the 2012 Period or the 2011 Period as the effect would be anti-dilutive.

LIQUIDITY AND CAPITAL RESOURCES At September 30, 2012, we had current assets of $167,391, current liabilities of $18,471,226, negative working capital of $18,303,835 and an accumulated deficit of $34,964,256. For the nine months ending September 30, 2012, we had net cash flows used in operating activities of ($88,837), net cash flows used in investing activities of ($1,371), and net cash flows provided by financing activities of $92,613.

18-------------------------------------------------------------------------------- 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. If we do not obtain additional capital, we may cease operations.

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.

CONTRACTUAL OBLIGATIONS The following table sets forth the contractual obligations of the Company as of December 31, 2011: Payments due by Period More than 5 Contractual Obligations Total Less than 1 year 1-3 years 3-5 years years Convertible debt, net $ 2,292,410 $ 2,292,410 $ - $ - $ - Notes payable 263,133 263,133 - - - Notes payable, related parties 292,812 292,812 - - - Operating leases 235,305 46,065 101,094 88,146 - Long -term debt 982,450 982,450 - - - Total $ 4,066,110 $ 3,876,870 $ 101,094 $ 88,146 $ - EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS Refer to Form 10-K for the year ended December 31, 2011.

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