UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER
LATTICE INCORPORATED
(Exact name of registrant as specified in charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
22-2011859
(I.R.S. Employer
Identification No.)
7150 N. Park Drive, Suite 500, Pennsauken, New Jersey 08109
(Address of principal executive offices) (Zip Code)
Registrant’s telephone Number: (856) 910-1166
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.01 par value
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
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 such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |||
Non-accelerated filer o | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting and non-voting common stock held by non-affiliates, based on the closing price of such common stock as reported on the OTC Bulletin Board as of March 27, 2014 was approximately $6,750,326.
As of March 28, 2014, the issuer had 37,501,813 outstanding shares of Common Stock.
TABLE OF CONTENTS
Page | |||
PART I | |||
Item 1. | Description of Business | 1 | |
Item 1A | Risk Factors | 3 | |
Item 1B | Unresolved Staff Comments | 6 | |
Item 2. | Reserved | 6 | |
Item 3. | Legal Proceedings | 6 | |
Item 4. | Reserved | 6 | |
PART II | |||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities | 6 | |
Item 6 | Selected Financial Data | 7 | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 7 | |
Item 8. | Financial Statements and Supplementary Data | 15 | |
Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure | 15 | |
Item 9A(T) | Controls and Procedures | 15 | |
Item 9B. | Other Information | 16 | |
PART III | |||
Item 10. | Directors, Executive Officers, Promoters and Corporate Governance | 17 | |
Item 11. | Executive Compensation | 19 | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 21 | |
Item 13. | Certain Relationship and Related Transactions, and Director Independence | 22 | |
Item 14. | Principal Accountant Fees and Services | 22 | |
Item 15. | Exhibits | 23 | |
SIGNATURES | 27 |
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
ORGANIZATIONAL HISTORY
We were formed under the name Science Dynamics Corporation, incorporated in the State of Delaware in May 1973 and began operations in July 1977. We have been developing and delivering secure telecommunication solutions for over 30 years. We changed our name to Lattice Incorporated in February 2007. Lattice incorporated is referred to herein as the “Company,” “we,” “us,” and “our”.
The Company derives revenue from three primary sources:
1. | Providing telecommunications services to correctional facilities and specialized service providers who provide telecommunication services within the industry. | |
2. | Selling or licensing our proprietary technology. | |
3. | Providing highly specialized engineering services to other technology companies and government agencies. |
During the second quarter we sold our Federal Government contracts and discontinued our Government Services business. This enables management to focus on our rapidly growing Communications Services business. Accordingly, the financial results for the Government Services operations are shown as income (loss) from discontinued operations.
Our Communication business continues to build upon our technology and experiences continuing growth. Since 2009 our communication revenues have grown from $1.1 million to $8.3 million in 2013. For the year ended December 31, 2013, revenues from our Communication business increased by 10% compared to the prior year period. Recurring revenue or call processing services accounted for approximately 72% of total revenues. During the year of 2013, we moved our call center to an in-house service and introduced our new fully integrated product suite ICON, each of which temporarily slowed our revenue growth. Our new call center and product suite are expected to add to our growth rates, as we began to experience in the fourth quarter. Although our quarterly growth rates tend to fluctuate based on our customers buying patterns, we anticipate our annual growth to continue. With the focus on our communications business and the introduction of our next generation cloud based service and technology, we anticipate remaining EBITDA positive for 2014 and moving the company toward profitability.
This year we introduced our next generation cloud based technology platform ICON Integrated Corrections Operations Network. The system includes a full suite of services and products available in modules, enabling service providers and correctional facilities to choose from a number of services that best fits their needs. The technology includes modules for:
· | Products and Services management, this includes fully integrated video, kiosk, and inmate tablet based services. |
· | Customer Information Database. |
· | Payment Processing. |
· | Account/Billing. |
· | Customer Care. |
· | Investigative Tool Sets. |
· | Jail Management System. |
The first version of the system was released in the second quarter and we anticipate subsequent releases to continue through the next year. The launch of the new product and the integration of our new call center with the ICON platform temporarily slowed our growth but we anticipate our growth rate to return to historical rates in the coming quarters.
1 |
We also completed installation of our product with Telus Canada that will be used as part to provide services to British Columbia Corrections. As part of the installation, we opened a Canadian call center which began operations in the fourth quarter of 2013. The call center contributed toward fourth quarter revenues and we anticipate revenues from this source will increase during 2014. The Canadian call center also provides us with the ability to serve other international markets and act as a backup facility for our U.S. based call center, in addition to its principal purpose of servicing Canadian markets.
We currently operate in 11 states; over 50,000 inmates are either using our service or are being provided a service by other companies utilizing our technology. We plan to continue this growth by expanding our direct services within the states we serve, expanding to other states, continue to offer our services to other providers on a wholesale basis, and continue to sell our technology to strategic partners both in the U.S. and internationally. Our technology is currently operating in Canada, U.K., Japan, and the Caribbean. We plan on expanding our installations in these countries as well as continuing to pursue other partners with the goal of expanding our global footprint.
We acquired the assets of Innovisit LLC, a provider of video visitation technology to the corrections market during the fourth quarter of 2013. Our acquisition was based, in part, upon our successful past usages of Innovisit’s technology and our expectation that the acquisition will expand our product offerings. We anticipate the acquisition will be accretive to revenues and earnings during 2014.
Building upon improving financial conditions and opportunities for growth, we are also improving our capital base as well as our balance sheet. Our improvement has been aided by improved income and opportunities to sustain growth in our core business in communications. We divested our Government business and begun to recapitalize so as to accelerate our growth with additional investments in product development, sales and marketing. We have solicited interest in equity financing which, if successfully obtained, will be applied to support our liquidity needs and pursue our growth plans. We have closed on approximately $1 million of equity capital, with the objective of completing another $2.6 million by May 2014. Our financing plans also include collecting a $1.2 million receivable due from the Federal Government Department of Defense and applying proceeds to pay down outstanding liabilities.
Our Products and Services
ICON (Integrated Corrections Operations Network)
The system includes a full suite of services and products available in modules, enabling service providers and correctional facilities to choose from a number of services that best fits their needs. The technology includes modules for:
· | Products and Services management, this includes fully integrated video, kiosk, and inmate tablet based services. |
· | Customer Information Database. |
· | Payment Processing. |
· | Account/Billing |
· | Customer Care. |
· | Investigative Tool Sets. |
· | Jail Management System. |
Nexus Call Control System
The Nexus Call Control System is built on our proprietary BubbleLink software architecture. BubbleLink is a versatile and feature rich transaction processing platform that is used to develop and enhance a variety of customizable communications applications. This open source platform is a combination of integrated computer telephony hardware and software. The Nexus Call Control System is capable of handling thousands of call transactions per hour and provides telecom service providers with effective tools to manage telephone calls. The Nexus Call Control System can manage small to large facilities without sacrificing features or performance. Nexus provides technologically advanced call control and management tools targeted at investigation and law enforcement in the inmate telephone control industry. Nexus includes live monitoring, debit, video visitation, kiosk integration, and recording features. The Nexus system can be structured to use pre-paid collect and pre-paid debit cards that support specialized tariffs and call timing. With pre-paid services, Nexus provides complete control and security. Nexus call control systems are supported by an integrated array of administrative and investigative programs that provide a management solution suite. All programs interact in real-time with Nexus calls and databases via an Ethernet Local Area Network (LAN) or a Wide Area Network (WAN).
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Wholesale Services
We provide transaction based services to other service providers based on the feature set of the Nexus platform. Service providers utilize our services to provide telecommunication services to facilities that require a secure call management solution. The features we offer vary based on the specific needs of the service provider. With the scalability of the Nexus system we are able to provide services across the country without requiring a large capital deployment for new facilities. This enables our customers to provide a unique solution with little upfront capital investment. In addition, customers are able to deploy a reliable and industry proven platform to their customers without having to focus on technology development.
Direct Services
Our Nexus platform allows us to provide correctional facilities with a feature rich secure call control service that enables inmates to make phone calls while providing the security and investigative features required in correctional facilities. In addition to telecommunications services the Nexus based system provides enhanced capabilities to provide services such as video visitation, kiosk management, e-mail, and other advanced inmate services not readily available through less advanced systems. Traditionally feature rich systems, because of cost, were only available to larger facilities. With the Nexus based platform, because it is centrally located, we are able to provide a full suite of features to smaller facilities, enabling us to provide services traditionally unavailable to this section of the market. Our services provide correctional facilities with three unique advantages:
1. | Increased revenue as a result of a highly reliable system. | |
2. | Operational efficiencies that ease the administrative burden on the correctional facility. | |
3. | Superior investigative tools that also enable information to readily be shared with outside agencies. |
We continue to enhance our system and service offerings based on our 35 years of industry experience and the unique requirements of our customers. In addition, we work with other large communications providers to engineer new unique solutions that we are able to integrate back into our product and service offering.
Employees
As of December 31, 2013, we had 26 full time employees and no part time employees. We supplement full time employees with subcontractors and part time individuals, consistent with workload requirements. None of our employees are covered by a collective bargaining agreement. We consider relations with our employees to be satisfactory.
ITEM 1A. RISK FACTORS
There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading price of our common stock could decline and investors could lose all or part of their investment.
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RISKS RELATED TO OUR BUSINESS
We are dependent upon access to financial resources to which we may have limited ability to secure, inhibiting our capacity to maintain and expand sales of our products.
Our current financial position does not provide sufficient operating cash flow to support our activities. In addition, our Communication Services business requires constant additional investment and adaptation. Our ability to raise additional equity capital does not itself assure we will obtain the balance of the additional capital we seek. Without obtaining sufficient additional capital, we will be unable to support investments beyond cash generated from our current operations and pay current liabilities. Our failure to secure sufficient capital as needed may inhibit our ability to generate revenue and increase our profitability of our Communication Services business.
Liquidity Risk
Our liquidity is highly dependent on our; (i) continued access to our credit lines with Action Capital and Cantone Asset Management, LLC, (ii) increasing cash flows generated from operations, and (iii) ability to obtain alternative financing. In the event there is an unexpected downturn in our business or we are unable to meet our objectives, the Company would need to modify its debt agreements, and/or curtail operations. Since our borrowing capacity is limited by the level of our eligible collateral, more reliance will be placed on our ability to achieve planned operating performance and alternative financing activities to fund our debt payments coming due in the next twelve months. Our liquidity is also dependent upon being able to negotiate time extensions of past due account payables with trade creditors. We cannot give any assurance that we will be able to achieve our planned operating goals nor give any assurance of our ability to obtain an adequate level of alternative financing.
Changes in technology and our ability to enhance our existing products, including by research and development, will require technical and financial resources, the unavailability of which could hinder sales of our products and result in decreased revenues.
The markets for our products, especially the telecommunications industry, change rapidly because of technological innovation, changes in customer requirements, declining prices, and evolving industry standards, among other factors. To be competitive, we must both develop or have access to the most current technology and incorporate this technology in our products in a manner acceptable to our customers. Our failure to offer our customers the most current technology could affect their willingness to purchase our products, which would, in turn, impair our ability to generate revenue.
Our wholesale and direct services revenues are concentrated in small number of service providers and correctional facilities, and if we lose or experience a significant reduction in sales to these service providers or revenues from direct services to correctional facilities, our revenues may decrease substantially.
We receive a significant amount of our revenues from a limited number of service providers. During 2013, approximately $1.6 million or 19% of our total revenues were derived from a wholesale contract with a large, Tier 1 telecom provider serving several end-user correctional facilities. During 2014, the service provider and end-user facilities will be negotiating a potential renewal of the telecom services agreement, but there is no assurance that either the underlying contract will be renewed or that our telecom provider client will renew its own contract with us. Other wholesale arrangements are subject to similar uncertainties. Further, our revenues are subject to fluctuations due to customers buying patterns. While our diversification strategy may mitigate some of these business risks, loss of significant wholesale customers or termination of existing contracts would likely harm our financial condition and results of operations. Our wholesale clients and correctional facility clients may chose not to renew agreements and otherwise discontinue use of our direct services, particularly because:
· | Our wholesale customers may switch to alternative platforms or technologies available either from our current or future competitors; |
· | our customers may experience termination of their own contracts with correctional facilities for which our customers incorporate our platform, technology and services; |
· | our wholesale customers may develop their own solutions; or |
· | our customers may be subject to severe business disruptions. |
4 |
If our products and services fail to perform or perform improperly, revenues and results of operations could be adversely affected and we could be subject to legal action to recover losses incurred by our customers.
Products as complex as ours may contain undetected errors or “bugs,” which may result in product failures or security breaches or otherwise fail to perform in accordance with customer expectations. Any failure of our systems could result in a claim for substantial damages against us, regardless of our responsibility for the failure. Although we maintain general liability insurance, including coverage for errors and omissions, we cannot assure you that our existing coverage will continue to be available on reasonable terms or will be sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The occurrence of errors could result in loss of data to us or our customers which could cause a loss of revenue, failure to achieve acceptance, diversion of development resources, injury to our reputation, or damages to our efforts to build brand awareness, any of which could have a material adverse effect on our market share, revenues and, in turn, our operating results.
We could be subject to legal action to recover losses incurred by our licensees of our technology.
We and our licensees are subject to litigation, including claims for patent infringement and indemnification. Such contingent liabilities can include losses from damages and indemnification, either by contract or at common law. Such losses can be difficult to quantify in advance and, if realized, could have a material adverse effect on our financial position.
If we make any acquisitions, they may disrupt or have a negative impact on our business.
We have recently made acquisitions and we may make additional acquisitions in the future. If we make acquisitions, we could have difficulty integrating the acquired companies’ personnel and operations with our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the affect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
● | the difficulty of integrating acquired products, services or operations; |
● | the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies; |
● | the difficulty of incorporating acquired rights or products into our existing business; |
● | difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities; |
● | difficulties in maintaining uniform standards, controls, procedures and policies; |
● | the potential impairment of relationships with employees and customers as a result of any integration of new management personnel; |
● | the potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers; |
● | the effect of any government regulations which relate to the business acquired; and |
● | potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether or not successful, resulting from actions of the acquired company prior to our acquisition. |
Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with these acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.
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We may not be able to enhance our existing products to address the needs of other markets.
