Note 7 - Cummings Creek/ CLR Acquisitions

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Note 7 - Cummings Creek/ CLR Acquisitions

On May 16, 2011, we entered into a Contribution and Exchange Agreement (“Contribution Agreement”) with Ralph Alexander (“Alexander”) pursuant to which Alexander, as sole stockholder, contributed all the outstanding shares of Cummings Creek Capital, Inc. (“Cummings Creek”), a Delaware corporation, to Lattice in exchange for 2,500,000 shares of restricted common stock and the Company’s assumption of certain promissory notes with a face value of $700,000. Cummings Creek holds 100% of the outstanding shares of CLR Group Ltd., (“CLR Group”) a government service contractor, with a principal place of business located in O ’ Fallon, Illinois.

Lattice Government Services (“LGS”), entered into an Employment Agreement with Alexander. Alexander will serve as chief executive officer of LGS for initial annual compensation of $210,000, as well as other benefits. He may be entitled to additional bonus compensation based upon performance.

The following pro-forma information for the year end December 31, 2011 is presented as if the acquisition took place as of January 1, 2011:

	Twelve Months Ended December 31, 2011
NET SALES	$	12,648,440
Net (Loss)	$	(6,119,928	)
Net Income (loss) per common share Basic and
Diluted	$	(0.23	)
Weighted average shares outstanding Basic
And Diluted		26,578,839

Under the acquisition method, the total purchase price was allocated to Cummings Creek’s net tangible and intangible assets based upon their estimated fair values as of May 16, 2011. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill. The factors that contributed to the recognition of goodwill included past performance and relationship in the industry, an experienced management team and acquiring a technically talented workforce.

The total purchase price for Cummings Creek was approximately $1.4 million which included a contingent liability of $167,300, representing the estimated fair value of contingent consideration we currently expect to pay to the former shareholder of CLR Group upon the achievement of certain revenue targets and future contract renewals.  The potential undiscounted amount of all future payments that we could be required to make under the contingent consideration arrangement is between $0 and $400,000 through February 2013.  The  amount of contingent consideration to be paid in the future was estimated by probability-weighting the payments to be made based on management’s best estimates of the occurrence of reaching future revenue targets and obtaining contract renewals.  These estimated payments were then discounted to present value using risk adjusted discount rates.

The fair value of the 2,500,000 common shares issued as part of the consideration paid was determined on the basis of the closing market price of Lattice’s common shares on the acquisition date.

The assumed promissory notes have a face value of $676,915 and bear interest at 4% per year.  The Company is required to pay principal and interest payments quarterly starting on May 31, 2011 until February 15, 2014 when any unpaid principal and interest remaining on the notes will be due.  The fair value of the notes was estimated based on a discounted cash flow approach using risk adjusted discount rates ranging from 7.43% to 8.29%.

The table below summarizes the allocation of the purchase price to the acquired net assets based on their estimated fair values as of May 16, 2011 and the associated estimated useful lives at that date.

(In thousands)	Amount			Range of risk adjusted discount rates used in estimate of fair value	Estimated useful  life
Purchase price:
Common stock	$	500,000		--
Assumed notes payable		726,200		7.43%- 8.29%
Contingent consideration		167,300		7.70%
	$	1,393,500
Net tangible assets	$	537,354
Identifiable intangible assets:		–
Customer contracts		113,600		26.51%		3
Customer relationships		232,700		26.51%		3
Contract backlog		412,700		25.51%		2
Deferred taxes arising from purchase		(305,649	)
Goodwill		402,795
Total purchase price allocation	$	1,393,500

The Company believes that CLR’s service offerings, markets covered and technical competencies affords it an opportunity for synergy, thus justifying the amount of goodwill attributed to the acquisition of Cummings Creek.

We believe that the estimated intangible asset values so determined represent the fair value at the date of acquisition. We used the income approach, specifically the discounted cash flow method, to derive the fair value of the amortizable intangible assets.  The estimated cash flows associated with the specific intangibles were discounted to present value over the intangible asset’s estimated useful life using a weighted average cost of capital derived from comparable companies and management’s estimates of the risk associated with each intangible asset.  The discount rates used in the fair value calculations as of the date of acquisition ranged from 23.72%- 24.72% These fair value measurements are based on significant unobservable inputs, including management estimates and assumptions and, accordingly, are classified as Level 3 within the fair value hierarchy prescribed by Topic 820.