The first step on realizing our business development strategy requires us to enhance current products so they can meet the needs of other markets. If we are unable to do this, we may not be able to increase our sales and further develop our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. RESERVED.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. We expect to resolve these and any similar suits within the ordinary course of business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
ITEM 4. RESERVED.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
Our common stock is currently quoted on the OTC Bulletin Board under the symbol “LTTC.” For the periods indicated, the following table sets forth the high and low closing sales prices per share of common stock for the years ended December 31, 2013 and 2012 and the interim periods through March 28, 2014. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
Interim Period Ending March 28, 2014
High | Low | |||||||||
First Quarter ended March 31, 2014 (through March 28, 2014) | $ | 0.23 | $ | 0.14 | ||||||
Year Ended December 31, 2013 | ||||||||||
High | Low | |||||||||
First Quarter ended March 31, 2013 | $ | 0.10 | $ | 0.07 | ||||||
Second Quarter ended June 30, 2013 | $ | 0.14 | $ | 0.07 | ||||||
Third Quarter ended September 30, 2013 | $ | 0.13 | $ | 0.09 | ||||||
Fourth Quarter ended December 31, 2013 | $ | 0.17 | $ | 0.10 | ||||||
Year Ended December 31, 2012 | ||||||||||
High | Low | |||||||||
First Quarter ended March 31, 2012 | $ | 0.12 | $ | 0.09 | ||||||
Second Quarter ended June 30, 2012 | $ | 0.15 | $ | 0.09 | ||||||
Third Quarter ended September 30, 2012 | $ | 0.50 | $ | 0.07 | ||||||
Fourth Quarter ended December 31, 2012 | $ | 0.10 | $ | 0.07 |
The market price of our common stock, like that of other technology companies, is highly volatile and is subject to fluctuations in response to variations in operating results, announcements of technological innovations or new products, or other events or factors. Our stock price may also be affected by broader market trends unrelated to our performance.
6 |
HOLDERS
As of March 2014, we had 37,501,813 outstanding shares of common stock held by approximately 278 stockholders of record. The transfer agent of our common stock is Continental Stock Transfer and Trust Company.
DIVIDENDS
The Company has recorded dividends on 502,160 shares of 5% Series B Preferred Stock. In 2013, the Company recorded and accrued $25,108 of dividends payable. Dividends have not been declared and cannot be paid as long as the Company has an outstanding balance on its revolving line of credit.
Equity Compensation Plan Information
The following table sets forth the information indicated with respect to our compensation plans under which our common stock is authorized for issuance as of the year ended December 31, 2013.
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) |
||||||||||
(a) | (b) | (c) | |||||||||||
Equity compensation plans approved by security holders** | 16,944,500 | $ | 0.10 | -0- | |||||||||
Equity compensation plans not approved by security holders | -0- | -0- | -0- | ||||||||||
Total | $ |
** 7,106,500 # of options requiring authorized reserve
RECENT SALES OF UNREGISTERED SECURITIES
As of March 28, 2014, the Company issued restricted common shares at a price of $0.12 per share in a series of private placements with gross proceeds of approximately $1,000,000. The proceeds are applied to increase working capital and reduce liabilities.
ITEM 6. SELECTED FINANCIAL DATA
N/A
7 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
FORWARD-LOOKING STATEMENTS
The information in this annual report contains forward-looking statements. All statements other than statements of historical fact made in this annual report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.
The following discussion and analysis should be read in conjunction with the consolidated financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
Business Overview:
For the twelve months ended December 31, 2013, total revenues were $8,270,000, up 10% from 2012 revenues of $7,530,000.
We ceased operations in our Government Services in the second quarter when the assets of Lattice Government Services LLC (“LGS”) were sold to a third-party for approximately $1.2 million. We retained residual assets and liabilities through LGS. We exited this business, given declining revenue, continued uncertainty pertaining to Federal Government budgets, and the opportunity to improve upon shareholder equity. The continued growth in our Communications Services segment makes it prudent to focus our resources in this area as we anticipate realizing a higher return on investment.
We operate as a Communication Services Company, offering our products on a wholesale basis and directly providing telecom services to inmate facilities. We continue to organize our business segments based on the nature of the services offered and end-user markets served. During the last two quarters we moved our call center to an in-house service and introduced our new fully integrated product suite ICON that temporarily slowed our revenue growth. With the addition of the new call center we saw our growth rates begin to pick up again in the fourth quarter. Although our quarterly growth rates tend to fluctuate based on our customers buying patterns, we anticipate our annual growth to continue. With the focus on our communications business and the introduction of our next generation cloud based service and technology, our adjusted operating income after adding back non-cash items remained positive for the year and anticipate moving the company toward profitability in 2014.
Historically, our revenue from the telecom services have been derived from wholesaling product and services to service providers providing telecom services to inmate facilities. In the latter part of 2009 we expanded our offering to include direct services to end-user inmate facilities either providing directly to inmate facilities or via a partnering arrangement with other service providers. This decision was made based on our insight to the growth opportunities with the company’s current customer base and within the inmate telecommunications market.
Our new services model has enabled us to direct our activities toward an addressable market of over $1.5 billion per year in the United States alone, based on the size of the inmate population in the United States and the telecommunications traffic derived by this population. Based upon successful testing of our technology, we similarly are implementing our technology and services model in Canada, Europe, and Asia. We also are responding to inquiries from international technology companies looking to implement our technology. We will continue to partner with companies established in international markets to implement our technology and expand our technology footprint. With the recent interest from international markets we have retained a consulting firm to assist the company in developing strategic plan to capitalize on the international opportunity.
There are risk factors such as contracts being cancelled or a drop in network usage that could cause a decline in our telecom services revenue. However based on our current operations we do not anticipate any factors that would cause a disruption.
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This year we introduced our next generation cloud based technology platform ICON Integrated Corrections Operations Network. The system includes a full suite of services and products available in modules, enabling service providers and correctional facilities to choose from a number of services that best fits their needs. The technology includes modules for:
· | Customer Information Database. |
· | Payment Processing. |
· | Account/Billing |
· | Customer Care. |
· | Investigative Tool Sets. |
· | Jail Management System. |
The first version of the system was released in the second quarter and we anticipate subsequent releases to continue through the next year. The launch of the new product and the integration of our new call center with the ICON platform temporarily slowed our growth but we anticipate our growth rate to return to historical rates in the coming quarters.
We completed the installation of our product with Telus Canada that will be utilized to provide services to B.C. Corrections. As part of the installation we opened a Canadian call center and began operations in the fourth quarter of this year. The call center not only provides us the ability to service the Canadian market but gives us the ability to serve other international markets in addition to serving as a backup facility for our U.S. based call center.
We currently operate in 11 states and the number of inmates using our service or are being provided a service by other companies utilizing our technology is over 50,000 inmates. We plan to continue this growth by expanding our direct services within the states we serve, expanding to other states, continue to offer our services to other providers on a wholesale basis, and continue to sell our technology to strategic partners both in the U.S. and internationally. Our technology is currently operating in Canada, U.K., Asia, and the Caribbean. We plan on expanding our installations in these countries as well as continuing to pursue other partners with goal of expanding our global footprint.
After achieving positive EBITDA in 2013 and ongoing growth of our communications business, we have been able to improve our balance sheet. Our improvement has been aided by improved income and opportunities to sustain growth in our core business in communications. We divested our Government business and begun to recapitalize so as to accelerate our growth with additional investments in product development, sales and marketing. We have solicited interest in equity financing which, if successfully obtained, will be applied to support our liquidity needs and pursue our growth plans. Also, we divested only certain government division assets, retaining some receivables. We retained a $1.5 million of receivables before a reserve allowance of $300,000 due from Federal Government Department of Defense agencies, which we are engaged in aggressive efforts to collect. We have made progress and continue to work diligently with the Federal Government so as to collect these receivable and plan to apply proceeds received toward existing liabilities.
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RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2013 COMPARED TO THE YEAR ENDED DECEMBER 21, 2012
The following tables set forth income and certain expense items as a percentage of total revenue:
For the Years Ending December 31, | ||||||||
2013 | 2012 | |||||||
Sales | $ | 8,270,000 | $ | 7,530,000 | ||||
Net loss | $ | (1,002,000 | ) | $ | (571,000 | ) | ||
Net loss per common share – Basic and Diluted | $ | (0.03 | ) | $ | (0.02 | ) |
OPERATING EXPENSES | PERCENT OF SALES | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Research & Development | $ | 659,000 | 660,000 | 8.0 | % | 8.8 | % | |||||||||
Selling, General & Administrative | $ | 2,769,000 | 2,250,000 | 33.5 | % | 30.0 | % |
REVENUES:
Total revenues were $8,270,000 for the year ended December 31, 2013, compared to $7,530,000 in 2012. This represents an increase in 2013 of 10%. Contributing to the increase in 2013 are revenues associated with assets purchased from Innovisit on November 1, 2013, which accounts for $479,000 or 6.4% of the total increase. Without the addition of Innovisit, the sales percentage increase was 3.5%.
Our total revenues consist of two components; recurring services and technology sales. Our recurring revenues from call provisioning and ancillary services increased by 5% and accounted for 72% of revenues. This revenue class is derived from direct services for correctional facilities or indirectly through wholesale arrangements. Our technology sales increased 26% to $2,284,000 or 28% of total revenues. Increases in technology sales includes effects of our acquisition of Innovisit’s business.
GROSS PROFIT:
For the twelve months ended December 31, 2013, our total gross profit increase by $373,000 or 15.3% to $2,809,000 from $2,436,000 in 2012. As a percent of sales, gross margin increased to 34.0% in 2013, as compared to 32.4% from the prior year. The increase in gross margin percent is mainly attributable to a higher component of revenues coming from technology sales in 2013 (28% of revenues) compared to the prior year (24%). The increase in the volume of technology sales is attributable to our Innovisit acquisition.
Gross margin as a percentage of revenues for our technology sales remains consistent in the 60% to 65% range. We anticipate margins on technology sales revenue will remain stable at these levels. The gross margin percentage for recurring revenues was approximately 25%, also consistent with prior year.
RESEARCH AND DEVELOPMENT:
Research and development expenses were level with prior year at approximately $659,000. Our engineering effort remained relatively level as we leveraged our existing cost base to accommodate the growth in our direct telecom services. Management believes that continual enhancements of the Company's products will be required to enable us to maintain its competitive position. In order to maintain our competitive position, we plan to invest in future development of our principal products and also spend resources on innovations for new technical products and for updating existing products.
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SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses ("SG&A") consist primarily of expenses for management, administrative personnel, legal, fringe costs, indirect overhead costs, accounting, consulting fees, sales commissions, non-cash depreciation and amortization expenses, marketing, and facilities costs. For the year ended December 31, 2013, SG&A increased to $2,769,000 from $2,250,000 from the comparable year ended December 31, 2012, representing an increase of $519,000 or 23%. As a percentage of revenues, SG&A costs for 2013 increased to 33.5% from 29.9% for the year ended December 31, 2012. Included in SG&A expense for 2013 was non-cash share based compensation of $76,000 compared to $6,000 in 2012. The increase in SG&A was mainly comprised of additional $146,000 operating expenses attributable to the Innovisit acquisition, higher selling expenses of $111,000 and higher investor relations expenses of approximately $100,000 with remaining amount in general overhead expenses of $162,000.
AMORTIZATION & IMPAIRMENT:
Non-cash amortization expense for 2013 and 2012 related to intangible assets recognized in the purchase accounting of Innovisit acquired in November 2013 and the intellectual property rights acquired in 2011 amounted to $163,000 and $130,000, respectively. The increase in 2013 was attributable to the addition of intangible assets as a result of the Innovisit purchase on November 1, 2013.
INTEREST EXPENSE:
Interest expense consists of interest paid and accrued on our notes payable and outstanding balance on our credit facility. Interest expense increased to $357,000 for the year ended December 31, 2013 from $299,000 for the prior year ended December 31, 2012. The increase in interest was related to an increase in net borrowings.
NET LOSS:
Our net loss for the year ended December 31, 2013 was $1,002,000 which compared to a net loss of $571,000 for the year ended December 31, 2012. Net loss is influenced by the matters discussed in the other sections of this MDA. However, it should be noted that our 2013 included a loss from discontinued operations of $504,000 which compared to a net loss of $92,000 in the prior year. The increase in net loss from discontinued operations was mainly attributable to a reserve adjustment of approximately $310,000 recorded against incurred cost receivables which originated from our discontinued government services operations.
INCOME APPLICABLE TO COMMON STOCKHOLDERS:
Income applicable to common stock gives effect to our net income, cumulative undeclared dividends on our Series B Preferred Stock and a deemed dividend on the issuance of Series D Preferred amounting to $25,108 and $25,108 for the year ended December 31, 2013 and 2012, respectively. Income applicable to common stockholders’ serves as the numerator in our basic earnings per share calculation. We will continue to reflect cumulative preferred stock dividends on Series B Preferred stock until the preferred stock is converted into common, if ever.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $313,000 at December 31, 2013 from $30,000 at December 31, 2012.
Net cash provided by operating activities was $575,000 for the twelve months ended December 31, 2013 compared to net cash provided by operating activities of $396,000 in the corresponding twelve months ended December 31, 2012. Net cash provided by operating activities in the current year was mainly driven by an increase in customer advances and a reduction of current assets from December 31. 2012 levels.
Net cash used in investment activities was $73,000 for the twelve months ended December 31, 2013 compared to $160,000 in the corresponding period ended December 31, 2012. In 2013 $304,000 was used to purchase property, plant and equipment supporting our direct services growth in our telecom segment which compared to $160,000 in the prior year. With the launch of our direct telecom services product in the latter part of 2009, we expect to continue to have a requirement for capital on a project by project basis as we are awarded service contracts. To date, we have financed these equipment purchases with equipment based financing, debt and equity financings.
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Net cash used by financing activities was $221,000 for the twelve months ended December 31, 2013 compared to net cash used by financing activities of $398,000 in the corresponding twelve months ended December 31, 2012. The $220,000 used by financing in 2013 was comprised of payments of debt totaling approximately $1,073,000, and net payments on our line of credit of $233,000 offset by net proceeds from the issuance of notes of $1,085,000.
Basis of Presentation as Going Concern:
At December 31, 2013, our working capital deficiency was $4,490,000 which compared to a working capital deficiency of $3,561,000 at December 31, 2012. The increase in deficiency for 2013 was mainly due to a $600,000 debt facility with an investor used for general working capital purposes which closed December 31, 2013 and matures June 30, 2014 combined with the principal balance maturing within the next twelve months on the seller note financing of $410,000 incurred to purchase the assets and business of Innovisit. Cash from operations and available capacity on current credit facilities are expected to be insufficient to cover all liabilities which will mature over the next twelve months. Additionally, we are extended on payables with trade creditors. We have several payment arrangements in place but face continuing pressures on past due payables. This condition raises substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern is highly dependent upon our ability to improve our operating cash flow, maintain our credit lines and secure alternative financing. It should be noted that we are pursuing equity financing with a goal of raising $3,600,000, with proceeds to be applied toward working capital and to improvement of our balance sheet. Securing sufficient capital for our growth strategy may also reduce doubts about our ability to operate as a going concern. During March 2014, we have closed on approximately $1,000,000 of equity financing by issuing restricted common stock to accredited investors, have solicited interests for an additional $2,600,000 investment expected to close by May 2014. There is no assurance, however, that we will succeed in raising this additional financing and obtain the capital sufficient to provide for all of our liquidity needs. In the event we fail to obtain additional capital and/or restructure our existing debts with current creditors, we may be required to curtail our operations significantly.
Our current cash position, availability on our line of credit and current level of operating cash flow is insufficient to support (i) current working capital requirements (ii) the interest costs and principal payments on maturing liabilities, and (iii) additional capital requirements for equipment purchases necessary to support our growth plans. In this regard, we are dependent on raising the remaining portion of the equity investment for which we have has been soliciting interest. We remain dependent upon maintaining and increasing our cash flow from operations and maintaining the continuing availability on our lines of credit. There can be no assurances that our businesses will generate sufficient forward operating cash flows, we will be able to obtain the balance of the equity investment sought, or that future borrowings under our line of credit facilities will be available in an amount sufficient to service our current indebtedness or to fund other liquidity needs.
Financing activities:
On February 26, 2013, we issued a note to Cantone Asset Management LLC for $600,000 and obtained net proceeds of $578,400. The note bears interest of 12% per annum, is payable monthly and is due by September 1, 2014. The note was issued to finance the costs of fulfilling a purchase order transaction by a telecommunications customer. In addition to the note, the investor was issued 850,000 warrants.
On October, 17 2013, we issued a note to an investor for $110,000 in exchange for $93,600 of net proceeds. The note bears interest of 12% payable monthly and is due by January 1, 2014. In addition to the note, the investor was issued 150,000 warrants.
As part of the consideration for our November 1, 2013 acquisition of Innovisit’s business, we delivered a $590,000 secured promissory note, payable in installments between November 30, 2013 and January 31, 2015.
On December 30, 2013, we issued 822,024 restricted common shares in exchange for the 800,000 and 150,000 warrants previously issued as part of the February 26, 2013 and October 17, 2013 debt financings transactions with Cantone Asset Management. The previously issued 950,000 exchanged warrants were cancelled.
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On December 31, 2013, we issued a note for $600,000 to Cantone Asset Management LLC and warrants for 1,000,000 common shares exercisable at $0.11 per share. We also issued 145,000 restricted shares of common stock in lieu of financing fees and expenses.
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, operating results, liquidity or capital expenditures.
CRITICAL ACCOUNTING POLICIES AND SENSITIVE ESTIMATES:
Use Estimates
The preparation of these financial statements in accordance with accounting principles generally accepted in the United States (US GAAP) requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments are based on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. US GAAP requires estimates and judgments in several areas, including those related to impairment of goodwill and equity investments, revenue recognition, recoverability of inventory and receivables, the useful lives, long lived assets such as property and equipment, the future realization of deferred income tax benefits and the recording of various accruals. The ultimate outcome and actual results could differ from the estimates and assumptions used.
Basis of Financial Statement Presentation
At December 31, 2013, we had a working capital deficiency of $4,490,000. During 2013, we had a loss from operations of $619,000 which included non-cash items totaling $663,000. The non-cash consisting of $426,000 from intangibles amortization and depreciation and $101,000 for share-based compensation expense. This working capital deficit condition raises substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon management’s continuing and successful execution on its business plan to achieve profitability and increased operating cash flows and the ability to close on the remaining alternative financing to support working capital deficit, debt coming due in the next twelve months and support the capital requirement of growing our communications business. The accompanying financial statements do not include any adjustments that may result from the outcome of this uncertainty.
Principles of Consolidation
The consolidated financial statements included the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. All significant inter-company accounts and transactions have been eliminated in consolidation. For those consolidated subsidiaries where Company ownership is less than 100%, the outside stockholders' interests are shown as minority interests.
Revenue Recognition
Revenue is recognized when all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Revenue from product sales is recognized when the goods are shipped and title passes to the customer.
The company applies the guidance of SOP-97-2 with regards to its software products sold. Under this guidance, the Company determined that its product sales do not contain multiple deliverables for an extended period beyond delivery where bifurcation of multiple elements is necessary. The software is embedded in the products sold and shipped. Revenue is recognized upon delivery, installation and acceptance by the customer. PCS (post-contract support) and upgrades are billed separately and when rendered or delivered and not contained in the original arrangement with the customer. Installation services are included with the original customer arrangement but are rendered at the time of delivery of the product and invoicing.
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In our Government Services segment (Discontinued operations), our revenues are derived from IT and business process outsourcing services under cost-plus, time-and-material, and fixed-price contracts, which may extend up to 5 years. Under our fixed-price contracts, revenues are generally recorded as delivery is made. For time-and-material contracts, revenues are computed by multiplying the number of direct labor-hours expended in the performance of the contract by the contract billing rates and adding other billable direct costs. Under cost-plus contracts, revenues are recognized as costs are incurred and include an estimate of applicable fees earned. Services provided over the term of these arrangements may include, network engineering, architectural guidance, database management, expert programming and functional area expert analysis Revenue is generally recognized when the service is provided and the amount earned is not contingent upon any further event.
Our fixed price contracts are primarily based on unit pricing (labor hours) or level of effort. The Company recognizes revenue for the number of units delivered in any given fiscal period. Accordingly, these contracts do not fall within the scope of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, where revenue is recognized on the percentage-of-completion method using costs incurred in relation to total estimated costs.
Under cost reimbursable contracts, the Company is reimbursed for allowable costs, and paid a fee, which may be fixed or performance-based. Revenues on cost reimbursable contracts are recognized as costs are incurred plus an estimate of applicable fees earned. The Company considers fixed fees under cost reimbursable contracts to be earned in proportion of the allowable costs incurred in performance of the contract. For cost reimbursable contracts that include performance based fee incentives, the Company recognizes the relevant portion of the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as the Company’s prior award experience and communications with the customer regarding performance.
Charges for certain allowable costs under government contracts remains subject to audit. Certain indirect costs are charged to contracts using provisional or estimated indirect rates, which are subject to later revision based on government audits of those costs. Management is of the opinion that costs subsequently disallowed, if any, would not be significant.
Revenues related to collect and prepaid calling services generated by the communication services segment are recognized during the period in which the calls are made. In addition, during the same period, the Company records the related telecommunication costs for validating, transmitting, billing and collection, and line and long distance charges, along with commissions payable to the facilities and allowances for uncollectible calls, based on historical experience.
Government claims: Unapproved claims relate to contracts where costs have exceeded the customer’s funded value of the task ordered on our cost reimbursement type contract vehicles. The unapproved claims are considered to be probable of collection and have been recognized as revenue in previous years. Unapproved claims included as a component of our Accounts Receivable totaled approximately $1,244,000 and $1,555,000 as of December 31, 2013 and December 31, 2012. Consistent with industry practice, we classify assets and liabilities related to these claims as current, even though some of these amounts may not be realized within one year.
Revenues recognition for Innovisit
Revenues from construction contracts are included in contract revenue in the consolidated statements of operations and are recognized under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to the estimated total cost of each project. This method is used as management considers expended cost to be the best available measure of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year. Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts.
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Contract costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative costs are charged to expense as incurred.
Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. An amount equal to contract costs incurred that are attributable to claims is included in revenue when realization is probable and the amount can be reliably estimated.
Costs and estimated earnings in excess of billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion method) for which billings had not been presented to customers because the amount were not billable under the contract terms at the balance sheet date. In accordance with the contract terms, the unbilled receivables at December 31, 2013 will be billed in 2014. Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.
Service Revenues are recorded when the service is provided and when collection can be reasonably assured
Fair Value Disclosures
Management believes that the carrying values of financial instruments, including, cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value as a result of the short-term maturities of these instruments. As discussed in Note 1(m) of our financial statements, derivative financial instruments are carried at fair value.
The carrying values of the Company’s long term debts and capital lease obligations approximates their fair values based upon a comparison of the interest rates and terms of such debt to the rates and terms of debt currently available to the Company
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial information required by this Item is attached hereto at the end of this report beginning on page F-1 and is hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
N/A
ITEM 9A(T). CONTROLS AND PROCEDURES.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:
- pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
- provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and directors; and
- provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, the Company assessed the effectiveness of the internal control over financial reporting as of December 31, 2013. In making this assessment, we used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this assessment and on those criteria, the Company concluded that a material weakness exists in the internal controls as of December 31, 2013.
A material weakness in the Company’s internal controls exists in that, beyond the Company’s CFO there is a limited financial background amongst other executive officers or the board of directors. This material weakness may affect management’s ability to effectively review and analyze elements of the financial statement closing process and prepare financial statements in accordance with U.S. GAAP. In making this assessment, our management used the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of the material weaknesses described above, our management concluded that as of December 31, 2013, we did not maintain effective internal control over financial reporting based on the criteria established in Internal Control — Integrated Framework issued by the COSO.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Changes in internal control
There were no changes in the small business issuer’s internal control over financial reporting identified in connection with the company evaluation required by paragraph (3) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the small business issuer’s fiscal year that has materially affected or is reasonably likely to materially affect the small business issuer’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each. There are no family relationships among any of our Directors and Executive Officers.
Name | Age | Position | ||
Paul Burgess | 48 | President, CEO and director | ||
Joe Noto | 54 | CFO and secretary | ||
Donald Upson | 59 | Director | ||
John Boyd | 73 | Director | ||
Mark V. Rosenker | 67 | Director |
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
Paul Burgess, President, Chief Executive Officer and Director. From March 1, 2003 until February 14, 2005, Mr. Burgess was our Chief Operating Officer. As of February 9, 2005, Mr. Burgess was appointed our President and Chief Executive Officer. On February 14, 2005, Mr. Burgess was appointed a member of our Board of Directors. From January 2000 to December 2002, Mr. Burgess was President and Chief Financial Officer of Plan B Communications. Prior to Plan B Communications, Mr. Burgess spent three years with MetroNet Communications, where he was responsible for the development of MetroNet’s coast to coast intra and inter city networks. Mr. Burgess was also influential in developing the operations of MetroNet during the company’s early growth stage. Prior to joining MetroNet, Mr. Burgess was with ISM, a company subsequently acquired by IBM Global Services, where he was responsible for developing and deploying the company’s distributed computing strategy.
Joe Noto, Chief Financial Officer and Secretary. Mr. Noto joined Lattice in March 2005 as Vice President of Finance and served in that position until May 2005 when he accepted the position of Chief Financial Officer. Prior to joining the Company, from 2002 to 2005, Mr. Noto was VP of Finance heading financial operations at Spectrotel Inc. (formerly Plan B Communications), a communications service provider. From 2000 to 2002, Mr. Noto was the Finance Director at Pivotech Systems, a communications software start-up Company backed by a leading venture capital firm, Optical Capital Group. Mr. Noto holds a B.A. degree from Rutgers College and is a Certified Public Accountant of New Jersey and is a member of the American Institute of CPA’s and the New Jersey Society of CPA’s.
Donald Upson, Director. Mr. Upson has been a member of our board of directors since January 2007. Mr. Upson recently retired as the Commonwealth of Virginia’s first Secretary of Technology. Mr. Upson has more than two decades of government, corporate, and high technology experience. Mr. Upson is a graduate of California State University Chico.
John Boyd, Director. John Boyd, as part of his business advisory practice, Boyd Operating Alliances, provides strategic growth and profit acceleration guidance for expansion stage businesses. Including 33 years at AT&T, Mr. Boyd’s experience spans decades in the communications, technology, media, energy, and business services industries. He has been president/CEO of a business process outsourcing provider to the telecommunications industry, president/CEO of an energy services company, president of AT&T’s international computer business, and a senior adviser to CKX. Mr. Boyd also has served on multiple advisory and corporate boards, including businesses in global wireless distribution, retail technology, and media/entertainment. A graduate of Iona College, he holds a Masters degree from Pace University in Advanced Management and certificates from Wharton in Advanced Marketing Management and Mergers and Acquisitions.
Mark V. Rosenker, Director. Mark Rosenker was chairman and acting chairman of the National Transportation Safety Board (NTSB) from 2005-2009. He retired as a Major General in the U.S. Air Force Reserve in December 2006 after 37 years of combined active and reserve service. During his Air Force career, Mark served as Deputy Assistant to the President and Director of the White House Military Office, where he was responsible for managing the military assets and personnel supporting the President and Vice President. Prior to his NTSB role, Mark was Managing Director of the Washington Office of the United Network for Organ Sharing. Earlier, he served 23 years as Vice President, Public Affairs for the Electronic Industries Association. His government service spans the Department of the Interior, the Federal Trade Commission, and the Commodity Futures Trading Commission. Mark’s Air Force awards and decorations include the Air Force Distinguished Service Medal with One Oak Leaf Cluster and the Legion of Merit. He is a former member of the Board of Visitors to the Community College of the Air Force. In addition to graduating from the University of Maryland, Mark is a graduate of the Air Command and Staff College and the Air War College.
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Oversight
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in our best interests and our shareholders to combine these roles. Paul Burgess currently serves as Chairman and Chief Executive Officer of the Company. Due to our small size and limited resources, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined.
Our Audit Committee is primarily responsible for overseeing our risk management processes on behalf of our board of directors. The Audit Committee receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. In addition, the Audit Committee reports regularly to the full Board of Directors, which also considers our risk profile. The Audit Committee and the full Board of Directors focus on the most significant risks facing our company and our company’s general risk management strategy, and also ensure that risks undertaken by our Company are consistent with the Board’s appetite for risk. While the Board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our Board leadership structure supports this approach.
BOARD COMPOSITION
At each annual meeting of stockholders, all of our directors are elected to serve from the time of election and qualification until the next annual meeting of stockholders following election. The exact number of directors is to be determined from time to time by resolution of the board of directors.
COMMITTEES
We have an audit committee, consisting of John Boyd whom is independent. We do not have an audit committee financial expert, as that term is defined in Item 401 of Regulation S-B, but expect to designate one in the near future. We have not yet adopted an audit committee charter but expect to do so in the near future.
We have a compensation committee. The members of the compensation committee are John Boyd, Mark Rosenker, and Donald Upson.
We do not have a nominating committee because of our limited resources. The full board will take part in the consideration of director nominees. The board considers, among other things, the diversity of potential board member’s backgrounds, including their professional experience, education, skills and other individual attributes in assessing their potential appointment to the board.
CODE OF ETHICS
We have adopted a Code of Ethics and Business Conduct for Officers, Directors and Employees that applies to all of our officers, directors and employees. The Code of Ethics is filed as Exhibit 14.1 to our annual report on Form 10-KSB for the fiscal year ended December 31, 2003, which was filed with the Securities and Exchange Commission on April 9, 2004. Upon request, we will provide to any person without charge a copy of our Code of Ethics. Any such request should be made to Attn: Paul Burgess, Lattice Incorporated, 7150 N. Park Drive, Suite 500, Pennsauken, N.J. 08109. Our telephone number is (856) 910-1166.
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SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of change in ownership of common stock and other of our equity securities. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To our knowledge, no persons have failed to file, on a timely basis, the identified reports required by Section 16(a) of the Exchange Act during the most recent fiscal year ended December 31, 2011.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all compensation earned in respect of our Chief Executive Officer and those individuals who received compensation in excess of $100,000 per year, collectively referred to as the named executive officers, for our last two completed fiscal years.
SUMMARY COMPENSATION TABLE
Name and Principal Position |
Year |
Salary $ |
Bonus $ (1) |
Stock Awards $ |
Option Awards $ (2) |
Non-Equity Incentive Plan Compensation $ |
Nonqualified Deferred Compensation Earnings $ |
All Other Compensation $ |
Total $ |
|||||||||||||||||||
Paul Burgess | 2013 | $ | 250,000 | $3,632 | $ |
253,632 |
||||||||||||||||||||||
President, CEO | 2012 | $ | 250,000 | $ | 250,000 | |||||||||||||||||||||||
And Director | 2011 | $ | 250,000 | $ | 250,000 | |||||||||||||||||||||||
Joe Noto | 2013 | $ | 175,000 | $1,816 | $ | 176,816 | ||||||||||||||||||||||
Chief Financial | 2012 | $ | 175,000 | $ | 175,000 | |||||||||||||||||||||||
Officer | 2011 | $ | 175,000 | $ | 175,000 |
(1) | Represents performance bonus earned in the year when paid. |
(2) | These amounts represent the estimated present value of stock options or warrants at the date of grant, calculated using the Black-Scholes options pricing model. The options vest annually on the anniversary date over 3 years. |
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table sets forth with respect to grants of options to purchase our common stock to the name executive officers as of December 31, 2013:
Name | Number of Securities Underlying
Unexercised Options # Exercisable | Number of Securities Underlying
Unexercised Options # Unexercisable | Equity Incentive Plan
Awards: Number of Securities Underlying Unexercised Unearned Options # | Option Exercise Price $ | Option Expiration Date | Number of Shares or Units
of Stock That Have Not Vested # | Market Value of Shares
or Units of Stock That Have Not Vested $ | Equity Incentive Plan
Awards: Number of Unearned Shares Units or Other Rights That Have not Vested # | Equity Incentive Plan
Awards Market or Payout Value of Unearned Shares Units or Other Rights That Have not
Vested $ | |||||||||||||||||||||||||||
Joe Noto | – | 200,000 | (a) | – | $ | 0.08 | July, 2015 | – | – | – | – | |||||||||||||||||||||||||
1,400,000 | (a) | $ | 0.08 | May, 2018 | ||||||||||||||||||||||||||||||||
1,400,000 | (c) | $ | 0.12 | Dec, 2023 | ||||||||||||||||||||||||||||||||
Paul Burgess | 200,000 | (b) | $ | 0.08 | May, 2018 | |||||||||||||||||||||||||||||||
200,000 | (b) | $ | 0.08 | Oct, 2018 | ||||||||||||||||||||||||||||||||
600,000 | (b) | $ | 0.08 | Feb, 2015 | ||||||||||||||||||||||||||||||||
2,800,000 | (b) | $ | 0.08 | May, 2018 | ||||||||||||||||||||||||||||||||
2,800,000 | (d) | $ | 0.12 | De, 2023 |
____________________
(a) | 1,600,000 vest as of December 31, 2011 | |
(b) | 3,800,000 vest as of December 31, 2010; | |
(c) | 1,400,000 vest as of December 31, 2016; | |
(d) | 2,800,000 vest as of December 31, 2016. |
COMPENSATION OF DIRECTORS
We compensate our directors $1,500 per meeting and $10,000 annually as a director. In 2012, director fees were unpaid and accrued.
EMPLOYMENT AGREEMENTS
On March 24, 2009, the Company renewed its Executive Employment Agreement with Paul Burgess. Under the Executive Employment Agreement, Mr. Burgess is employed as our Chief Executive Officer for an initial term of three years. Thereafter, the Executive Employment Agreement shall automatically be extended for successive terms of one year each. Mr. Burgess will be paid a base salary of $250,000 per year under the Executive Employment Agreement Amendment. Mr. Burgess is also eligible for an incentive bonus of not less than 40% of his base salary based on achieving certain goals established annually by the Compensation Committee of the Board. As part of the agreement he will receive medical, vacation and profit sharing benefits consistent with our current policies. The agreement may be terminated by Mr. Burgess upon at least 60 days prior notice to us.
On March 24, 2009, the Company renewed its executive employment agreement with Joe Noto. Under the Executive Employment agreement, Mr. Noto is employed as our Chief Financial Officer for a term of three years at an annual base salary of $185,000. Thereafter, the Executive Employment Agreement will shall be automatically extended for successive terms of one year each. Mr. Noto is also eligible for an incentive bonus of not less than 40% of his base salary based on achieving certain goals established annually by the Compensation Committee of the Board. As part of the agreement he will receive medical, vacation and profit sharing benefits consistent with our current policies. The agreement may be terminated by Mr. Noto upon at least 60 days prior notice to us.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides information about shares of common stock beneficially owned as of March 28, 2014 by:
● | each director; | |
● | each officer named in the summary compensation table; | |
● | each person owning of record or known by us, based on information provided to us by the persons named below, to own beneficially at least 5% of our common stock; and | |
● | all directors and executive officers as a group. |
Name of Beneficial Owner (1) | Common Stock Beneficially Owned (2) |
Percentage of Common Stock Beneficially Owned (2) |
|||||||
Paul Burgess (3) | 4,527,000 | 10.96 | % | ||||||
Joe Noto | 1,600,000 | 4.09 | % | ||||||
Benjamin Auger (4) | 2,073,136 | 5.53 | % | ||||||
Donald Upson (5) | 268,637 | * | % | ||||||
Alan Bashforth (6) | 704,836 | 1.88 | % | ||||||
John Boyd (7) | 240,000 | * | % | ||||||
Mark V. Rosenker (7) | 240,000 | * | % | ||||||
All named executive officers and directors as a group (4 persons) | 6,875,637 | 15.76 | % |
* Less than 1% |
(1) | Except as otherwise indicated, the address of each beneficial owner is c/o Lattice Incorporated , 7150 N. Park Drive, Suite 500, Pennsauken, NJ 08109 |
(2) | Applicable percentage ownership is based on 37,501,813 shares of common stock outstanding as of March 28, 2014, together with securities exercisable or convertible into shares of common stock within 60 days of March 28, 2014 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of March 28, 2014 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. |
(3) | Represents 3,800,000 shares issuable upon exercise of options and 727,000 restricted shares. |
(4) | Includes (a) 92,460 common shares owned by Ben and Carol Auger; (b) 1,970,526 common shares owned by an IRA for benefit of Ben Auger; (c) 10,000 common shares owned by Ben Auger c/f Bonnie Auger; and (d) 150 common shares owned by Ben Auger c/f Ian Auger. |
(5) | Represents 268,000 shares issuable upon exercise of options. |
(6) | Includes: (a) 16,500 shares owned by Mr. Bashforth; (b) 152,000 shares owned by Innovative Communications Technology, Ltd., which is controlled by Mr. Bashforth; (c) 436,336 shares owned by Calabash Holdings Ltd., which is controlled by Mr. Bashforth. We issued 100,000 shares of common stock in December 2007 related to consulting services rendered. |
(7) | Represents 240,000 shares issuable upon exercise of options. |
No Director, executive officer, affiliate or any owner of record or beneficial owner of more than 5% of any class of our voting securities is a party adverse to our business or has a material interest adverse to us.
21 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director Independence
Of the members of the Company’s board of directors, Donald Upson, Mark Rosenker and John Boyd are considered to be independent under the listing standards of the Rules of NASDAQ set forth in the NASDAQ Manual independent as that term is set forth in the listing standards of the National Association of Securities Dealers.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed by our independent auditors, for professional services rendered for the audit of our annual financial statements for the years ended December 31, 2013 and 2012, and for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q during the fiscal years were $73,000 and $75,000, respectively.
Audit-Related Fees
Tax Fees
The aggregate fees billed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2013 and 2012 were $12,500 and $12,500 respectively. These fees related to the preparation of federal income and state franchise tax returns.
All Other Fees
There were no other fees billed for products or services provided by our principal accountant for the fiscal years ended December 31, 2013 and 2012.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to our Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.
All members of the Company’s audit committee approved the engagement of Rosenberg Rich Baker Berman & Company as the Company’s independent registered public accountants.
22 |
ITEM 15. EXHIBITS.
Exhibit
Number Description
Exhibit Number |
Description | |
2.2 | Stock Purchase Agreement dated December 16, 2004 among Science Dynamics Corporation, Systems Management Engineering, Inc. and the shareholders of Systems Management Engineering, Inc. identified on the signature page thereto (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on December 22, 2004) | |
2.3 | Amendment No. 1 to Stock Purchase Agreement dated February 2, 2005 among Science Dynamics Corporation, Systems Management Engineering, Inc. and the shareholders of Systems Management Engineering, Inc. identified on the signature page thereto (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 11, 2005) | |
2.4 | Stock purchase agreement by Ricciardi Technologies, Inc., its Owners, including Michael Ricciardi as the Owner Representative and Science Dynamics Corporation, dated as of September 12, 2006.(1) | |
3.1 | Certificate of Incorporation (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981) | |
3.2 | Amendment to Certificate of Incorporation dated October 31, 1980 (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981) | |
3.3 | Amendment to Certificate of Incorporation dated November 25, 1980 (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981) | |
3.4 | Amendment to Certificate of Incorporation dated May 23, 1984 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001) | |
3.5 | Amendment to Certificate of Incorporation dated July 13, 1987 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001) | |
3.6 | Amendment to Certificate of Incorporation dated November 8, 1996 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001) | |
3.7 | Amendment to Certificate of Incorporation dated December 15, 1998 (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-62226) filed with the Securities and Exchange Commission on June 4, 2001) | |
3.8 | Amendment to Certificate of Incorporation dated December 4, 2002 (Incorporated by reference to the Company’s information statement on Schedule 14C filed with the Securities and Exchange Commission on November 12, 2002) | |
3.9 | By-laws (Incorporated by reference to the Company’s registration statement on Form S-18 (File No. 33-20687), effective April 21, 1981) | |
3.10 | Restated Certificate of Incorporation (Incorporated by reference to the Registration Statement On Form SB-2. file with the Securities and Exchange Commission on February 12, 2007) | |
4.1 | Secured Convertible Term Note dated February 11, 2005 issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005) |
23 |
4.2 | Common Stock Purchase Warrant dated February 11, 2005 issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005) | |
4.3 | Second Omnibus Amendment to Convertible Notes and Related Subscription Agreements of Science Dynamics Corporation issued to Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on March 2, 2005) | |
4.4 | Form of warrant issued to Barron Partners LP.(1) | |
4.5 | Promissory Note issued to Barron Partners LP.(1) | |
4.6 | Form of warrant issued to Dragonfly Capital Partners LLC.(1) | |
4.7 | Secured Promissory Note issued to Michael Ricciardi.(1) | |
4.8 | Amended and Restated Common Stock Purchase Warrant issued to Laurus Master Fund LTD to Purchase up to 3,000,000 share of Common Stock of Lattice Incorporated.(1) | |
4.9 | Amended and Restated Common Stock Purchase Warrant issued to Laurus Master Fund, LTD to Purchase up to 6,000,000 shares of Common Stock of Lattice Incorporated** | |
4.10 | Common Stock Purchase Warrant issued to Laurus Master Fund, LTD to Purchase 14,583,333 Shares Of Common Stock of Lattice Incorporated. | |
4.11 | Second Amended and Restated Secured Term Note from Lattice Incorporated to Laurus Master Fund, LTD. | |
10.1 | Executive Employment Agreement Amendment made as of February 14, 2005 by and between Science Dynamics Corporation and Paul Burgess (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on March 2, 2005).(1) | |
10.2 | Stock Purchase Agreement by Ricciardi Technologies, Inc., its Owners, including Michael Ricciardi as Owner Representative and Lattice Incorporated, dated September 12, 2006.(1) | |
10.3 | Omnibus Amendment and Waiver between Lattice Incorporated and Laurus Master Fund, LTD, dated September 18, 2006.(1) | |
10.3 | Agreement dated December 30, 2004 between Science Dynamics Corporation and Calabash Consultancy, Ltd. (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 25, 2005) | |
10.4 | Employment Agreement dated January 1, 2005 between Science Dynamics Corporation, Systems Management Engineering, Inc. and Eric D. Zelsdorf (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 25, 2005) | |
10.5 | Executive Employment of dated March 7, 2005 by and between Science Dynamics Corporation and Joe Noto (Incorporated by reference to the 10-KSB filed on April 17, 2006) | |
10.7 | Sub-Sublease Agreement made as of June 22, 2001 by and between Software AG and Systems Management Engineering, Inc. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005) | |
10.8 | Securities Purchase Agreement dated February 11, 2005 by and between Science Dynamics Corporation and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005) |
24 |
10.9 | Master Security Agreement dated February 11, 2005 among Science Dynamics Corporation, M3 Acquisition Corp., SciDyn Corp. and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005) | |
10.10 | Stock Pledge Agreement dated February 11, 2005 among Laurus Master Fund, Ltd., Science Dynamics Corporation, M3 Acquisition Corp. and SciDyn Corp. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005) | |
10.11 | Subsidiary Guaranty dated February 11, 2005 executed by M3 Acquisition Corp. and SciDyn Corp. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005) | |
10.12 | Registration Rights Agreement dated February 11, 2005 by and between Science Dynamics Corporation and Laurus Master Fund, Ltd. (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005) | |
10.13 | Microsoft Partner Program Agreement (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005 | |
10.14 | AmberPoint Software Partnership Agreement (Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on February 18, 2005) | |
10.15 | Securities Agreement between Science Dynamics Corporation and Barron Partners LP, dated September 15, 2006.(1) | |
10.16 | Employment Agreement between Science Dynamics Corporation and Michael Ricciardi.(1) | |
10.17 | Amendment to Employment Agreement - Paul Burgess.(1) | |
10.18 | Amendment to Employment Agreement - Joe Noto.(1) | |
10.19 | Registration Rights Agreement by and among Science Dynamics Corporation and Barron Partners LLP, dated As of September 19, 2006.(1) | |
10.20 | Amendment to Securities Purchase Agreement and Registration Rights Agreement (Incorporated by Reference to the Registration Statement on Form SB-2 filed with the SEC on February 12, 2007). | |
10.21 | Exchange Agreement between Lattice Incorporated and Barron Partners LP dated June 30, 2008.(2) | |
10.22 | Certificate of Designations of Series C Preferred Stock.(2) | |
10.23 | Accounts Receivable Purchase Agreement dated March 11, 2009.(3) | |
10.24 | Securities Purchase Agreement dated February 1, 2010 | |
10.25 | Promissory Note issued to I. Wistar Morris. (4) | |
10.26 | Security Agreement dated June 11, 2010 by and between Lattice, Incorporated, Lattice Government Services, Inc. and I. Wistar Morris.(4) | |
10.27 | Inter-Creditor Agreement dated June 11, 2010 among Action Capital Corporation and I. Wistar Morris. (4) | |
10.28 | Amendment Number One to Promissory Note issued to I. Wistar Morris dated July 21, 2010.(4) | |
10.29 | Amendment Number One to Security Agreement by and between Lattice, Incorporated, Lattice Government Services, Inc. and I. Wistar Morris dated July 21, 2010.(4) | |
10.30 | First Amendment to Intercreditor Agreement between Action Capital Corporation and I. Wistar Morris. (4) |
25 |
10.31 | Certificate of Designation, Series D Convertible Preferred Stock, dated February 10, 2011.(5) | |
10.32 | Securities Purchase Agreement, between the Company and Barron Partners LP, dated February 14, 2011.(5) | |
10.33 | Securities Purchase Agreement between Company and Barron Partners LP, dated March 28, 2011 | |
10.34 | Amended Certificate of Designation, Series D Convertible Preferred Stock, dated April 17, 2011.(6) | |
10.35 |
Asset Purchase Agreement by and among the Company and Blackwatch International, Inc., dated as of March 29, 2013. (7) | |
10.36 | Asset Purchase Agreement by and among the Company and Innovisit LLC, dated as of November 1, 2013. (8) | |
14.1 | Code of Ethics (Incorporated by reference to the Company’s annual report on Form 10-KSB for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission on April 9, 2004) | |
21.1 | Subsidiaries of the Company (Incorporated by Reference to the Registration Statement on Form SB-2 filed with the SEC on February 12, 2007). | |
31.1 | Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act | |
31.2 | Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act | |
32.1 | Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code | |
32.2 | Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code | |
99.1 | Pledge and Security Agreement made by and between Science Dynamics Corporation in favor of and being delivered to Michael Ricciardi as Owner Representative, dated September 19, 2006.(1) | |
99.10 | Lockup Agreement from Laurus Master Fund, LTD.(1) | |
99.11 | Irrevocable Proxy.(1) | |
99.2 | Escrow Agreement by and between Science Dynamics Corporation, Ricciardi Technologies, Inc. and the individuals listed on Schedule 1 thereto, dated September 19, 2006.(1) | |
99.3 | Form of Lock Up Agreement, executed pursuant to the Securities Purchase Agreement between Science Dynamics Corporation and Barron Barron Partners, dated September 15, 2006.(1) |
(1) Incorporated by reference to the 8-K filed by the Company with the SEC on September 25, 2006 |
(2) Incorporated by reference to the 8-K filed by the Company on July 8, 2008 |
(3) Incorporated by reference to the 8-K filed by the Company on March 27, 2009 |
(4) Incorporated by reference to the 10-Q for fiscal quarter ending June 30, 2010 and filed by the Company on August 20, 2010 |
(5) Incorporated by reference to the 8-K filed by the Company on February 22, 2011 |
(6) Incorporated by reference to the 8-K filed by the Company on March 13, 2011 |
(7) Incorporated by reference to the 8-K filed by the Company on May 6, 2013 (8) Incorporated by reference to the 8-K filed by the Company on November 18, 2013 |
26 |
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LATTICE INCORPORATED | ||
Date: March 31, 2014 | By: /s/ Paul Burgess | |
Paul Burgess | ||
President, Chief Executive Officer | ||
and Director | ||
Date: March 31, 2014 | By: /s/ Joe Noto | |
Joe Noto | ||
Chief Financial Officer and Principal | ||
Accounting Officer |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Paul Burgess | ||||
Paul Burgess | President, Chief Executive Officer and Director | March 31, 2014 | ||
/s/ Joe Noto | ||||
Joe Noto | Chief Financial Officer and Secretary | March 31, 2014 | ||
/s/ Donald Upson | ||||
Donald Upson | Director | March 31, 2014 | ||
/s/ John Boyd | ||||
John Boyd | Director | March 31, 2014 | ||
/s/ Mark V. Rosenker | ||||
Mark V. Rosenker | Director | March 31, 2014 |
27 |
Lattice Incorporated Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firms | F-2 |
Consolidated Balance Sheets as of December 31, 2013 and 2012 | F-3 |
Consolidated Statements of Operations, two years ended December 31, 2013 and 2012 | F-4 |
Consolidated Statements of Changes in Shareholders' Equity, two years ended December 31, 2013 | F-5 |
Consolidated Statements of Cash Flows, two years ended December 31, 2013 and 2012 | F-6 |
Notes to Consolidated Financial Statements | F-7 - F-29 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Lattice Incorporated
We have audited the accompanying consolidated balance sheet of Lattice Incorporated as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years in the two-year period ended December 31, 2013. Lattice Incorporated’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lattice Incorporated and Subsidiaries as of December 31, 2013 and 20131, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 1b to the financial statements, the Company has a history of operating losses, has a working capital deficit and requires additional working capital to meet its current liabilities. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1b. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Somerset, New Jersey
March 31, 2014
F-2 |
LATTICE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, | December 31, | |||||||
2013 | 2012 | |||||||
ASSETS: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 312,703 | $ | 30,368 | ||||
Accounts receivable | 1,897,856 | 2,420,737 | ||||||
Note receivable - current | 350,000 | – | ||||||
Inventories | 9,330 | – | ||||||
Other current assets | 73,940 | 109,698 | ||||||
Total current assets | 2,643,829 | 2,560,803 | ||||||
Property and equipment, net | 861,712 | 518,444 | ||||||
Other intangibles, net | 895,439 | 910,008 | ||||||
Note receivable - long term | 350,000 | – | ||||||
Other assets | 12,812 | 2,812 | ||||||
Assets to be disposed of: goodwill and intangibles | – | 923,381 | ||||||
Total assets | $ | 4,763,792 | $ | 4,915,448 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,075,651 | $ | 1,854,009 | ||||
Accrued expenses | 2,264,260 | 1,499,526 | ||||||
Customer advances | 1,023,966 | 456,930 | ||||||
Notes payable - current, net of discounts $227,251 and $19,484, respectively | 2,601,724 | 2,033,312 | ||||||
Derivative liability | 122,698 | 57,634 | ||||||
Billings in excess of costs and estimated earnings | 45,797 | – | ||||||
Liabilities to be disposed of | – | 225,104 | ||||||
Total current liabilities | 7,134,096 | 6,126,515 | ||||||
Long term liabilities: | ||||||||
Long term liability to be disposed of | – | 56,352 | ||||||
Notes Payable - long term, net of discounts $0 and $5,158, respectively | 100,000 | 360,840 | ||||||
Deferred tax liabilities | – | 94,184 | ||||||
Total long term liabilities | 100,000 | 511,376 | ||||||
Total liabilities | 7,234,096 | 6,637,891 | ||||||
Shareholders' Deficit | ||||||||
Preferred Stock - .01 par value Series A 9,000,000 shares authorized 6,575,815 issued and outstanding as of December 31, 2013 and 6,895,815 issued and outstanding as of December 31, 2012 |
|
|
65,758 |
|
|
|
68,958 |
|
Series B 1,000,000 shares authorized 1,000,000 issued and 502,160 outstanding | 10,000 | 10,000 | ||||||
Series C 520,000 shares authorized 520,000 issued and outstanding | 5,200 | 5,200 | ||||||
Series D 636,400 shares authorized 590,910 issued and outstanding | 5,909 | 5,909 | ||||||
Common stock - .01 par value, 200,000,000 authorized, 38,569,714 and 33,116,509 issued and 35,304,714 and 32,313,522 outstanding respectively as of December 31, 2013 and 2012 |
|
|
353,047 |
|
|
|
326,166 |
|
Additional paid-in capital | 43,714,377 | 43,338,352 | ||||||
Accumulated deficit | (46,066,499 | ) | (45,039,065 | ) | ||||
(1,912,208 | ) | (1,284,480 | ) | |||||
Stock held in treasury, at cost | (558,096 | ) | (558,096 | ) | ||||
Equity attributable to shareowners of Lattice Incorporated | (2,470,304 | ) | (1,842,576 | ) | ||||
Equity attributable to noncontrolling interest | – | 120,133 | ||||||
Total liabilities and shareholders' deficit | $ | 4,763,792 | $ | 4,915,448 |
See accompanying notes to the consolidated financial statements.
F-3 |
LATTICE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
FOR THE YEARS ENDED DECEMBER 31, 2013 and 2012
2013 | 2012 | |||||||
Revenue | $ | 8,269,834 | $ | 7,530,216 | ||||
Cost of Revenue | 5,460,873 | 5,094,031 | ||||||
Gross Profit | 2,808,961 | 2,436,185 | ||||||
34.0% | 32.4% | |||||||
Operating expenses: | ||||||||
Selling, general and administrative | 2,769,176 | 2,250,457 | ||||||
Research and development | 659,178 | 659,787 | ||||||
Total operating expenses | 3,428,354 | 2,910,244 | ||||||
Loss from operations | (619,393 | ) | (474,059 | ) | ||||
Other income (expense): | ||||||||
Derivative income (expense) | (65,064 | ) | 38,733 | |||||
Financing fees | (53,035 | ) | – | |||||
Gain on extinguishment of debt | 29,658 | – | ||||||
Other income | 46,713 | 255,613 | ||||||
Interest expense | (356,915 | ) | (298,599 | ) | ||||
Total other income (expense) | (398,643 | ) | (4,253 | ) | ||||
Loss before taxes | (1,018,036 | ) | (478,312 | ) | ||||
Income taxes | 2,000 | – | ||||||
Net Loss from continuing operations | (1,020,036 | ) | (478,312 | ) | ||||
Net Loss from operations of discontinued component | (503,733 | ) | (92,460 | ) | ||||
Gain on sale of assets discontinued component | 521,443 | – | ||||||
Net income (loss) from operations of discontinued component | 17,710 | (92,460 | ) | |||||
Net loss | $ | (1,002,326 | ) | $ | (570,772 | ) | ||
Reconciliation of net income (loss) to income applicable to common shareholder: | ||||||||
Net loss | $ | (1,002,326 | ) | $ | (570,772 | ) | ||
Preferred Stock Dividend | (25,108 | ) | (25,108 | ) | ||||
Loss applicable to common stockholders | $ | (1,027,434 | ) | $ | (595,880 | ) | ||
Basic net Loss per common share | ||||||||
From continuing operations | $ | (0.03 | ) | $ | (0.02 | ) | ||
From Discontinued operations | 0.00 | (0.00 | ) | |||||
Net Loss per common share | $ | (0.03 | ) | $ | (0.02 | ) | ||
Diluted net Loss per common share | ||||||||
From continuing operations | $ | (0.03 | ) | $ | (0.02 | ) | ||
From Discontinued operations | 0.00 | (0.00 | ) | |||||
Net Loss per common share | $ | (0.03 | ) | $ | (0.02 | ) | ||
Weighted average shares: | ||||||||
Basic | 33,582,936 | 30,633,941 | ||||||
Diluted | 33,582,936 | 30,633,941 |
See accompanying notes to the consolidated financial statements.
F-4 |
LATTICE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHARHOLDERS' DEFICIT
FOR THE TWO YEARS ENDED DECEMBER 31, 2013
Preferred Stock | Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||
Additional Paid In | Accumulated | Stockholders | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | deficit | Shares | Amount | 'Deficit | ||||||||||||||||||||||||||||
Stockholders' deficit, December 31, 2011 | 9,641,592 | $ | 96,416 | 29,851,509 | $ | 298,516 | $ | 43,313,969 | $ | (44,443,185 | ) | 302,987 | $ | (558,096 | ) | $ | (1,292,380 | ) | ||||||||||||||||||
Net income (loss) | – | – | – | – | – | (570,772 | ) | (570,772 | ) | |||||||||||||||||||||||||||
Common stock issued for services | – | – | 500,000 | 5,000 | 35,000 | 40,000 | ||||||||||||||||||||||||||||||
Common stock issue for conversions of 634,205 SHS Series A Preferred Stock | (634,866 | ) | (6,349 | ) | 2,265,000 | 22,650 | (16,301 | ) | 0 | |||||||||||||||||||||||||||
Share-based compensation | – | – | – | – | 5,684 | 5,684 | ||||||||||||||||||||||||||||||
Dividends - Series B Preferred (1000000 less 497840) | (25,108 | ) | (25,108 | ) | ||||||||||||||||||||||||||||||||
Stockholders' deficit, December 31, 2012 | 9,006,726 | $ | 90,067 | 32,616,509 | $ | 326,166 | $ | 43,338,352 | $ | (45,039,065 | ) | 302,987 | $ | (558,096 | ) | $ | (1,842,576 | ) | ||||||||||||||||||
Net income (loss) | – | – | – | – | – | (1,002,326 | ) | (1,002,326 | ) | |||||||||||||||||||||||||||
Common stock issued for services | 578,333 | 5,783 | 68,617 | 74,400 | ||||||||||||||||||||||||||||||||
Common stock issued for financing fees Cantone | – | – | 145,000 | 1,450 | 20,300 | 21,750 | ||||||||||||||||||||||||||||||
Common stock issued for conversion of 320,000 SHS of Series A Preferred | (320,000 | ) | (3,200 | ) | 1,142,848 | 11,428 | (8,228 | ) | (0 | ) | ||||||||||||||||||||||||||
Common stock issued for exchange of 950,000 warrants | – | – | 822,024 | 8,220 | (8,220 | ) | 0 | |||||||||||||||||||||||||||||
Common stock warrants issued with debt financing (1,950,000 warrants issued) | – | – | – | – | 221,075 | 221,075 | ||||||||||||||||||||||||||||||
Share-based compensation | – | – | – | – | 82,481 | 82,481 | ||||||||||||||||||||||||||||||
Dividends - Series B Preferred (1000000 less 497840) | (25,108 | ) | (25,108 | ) | ||||||||||||||||||||||||||||||||
Stockholders' deficit, December 31, 2013 | 8,686,726 | $ | 86,867 | 35,304,714 | $ | 353,047 | $ | 43,714,377 | $ | (46,066,499 | ) | 302,987 | $ | (558,096 | ) | $ | (2,470,304 | ) |
See accompanying notes to the consolidated financial statements.
F-5 |
LATTICE INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2013 and 2012
2013 | 2012 | |||||||
Cash flow from operating activities: | ||||||||
Net Loss | $ | (1,002,326 | ) | $ | (570,772 | ) | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Operating activities discontinued operations | 48,050 | 114,504 | ||||||
Gain on disposition of discontinued Government segment assets | (521,443 | ) | – | |||||
Derivative income (expense) | 65,064 | (38,733 | ) | |||||
Amortization of intangible assets | 162,963 | 129,996 | ||||||
Stock issued for service | 74,400 | 40,000 | ||||||
Amortization of debt discount | 64,547 | – | ||||||
Gain on extinguishment of debt | (76,371 | ) | – | |||||
Financing fees | 53,035 | – | ||||||
Share-based compensation | 84,799 | 5,684 | ||||||
Depreciation | 263,511 | 254,522 | ||||||
Changes in operating assets and liabilities: | – | |||||||
(Increase) decrease in: | ||||||||
Accounts receivable | 518,936 | 280,122 | ||||||
Other current assets | 183,581 | 15,510 | ||||||
Increase (decrease) in: | – | |||||||
Accounts payable and accrued liabilities | 43,784 | (117,083 | ) | |||||
Billing in excess of cost and estimated earnings | 45,797 | (50,000 | ) | |||||
Customer advances | 567,036 | 332,664 | ||||||
Total adjustments | 1,577,689 | 967,186 | ||||||
Net cash used in operating activities | 575,363 | 396,414 | ||||||
Cash Used in investing activities: | ||||||||
Purchase of equipment | (304,184 | ) | (160,255 | ) | ||||
Cash received sale of discontinued operations | 231,670 | – | ||||||
Net cash provided by investing activities | (72,514 | ) | (160,255 | ) | ||||
Cash flows from financing activities: | ||||||||
Revolving credit facility (payments) borrowings, net | (232,807 | ) | (179,966 | ) | ||||
Payments on capital equipment lease | (25,371 | ) | (21,675 | ) | ||||
Payments on notes payable - discontinued operations | (56,352 | ) | (282,456 | ) | ||||
Payments on notes payable | (940,000 | ) | (35,882 | ) | ||||
Proceeds from the issuance of note payable, net of discount | 1,085,000 | 175,000 | ||||||
Payments on director loans | (50,984 | ) | (53,098 | ) | ||||
Net cash used in financing activities | (220,514 | ) | (398,077 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 282,335 | (161,918 | ) | |||||
Cash and cash equivalents - beginning of period | 30,368 | 192,286 | ||||||
Cash and cash equivalents - end of period | $ | 312,703 | $ | 30,368 | ||||
Supplemental cash flow information | ||||||||
Interest paid in cash | $ | 311,826 | $ | 399,796 |
See accompanying notes to the consolidated financial statements.
F-6 |
LATTICE INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies:
a) Organization
Lattice Incorporated (the “Company”) was incorporated in the State of Delaware May 1973 and commenced operations in July 1977. The Company began as a provider of specialized solutions to the telecom industry. Throughout its history Lattice has adapted to the changes in this industry by reinventing itself to be more responsive and open to the dynamic pace of change experienced in the broader converged communications industry of today. Currently Lattice provides advanced solutions for several vertical markets. The greatest change in operations is in the shift from being a component manufacturer to a solution provider focused on developing applications through software on its core platform technology. To further its strategy of becoming a solutions provider, the Company acquired a majority interest in “SMEI” in February 2005. In September 2006 the Company purchased all of the issued and outstanding shares of the common stock of Lattice Government Services, Inc., (“LGS”) (formerly Ricciardi Technologies Inc. (“RTI”)). LGS was founded in 1992 and provides software consulting and development services for the command and control of biological sensors and other Department of Defense requirements to United States federal governmental agencies either directly or through prime contractors of such governmental agencies. LGS’s proprietary products include SensorView, which provides clients with the capability to command, control and monitor multiple distributed chemical, biological, nuclear, explosive and hazardous material sensors. In December 2009 we changed RTI’s name to Lattice Government Services Inc. In January 2007, we changed our name from Science Dynamics Corporation to Lattice Incorporated. On May 16, 2011 we acquired 100% of the shares of Cummings Creek Capital, a holding Company which itself owns 100% of the shares of CLR Group Limited. (“CLR”). CLR is a government contractor which complements our Government Services business by expanding markets and service offerings. Together the SMEI, RTI and CLR acquisitions formed our federal government services business unit. Through 2012 we operated in two segments, our federal government services unit and our telecommunication services business.
As part of the Company’s strategy to focus on its higher growth potential communications business, the Company decided during the first quarter of 2013 to exit the Government services segment which derived its revenues mainly from contracts with federal government Dept of Defense agencies either as prime contractor or as a subcontractor to another prime contractor. On April 2, 2013, we entered an Asset Purchase Agreement (“Purchase Agreement”) with Blackwatch International, Inc. (“Blackwatch”), a Virginia corporation, pursuant to which we primarily sold our government Dept. of Defense (DoD) contract vehicles for approximately $1.2 million. These assets essentially comprised our Federal Government services segment operations. The Company retained the residual assets and liabilities of Lattice Government services, Inc. We ceased operations of the federal government business back in April, 2013 coinciding with the sale of assets to Blackwatch. For the years ended 2013 and 2012 the financial results of the government services business are being reported as discontinued operations.
On November 1, 2013 we closed on the purchase of certain of assets with Innovisit, LLC. The assets mainly acquired included; awarded contracts, customer lists, and its intellectual property rights to the Video Visitation software assets. Under the agreement, the workforce and operating infrastructure supporting Innovisit’s business operations are being transferred to Lattice, including but not limited to certain employees, and leases. This acquisition complimented the product offering of our telecom services business.
b) Basis of Presentation going concern
At December 31, 2013, our working capital deficiency was $4,490,000 which compared to a working capital deficiency of $3,561,000 at December 31, 2012. The increase in deficiency for 2013 was mainly due to a $600,000 debt facility with an investor used for general working capital purposes which closed December 31, 2013 and matures June 30, 2014 combined with the principal balance maturing within the next twelve months on the seller note financing of $410,000 incurred to purchase the assets of Innovisit. Cash from operations and available capacity on current credit facilities are insufficient to cover liabilities currently due and the liabilities which will mature over the next twelve months. Additionally, we are extended on payables with trade creditors. We have several payment arrangements in place but face continuing pressures with negotiating payment arrangements with trade creditors regarding overdue payables. These conditions raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern is highly dependent upon our ability to improve our operating cash flow, maintain our credit lines and secure the full financing objective currently underway. Management is currently engaged in raising capital with a goal of raising approximately $3,600,000, the proceeds of which to be used to improve working capital and strengthen our balance sheet. Securing sufficient capital for our growth strategy may also reduce doubts about our ability to operate as a going concern. During February and March 2014, we have closed on approximately $1,000,000 of equity financing by issuing restricted common stock to accredited investors, have solicited interests for an additional $2,600,000 investment from various investors anticipated to close by May 2014 timeframe. There is no assurance, however, that we will succeed in raising this additional financing and obtain the capital sufficient to provide for all of our liquidity needs. In the event we fail to obtain the additional capital needed and/or restructure our existing debts with current creditors, we may be required to curtail our operations significantly.
Our current cash position, availability on our lines of credit and current level of operating cash flow is insufficient to support (i) current working capital requirements (ii) pay the interest costs and principal payments on maturing liabilities, and (iii) provide the additional capital for equipment purchases necessary to support our growth plans. In this regard, we are highly dependent on obtaining the remainder of the targeted financing investment for which we have has been soliciting interest. Also, we remain dependent upon maintaining and increasing our cash flow from operations and maintaining the continuing availability on our lines of credit. There can be no assurances that our businesses will generate sufficient forward operating cash flows, we will be able to obtain the balance of the financing sought, or that future borrowings under our line of credit facilities will be available in an amount sufficient to service our current indebtedness or to fund other liquidity needs.
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s financial position and operating results.
F-7 |
c) Principles of consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. All significant inter-company accounts and transactions have been eliminated in consolidation. For those consolidated subsidiaries where Company ownership is less than 100%, the outside stockholders’ interests are shown as non-controlling interest. Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis of accounting.
d) Use of estimates
The preparation of these financial statements in accordance with accounting principles generally accepted in the United States (US GAAP) requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments are based on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. US GAAP requires estimates and judgments in several areas, including those related to impairment of goodwill and equity investments, revenue recognition, recoverability of inventory and receivables, the useful lives, long lived assets such as property and equipment, the future realization of deferred income tax benefits and the recording of various accruals. The ultimate outcome and actual results could differ from the estimates and assumptions used.
e) Fair Value Disclosures
Management believes that the carrying values of financial instruments, including, cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value as a result of the short-term maturities of these instruments. As discussed in Note 1(m), below, derivative financial instruments are carried at fair value.
The carrying values of the Company’s long term debts and capital lease obligations approximates their fair values based upon a comparison of the interest rates and terms of such debt to the rates and terms of debt currently available to the Company.
f) Cash
The Company maintains its cash balances with various financial institutions. Balance at various times during the year may exceed Federal Deposit Insurance Corporation limits.
g) Inventories
Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis.
h) Income Taxes
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. At December 31, 2013 and 2012, deferred tax liabilities were $0 and $94,184, respectively.
We account for uncertain tax positions using a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, based on the technical merits. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. We did not recognize any additional tax benefit or additional charges to our tax provision during 2013 and 2012. As of December 31, 2013 and 2012, the Company has no liability related to uncertain tax positions.
The Company’s 2010, 2011, 2012 and 2013 federal and state tax returns remain subject to examination by the respective taxing authorities. In addition, net operating losses and research tax credits arising from prior years are also subject to examination at the time that they are utilized in future years. Neither the Company’s federal or state tax returns are currently under examination.
F-8 |
i) Revenue Recognition
Revenue is recognized when all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Revenue from product sales is recognized when the goods are shipped and title passes to the customer.
The company applies the guidance of SOP-97-2 with regards to its software products sold. Under this guidance, the Company determined that its product sales do not contain multiple deliverables for an extended period beyond delivery where bifurcation of multiple elements is necessary. The software is embedded in the products sold and shipped. Revenue is recognized upon delivery, installation and acceptance by the customer. PCS (post-contract support) and upgrades are billed separately and when rendered or delivered and not contained in the original arrangement with the customer. Installation services are included with the original customer arrangement but are rendered at the time of delivery of the product and invoicing.
In our Government Services segment (Discontinued operations), our revenues are derived from IT and business process outsourcing services under cost-plus, time-and-material, and fixed-price contracts, which may extend up to 5 years. Under our fixed-price contracts, revenues are generally recorded as delivery is made. For time-and-material contracts, revenues are computed by multiplying the number of direct labor-hours expended in the performance of the contract by the contract billing rates and adding other billable direct costs. Under cost-plus contracts, revenues are recognized as costs are incurred and include an estimate of applicable fees earned. Services provided over the term of these arrangements may include, network engineering, architectural guidance, database management, expert programming and functional area expert analysis Revenue is generally recognized when the service is provided and the amount earned is not contingent upon any further event.
Our fixed price contracts are primarily based on unit pricing (labor hours) or level of effort. The Company recognizes revenue for the number of units delivered in any given fiscal period. Accordingly, these contracts do not fall within the scope of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts , where revenue is recognized on the percentage-of-completion method using costs incurred in relation to total estimated costs.
Under cost reimbursable contracts, the Company is reimbursed for allowable costs, and paid a fee, which may be fixed or performance-based. Revenues on cost reimbursable contracts are recognized as costs are incurred plus an estimate of applicable fees earned. The Company considers fixed fees under cost reimbursable contracts to be earned in proportion of the allowable costs incurred in performance of the contract. For cost reimbursable contracts that include performance based fee incentives, the Company recognizes the relevant portion of the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as the Company’s prior award experience and communications with the customer regarding performance.
The allowability of certain costs under government contracts is subject to audit by the government. Certain indirect costs are charged to contracts using provisional or estimated indirect rates, which are subject to later revision based on government audits of those costs. Management is of the opinion that costs subsequently disallowed, if any, would not be significant.
Revenues related to collect and prepaid calling services generated by the communication services segment are recognized during the period in which the calls are made. In addition, during the same period, the Company records the related telecommunication costs for validating, transmitting, billing and collection, and line and long distance charges, along with commissions payable to the facilities and allowances for uncollectible calls, based on historical experience.
Government claims: Unapproved claims relate to contracts where costs have exceeded the customer’s funded value of the task ordered on our cost reimbursement type contract vehicles. The unapproved claims are considered to be probable of collection and have been recognized as revenue in previous years. Unapproved claims included as a component of our Accounts Receivable totaled approximately $1,244,000 and $1,555,000 as of December 31, 2013 and December 31, 2012. Consistent with industry practice, we classify assets and liabilities related to these claims as current, even though some of these amounts may not be realized within one year.
F-9 |
Revenues recognition for Innovisit
Revenues from construction contracts are included in contract revenue in the consolidated statements of operations and are recognized under the percentage-of-completion accounting method. The percent complete is measured by the cost incurred to date compared to the estimated total cost of each project. This method is used as management considers expended cost to be the best available measure of progress on these contracts, the majority of which are completed within one year, but may occasionally extend beyond one year. Inherent uncertainties in estimating costs make it at least reasonably possible that the estimates used will change within the near term and over the life of the contracts.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance and completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. General and administrative costs are charged to expense as incurred.
Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. An amount equal to contract costs incurred that are attributable to claims is included in revenue when realization is probable and the amount can be reliably estimated.
Costs and estimated earnings in excess of billings are comprised principally of revenue recognized on contracts (on the percentage-of-completion method) for which billings had not been presented to customers because the amount were not billable under the contract terms at the balance sheet date. In accordance with the contract terms, the unbilled receivables at December 31, 2013 will be billed in 2014. Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.
Service Revenues are recorded when the service is provided and when collection can be reasonably assured
j) Share-based payments
On January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification 718-10, Accounting for Share-based payment , to account for compensation costs under its stock option plans and other share-based arrangements. ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.
For purposes of estimating fair value of stock options, we use the Black-Scholes-Merton valuation technique. For the twelve months ended December 31, 2013 and 2012, there was approximately $706,000 and $10,248 of total unrecognized compensation cost related to unvested share-based compensation awards granted under the equity compensation plans which do not include the effect of future grants of equity compensation, if any. The $706,000 will be amortized over the weighted average remaining service period.
F-10 |
k) Depreciation, amortization and long-lived assets:
Long-lived assets include:
Property, plant and equipment - These assets are recorded at original cost. The Company depreciates the cost evenly over the assets’ estimated useful lives. For tax purposes, accelerated depreciation methods are used as allowed by tax laws.
Goodwill- Goodwill represents the difference between the purchase price of an acquired business and the fair value of the net assets acquired and the liabilities assumed at the date of acquisition. Goodwill is not amortized. The Company tests goodwill for impairment annually ( or in interim periods if events or changes in circumstances indicate that its carrying amount may not be recoverable) by comparing the fair value of each reporting unit, as measured by discounted cash flows, to the carrying value to determine if there is an indication that potential impairment may exist. Absent an indication of fair value from a potential buyer or similar specific transactions, the Company believes that the use of this income approach method provides reasonable estimates of the reporting unit’s fair value. Fair value computed by this method is arrived at using a number of factors, including projected future operating results, economic projections and anticipated future cash flows. The Company reviews its assumptions each time goodwill is tested for impairment and makes appropriate adjustments, if any, based on facts and circumstances available at that time. There are inherent uncertainties, however, related to these factors and to management’s judgment in applying them to this analysis. Nonetheless, management believes that this method provides a reasonable approach to estimate the fair value of the Company’s reporting units.
The income approach, which is used for the goodwill impairment testing, is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. Management believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating and cash flow performance. This approach also mitigates most of the impact of cyclical downturns that occur in the reporting unit’s industry. The income approach is based on a reporting unit’s five year projection of operating results and cash flows that is discounted using a buildup approach. The projection is based upon management’s best estimates of projected economic and market conditions over the related period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future capital expenditures and changes in future working capital requirements based on management projections.
Identifiable intangible assets - The Company amortizes the cost of other intangibles over their useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are not amortized; however, they are tested annually for impairment and written down to fair value as required.
At least annually, The Company reviews all long-lived assets for impairment. When necessary, charges are recorded for impairments of long-lived assets for the amount by which the fair value is less than the carrying value of these assets.
l) Fair Value of Financial Instruments
In accordance with FASB ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
● | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
● | Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
● | Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value. |
As of December 31, 2013 and December 31, 2012, the derivative liabilities amounted to $122,698 and $57,634. In accordance with the accounting standards the Company determined that the carrying value of these derivatives approximated the fair value using the level 3 inputs.
F-11 |
m) Derivative Financial Instruments and Registration Payment Arrangements
Derivative financial instruments, as defined in Financial Accounting Standard, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into various types of financing arrangements to fund its business capital requirements, including convertible debt and other financial instruments indexed to the Company’s own stock. These contracts require careful evaluation to determine whether derivative features embedded in host contracts require bifurcation and fair value measurement or, in the case of freestanding derivatives (principally warrants) whether certain conditions for equity classification have been achieved. In instances where derivative financial instruments require liability classification, the Company is required to initially and subsequently measure such instruments at fair value. Accordingly, the Company adjusts the fair value of these derivative components at each reporting period through a charge to income until such time as the instruments acquire classification in stockholders’ equity. See Note 9 for additional information.
As previously stated, derivative financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, management considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes-Merton option valuation technique because it embodies all of the requisite assumptions (including trading volatility, dividend yield, estimated terms and risk free rates) necessary to fair value these instruments. For complex derivative instruments, such as embedded conversion options, the Company generally uses the Flexible Monte Carlo valuation technique because it embodies all of the requisite assumptions (including credit risk, interest-rate risk and exercise/conversion behaviors) that are necessary to fair value these more complex instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, the Company projects and discounts future cash flows applying probability-weightings to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income (loss) will reflect the volatility in these estimate and assumption changes.
n) Segment Reporting
FASB ASC 280-10-50, “Disclosure about Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. The Company exited its Government services business in April 2013 and is reporting the operating results of that unit as discontinued operations in the financial reports. Accordingly, the Company operates in one segments during the year ended December 31, 2013 (Telecom services).
o) Basic and diluted income (loss) per common share:
The Company calculates income (loss) per common share in accordance with Statements on Financial Accounting Standards ASC Topic 260, Earnings Per Share (“ASC 260”). Basic and diluted income (loss) per common share is computed based on the weighted average number of common shares outstanding. Common share equivalents (which consist of convertible preferred stock, options and warrants) are excluded from the computation of diluted loss per share since the effect would be anti-dilutive. Common share equivalents which could potentially dilute basic earnings per share in the future, and which were excluded from the computation of diluted loss per share, totaled approximately 58 million shares and 54 million shares at December 31, 2013 and 2012, respectively.
F-12 |
p) Recent accounting pronouncements
In July, 2013, the FASB issued Accounting Standards Update, or ASU, No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force), or ASU 2013-11. The amendments in ASU 2013-11 provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in ASU No. 2013-11 do not require new recurring disclosures. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments in ASU No. 2013-11 are not expected to have a material impact on our consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, or ASU 2012-02. ASU 2012-02 gives entities an option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the long-lived intangible asset are impaired. If, based on its qualitative assessment, an entity concludes that it is more likely than not that the fair value of an indefinite lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. ASU 2012-02 is not expected to have a material impact on our financial position or results of operations.
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, or ASU 2011-11. ASU 2011-11 enhances current disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. Entities are required to provide both net and gross information for these assets and liabilities in order to facilitate comparability between financial statements prepared in conformity with GAAP and financial statements prepared on the basis of International Financial Reporting Standards. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those years. ASU 2011-11 is not expected to have a material impact on our financial position or results of operations.
We do not believe there would have been a material effect on the accompanying consolidated financial statements had any other recently issued, but not yet effective, accounting standards been adopted in the current period.
q) Reclassifications
Certain 2012 amounts have been reclassified to conform to current year presentation
F-13 |
Note 2 - Accounts Receivable
The Company evaluates its accounts receivable on a customer-by-customer basis and has determined that an allowance for doubtful accounts is necessary at December 31, 2013 related to its incurred cost claim receivables attributable to the Company’s discontinued Federal government operations. These claims with Federal Dept. of Defense agencies relate to prior year contracts where costs have exceeded the customer’s funded value of the task ordered on our cost reimbursement type contract vehicles. Unapproved claims included as a component of our Accounts Receivable totaled approximately $1,555,000 before a reserve allowance of $311,000 as of December 31, 2013. As of December 31, 2012, the receivable balance was $1,555,000. These unapproved claims represent the additional costs recoverable on our cost recoverable type contract vehicles as supported by our actual incurred cost submissions or actual rate filings with the DCAA (Defense Contract Audit Agency) compared to the provisional (budgetary) rates used for billing under these contracts. We are engaged with the Defense Contract Audit Agency (DCAA) in the review of these claims. Based on evaluations by management and information regarding the backlog for DCAA audits of incurred cost submissions and recent communications with DCAA, management believes that a reserve allowance estimate of 20% of these receivables is appropriate. Accordingly, the Company recorded bad debt expense of $311,000 which is included as a component of loss from discontinued operations in the Profit and Loss statement.
Consistent with industry practice and since we are currently engaged in the closing out these claims with DCAA, we have classified the remaining $1,244,000 of receivables as current assets.
Note 3 - Property and Equipment
A summary of the major components of property and equipment is as follows:
December 31, 2013 | December 31, 2012 | |||||||
Computers, fixtures and equipment | $ | 3,157,729 | $ | 2,641,947 | ||||
Less : accumulated depreciation | (2,295,820 | ) | (2.123,503 | ) | ||||
Total | $ | 861,712 | $ | 518,444 |
Depreciation expense for December 31, 2013 and 2012 was $263,511 and $254,522 respectively.
F-14 |
Note 4 - Notes payable
Notes payable consists of the following as of December 31, 2013 and December 31, 2012:
December 31, 2013 | December 31, 2012 | |||||||
Bank line-of-credit (a) | $ | – | $ | 232,807 | ||||
Notes payable to Stockholder/director (b) | 192,048 | 243,315 | ||||||
Capital lease payable (c) | – | 25,089 | ||||||
Notes Payable (d) | 1,999,676 | 1,892,941 | ||||||
Note Payable, Innovisit (e) | 510,000 | – | ||||||
Notes payable Cummings Creek/CLR (f) (disposed of liability) | – | 281,456 | ||||||
Total notes payable | 2,701,724 | 2,675,608 | ||||||
Less current maturities | (2,601,724 | ) | (2,258,416 | ) | ||||
Long-term debt | $ | 100,000 | $ | 417,192 |
(a) Bank Line-of-Credit
On July 17, 2009, the Company and its wholly-owned subsidiary, Lattice Government Services (formally “RTI”), entered into a Financing and Security Agreement (the “Action Agreement”) with Action Capital Corporation (“Action Capital”).
Pursuant to the terms of the Action Agreement, Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable account receivables of the Company (the “Acceptable Accounts”). The maximum amount eligible to be advanced to the Company by Action Capital under the Action Agreement is $3,000,000. The Company will pay Action Capital interest on the advances outstanding under the Action Agreement equal to the prime rate of Wachovia Bank, N.A. in effect on the last business day of the prior month plus 1%. In addition, the Company will pay a monthly fee to Action Capital equal to 0.75% of the total outstanding balance at the end of each month.
In addition, pursuant to the Action Agreement, the Company granted Action Capital a security interest in certain assets of the Company including all, accounts receivable, contract rights, rebates and books and records pertaining to the foregoing (the “Action Lien”). On June 11, 2010, Action Capital and an accredited investor entered into an agreement under which $1,250,000 of the collateral otherwise securing advances covered by the Action Agreement are subordinated to a new security interest securing an additional loan from the accredited investor. During November 2011, $268,345 of the collateral was collected by Action, escrowed and paid directly to the accredited investor reducing the collateral and outstanding balance on the loan to $981,655 at September 30, 2013. See (d) below.
The outstanding balance owed on the line at December 31, 2013 and December 31, 2012 was $0 and $232,807 respectively. At December 31, 2013 and December 31, 2012 our interest rate was approximately 13.25%.
(b) Notes Payable Stockholders/Director
The first note bears interest at 21.5% per annum. During December 2010, the note was amended to flat monthly payments of $6,000 until maturity, December 31, 2013, at which time any remaining interest and or principal will be paid. This note has an outstanding balance of $24,048 and $75,315 as of December 31, 2013 and December 31, 2012, respectively. Payment of the note is past due however the note holder has not invoked his rights under the default provisions of the note.
The second note dated October 14, 2011 has a face value of $168,000 of which the Company received $151,200 in net proceeds during October 2011. The discount of $16,800 is being amortized to interest expense over the term of the note. The note carries an annual interest rate of 10% payable quarterly at the rate of $4,200 per quarter. The entire principal on the note of $168,000 is due at maturity on October 14, 2014. The Company is in arrears on interest payments that were due but has accrued the interest costs on the note. The holder has not as of the date of this filing invoked his rights under the default provisions of the note related to the past due interest payments.
F-15 |
(c) Capital Lease Payable
On June 16, 2009 Lattice entered an equipment lease financing agreement with Royal Bank America Leasing to purchase approximately $130,000 in equipment for our communication services. The terms of which included monthly payments of $5,196 per month over 32 months and a $1.00 buy-out at end of the lease term. On July 15, 2011 we signed an addendum to this lease and received additional equipment financing for $58,122 payable over 30 months at $2,211 per month. As of December 31, 2013 and December 31, 2012, the outstanding balance was $0 and $25,089, respectively.
(d) Note Payable
On June 11, 2010, Lattice closed on a Note Payable for $1,250,000. The net proceeds to the Company were $1,100,000. The $150,000 was amortized over the life of the note as additional interest expense. The note matured June 30, 2012 and payment of principal was due at that time in the lump sum value of $981,655 including any unpaid interest. On June 30, 2012 the holder of the note agreed to an extension for payment in full of the note to October 31, 2012. In addition to the maturity extension the Company agreed to increase the collateral by $250,000 the note was secured by certain receivables totaling $981,655, the new secured total is approximately $1,232,000. Until maturity, Lattice is required to make quarterly interest payments (calculated in arrears) at 12% stated interest with the first quarter interest payment of $37,500 due September 30, 2010 and $37,500 due each quarter end thereafter until the final payment comes due October 31, 2012 totaling $1,019,155 including the final interest payment. Concurrent with the note, an intercreditor agreement was signed between Action Capital and Holder where Action Capital has agreed to subordinate the Action Lien on certain government contracts, task orders and accounts receivable totaling $981,655. During November 2011, $268,345 of the original $1,250,000 accounts receivable securing the note was collected, escrowed and paid directly to the note holder by Action Capital thereby reducing the outstanding balance on the note and the collateral to $981,655 at December 31, 2013 and 2012. As of the date of this filing, the Company is currently in violation under this note agreement from not paying the principal due at the October 31, 2012 maturity date. The Company is current with quarterly interest payments. The holder has not as of the date of this filing invoked his rights under the default provisions of the note.
During the quarter ended June 30, 2011, we issued a two year promissory note payable for $200,000 to a shareholder of the Company. The Note bears interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on June 30, 2011. On May 15, 2013 the maturity date, the principal amount of $200,000 became due along with any unpaid and accrued interest. The Company is not in compliance with the terms of the note. We have accrued interest at current rate; no default provision has been invoked.
During the quarter ended September 30, 2011, we issued a two year promissory note payable for $227,272 to an investor. The Note bears interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on September 30, 2011. On August 3, 2013 the maturity date, the principal amount of the note will be due along with any unpaid and accrued interest. The Company is not in compliance with the terms of the note. We have accrued interest at current rate; no default provision has been invoked.
On December 13, 2011, we converted outstanding invoices that we owed a vendor by converting the liability to a promissory note in the amount of $416,533. The note is payable quarterly over a two year term with principal payments due as follows: December 31, 2011 of $10,000, January 15, 2012 of $50,000, March 31, 2012 of $20,000, June 30, 2012 of $30,000, September 30, 2012 of $30,000, December 31, 2012 of $45,000, March 31, 2013 of $45,000, June 30, 2013 of $55,000, September 30, 2013 of $55,000 and December 31, 2013 of $76,533. The note carries a 12% annual interest rate calculated on the outstanding principal balance payable monthly. As of December 31, 2013, the outstanding balance of the note is $20,000. The Company was in default under this note agreement in that it did not pay certain principal payments when due. In June 2013, the Company was served a writ of Garnishment against the note receivable of $700,000 from Blackwatch International Inc. for the outstanding balance due for which we are in default. In October 2013, the Company reached a settlement arrangement whereby the holder agreed to forbear any further collection actions against the Company in exchange for $280,000 payable as follows; $240,000 on October 10, 2013 and then $10,000 payable monthly over four months starting November 10, 2013. The October, November and December payments totaling $260,000 were paid as of December 31, 2013 leaving a remaining balance of $20,000 under the note at December 31, 2013. The Company recorded a gain on extinguishment of $29,658 representing the difference between the loan balance before the settlement of $309,658 and the settlement amount of $280,000.
On January 23, 2012, we issued several promissory notes to private investors with face values totaling $198,000. The proceeds from the notes totaled $175,000 used for working capital. The discount of $23,000 has been recorded as a deferred financing fee and amortized over the life of the note. The Notes bear interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on March 31, 2012. On January 23, 2014 the maturity date, the principal amount of the notes were due along with any unpaid and accrued interest.
F-16 |
On February 26, 2013, the Company issued a note to an investor for $600,000 for which $580,400 of net proceeds were received. The note bears interest of 12% payable monthly and is due in full to investor by the earlier of (i) September 1, 2013 or (ii) the date the customer pays for the system. The note was issued to finance the costs associated with a purchase order transaction with a large telecommunications customer. In addition to the interest we agreed to deliver warrants to the lender for the purchase of up to 800,000 shares of common stock at an exercise price of $0.08 per share, with anti-dilution provisions covering capital stock changes affecting all stockholders, exercisable for four years from the date of issuance. A debt discount of $64,547 was recorded representing the fair value of the warrants issued and was fully amortized to interest expense during the nine months ended September 30, 2013. The fair value of the warrants was determined using the Black Scholes pricing model with the following assumptions; No dividend yield, expected volatility of 159%, a risk free rate of 0.73% and an expected life of 4 years. The Company also recorded amortization of deferred financing fees of $19,600 representing agency fees which has been fully amortized to expense. The Company paid this note in full on July 27, 2013.
On October 7, 2013, we issued a promissory note with a face value of $110,000 and 150,000 warrants to an investor. The net proceeds from the note totaled $94,700 and were used for working capital. A debt discount totaling $27,185 had been recorded comprised of an original issue discount of 10% or $11,000 and the fair value of the warrants issued of $16,185. Also being deducted from proceeds were $4,300 in placement agent fees and expenses which was expensed as financing fees. The Notes bear interest of 12% per year, however no interest charged if paid off before January 1, 2014. On December 31, 2013, the principal amount of the note was paid in full from the December 31, 2013 financing with the same investor (See paragraph below). Accordingly, the unamortized debt discount of $27,185 was recorded as interest expense.
On December 31, 2013, the Company issued a note to an investor for $600,000 for which $411,000 of net proceeds were received. Of the 600,000; $60,000 was an original issue discount of 10% or $60,000, $110,000 was used to pay-off the October 2013 note held by the same investor and $19,000 was used for placement fees and legal expenses. Zero interest payable if $600,000 principal is paid within three months from the date of this Note; 12% annual interest accrues on the principal sum beginning March 30, 2014 if the principal remains outstanding, with interest paid monthly, in arrears, on the last day of the month, $6000 per month with first cash payment due April 30, 2014, and will continue until the Amount Due is paid. The net proceeds of $411,000 were used for working capital purposes. In addition to the interest we agreed to deliver warrants to the lender for the purchase of up to 1,000,000 shares of common stock at an exercise price of $0.11 per share, with anti-dilution provisions covering capital stock changes affecting all stockholders, exercisable for four years from the date of issuance. In addition, the Company issued 145,000 shares of common stock. A debt discount of $162,093 was recorded representing the fair value of the warrants and the common stock issued and is being amortized over the term of the note which matures June 30, 2014. The fair value of the warrants was determined using the Black Scholes pricing model with the following assumptions; No dividend yield, expected volatility of 176.04%, a risk free rate of 1.72% and an expected life of 4 years. The Company also recorded amortization of deferred financing fees of $19,600 representing agency fees which has been fully amortized to expense. The carrying value at December 31, 2013 was $377,907 comprised of the face value of the loan of $600,000 less original issue discount of $60,000; less the debt discount of $140,343 and $21,750 representing the fair values of the warrants and stock issued respectively.
(e) Notes payable - Innovisit
In conjunction with the purchase of intellectual property and certain other assets of Innovisit (See Note #6) on November 1, 2013, Lattice issued a promissory note for $590,000 to Icotech LLC, the owner of Innovisit. Lattice agreed to pay to Icotech; (a) $250,000 on November 30, 2013, and four payments of $60,000 on each of January 1, 2014, April 30, 2014, July 31, 2014, and October 31, 2014; and final Payment of $100,000 due and payable on January 31, 2015. The note bears no interest on the unpaid principal amount and is secured with the intellectual property acquired. . The Company had paid $80,000 on December 30, 2013 leaving a balance outstanding of $510,000 at December 31, 2013. The Company is in arrears on payments but is in discussion with the principals of Icotech on modifying the timing of payments. Icotech has not invoked any of the default provisions under the note.
(f) Notes payable Cummings Creek / CLR
In conjunction with the Cumming Creek Capital / CLR acquisition, Lattice assumed notes totaling $676,925 comprised of three notes each with the former principles of CLR Group. The notes bear interest on the unpaid principal amount until paid in full, at a rate of four percent (4.0%) per annum payable quarterly. The Company will pay the unpaid principal amount as follows: beginning on May 31, 2011, the Company will make equal payments of principal on the first day of each calendar quarter totaling $58,275 (i.e., February 28, May 31, August 30 and November 30), until February 15, 2014. The unpaid balances of the notes were assumed by Purchaser as part of the sale of our Government assets transaction on April 2, 2013. Accordingly, there is no balance owing as of December 31, 2013 on these notes.
F-17 |
Note 5 - Stockholders’ Deficit
Common Stock
General
The preferred shares have a par value of $.01 per share, and the Company is authorized to issue 11,156,400 shares. The preferred stock of the Company shall be issued by the board of directors of the Company in one or more classes or one or more series within an class, and such classes or Series shall have such voting powers, full or limited, or no voting powers, and such designations, preferences, limitations or restrictions as the board of directors of the Company may determine, from time to time. Currently issued and outstanding are designated Series A, B, C and D.
The common stock shares have a par value of $.01 per share and the Company is authorized to issue 200,000,000 shares, each share shall be entitled to cast one vote for each share held at all stockholders’ meeting for all purposes, including the election of directors. The common stock does not have cumulative voting rights.
2012 issuances:
On October 15, 2012, Barron Partners L.P. converted 262,202 shares of Series A Preferred Stock into 940,000 Common Shares. Subsequent to this conversion event, Barron Partners owned 5,443,866 shares of Series A Preferred Stock and 1,569,147 Common Shares.
On July 5, 2012, Barron Partners L.P. converted 371,003 shares of Series A Preferred Stock into 1,325,000 Common Shares. Subsequent to this conversion event, Barron Partners owned 5,707,068 shares of Series A Preferred Stock and 1,478,753 Common Shares.
2013 issuances:
On April 24, 2013, we issued 1,142,848 common shares to Barron Partners L.P. Such shares were issuable upon the March 20, 2013 exercise of conversion rights associated with 320,000 shares of Series A Preferred Stock owned by Barron Partners.
During fiscal year 2013 we issued 578,333 Common shares for services valued at $74,400.
On December 30, 2013, we issued 145,000 Common shares as compensation to placement agent for financing fees
On December 30, 2013, we issued 822,024 Common shares in exchange and cancelation of 950,000 warrants outstanding, the fair value of the exchanged warrants was less than the fair value of stock issued.
2013 Warrant issuances:
In February 2013 we issued 800,000 warrants with a 4 year term and a strike price of $0.11 per share in conjunction with $600,000 debt financing with an investor. These warrants were canceled in exchange for common shares issued December 2013 (see 2013 issuances above). These warrants had a fair value of $64,547.
In October 2013, we issued 150,000 warrants with a 4 year term and a strike price of $0.11 per share in conjunction with $110,000 debt financing with an investor. These warrants had a fair value of $16,185. These warrants were canceled in exchange for common shares issued December 2013 (see 2013 issuances above).
In December 2013, we issued 1,000,000 warrants with a 4 year term and a strike price of $0.11 per share in conjunction with $600,000 debt financing with an investor. These warrants had a fair value of $140,343.
F-18 |
Summary of our warrant activity and related information for 2013 and 2012
Number of shares under warrants | Weighted Average Exercise price | Weighted Average Remaining Contractual term in Years | Aggregate Intrinsic Value | |||||||||
Outstanding at December 31, 2011 | 3,778,233 | $ | 0.81 | 3 | $ | – | ||||||
Granted | - | – | - | – | ||||||||
Exercised | - | – | - | – | ||||||||
Cancelled/expired | - | – | - | – | ||||||||
Outstanding at December 31, 2012 | 3,778,233 | $ | 0.08 | 2 | $ | – | ||||||
Granted | 1,950,000 | $ | 0.11 | 4 | ||||||||
Exercised | - | |||||||||||
Cancelled/expired | (950,000) | $ | 0.10 | - | ||||||||
Outstanding at December 31, 2013 | 4,778,233 | $ | 0.67 | 3.5 | $ | – | ||||||
Vested and exercisable at December 31, 2013 | 4,778,233 | |||||||||||
Vested and exercisable at December 31, 2012 | 3,778,223 | |||||||||||
2013 | 2012 | |||||||||||
Weighted average fair value | $ 0.08 - $ 0.14 | – | ||||||||||
Risk-free interest rate | .73% - 1.72% | – | ||||||||||
Volatility | 159.1% - 179.2% | – | ||||||||||
Terms in years | 4 - 4.2 | – | ||||||||||
Dividend yield | 0% | – |
F-19 |
Note 6 - Asset Purchase - Innovisit
On November 1, 2013, we acquired certain assets which included; awarded contracts, customer lists, and intellectual property rights to Video Visitation software from Innovisit LLC (“Innovisit”), an Alabama limited liability company. Under the asset purchase agreement, the workforce and operating infrastructure supporting Innovisit’s business operations are being transferred to Lattice, including but not limited to certain employees, and leases.
As part of the consideration, we delivered a $590,000 secured promissory note, payable in several installments between November 30, 2013 and January 31, 2015. We also entered an employment agreement with Scott Pritchett, who has joined our organization as a manager. Under his three year employment contract, Mr. Pritchett is compensated at a base salary of $100,000 as well as commissions based upon realization of agreed upon revenue targets.
The total purchase price of $590,000 was allocated to Innovisit’s net tangible and intangible assets based upon their estimated fair values as of November 1, 2013.
The table below summarizes the preliminary allocation of the purchase price to the acquired net assets based on their estimated fair values as of Novemeber 1, 2013and the associated estimated useful lives at that date.
Amount | ||||
Purchase price: | ||||
Note Payable | $ | 590,000 | ||
Preliminary Allocation of Purchase Price: | ||||
Intangible assets: | ||||
Software (Video conferencing) | $ | 302,794 | ||
Contract backlog | 148,406 | |||
Tangible assets: | ||||
Cash | 5 | |||
Inventory | 138,795 | |||
Total purchase price allocation | $ | 590,000 |
Note 7 - Intangible assets :
In accordance with the Goodwill and Other Intangibles Topic of the ASC, goodwill and indefinite-lived intangible assets are tested for impairment annually, and interim impairment tests are performed whenever an event occurs or circumstances change that indicate that it is more likely than not that an impairment has occurred. December 31 has been established for the annual impairment review.
Determining the fair value of intangible assets is judgmental in nature and requires the use of significant estimates and assumptions including, but not limited to, revenue growth rates, future market conditions and strategic plans. The Company cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill. Such events may include, but are not limited to, the impact of the economic environment, a material negative change in relationships with significant customers; or strategic decisions made in response to economic and competitive conditions.
F-20 |
The tables below present amortizable intangible assets as of December 31, 2013 and 2012:
Gross Carrying | Accumulated | Impairment | Net Carrying | Weighted average remaining amortization | ||||||||||||||
Amount | Amortization | charge | Amount | period | ||||||||||||||
December 31, 2013 | ||||||||||||||||||
Amortizable intangible assets: | ||||||||||||||||||
IP Rights Agreement | 1,300,000 | (519,988 | ) | – | 780,012 | 3.86 years | ||||||||||||
Customer contracts | 148,406 | (32,979 | ) | – | 115,427 | 0.58 years | ||||||||||||
$ | 1,448,406 | $ | (552,967 | ) | $ | – | $ | 895,439 |
Gross Carrying | Accumulated | Impairment | Net Carrying | Weighted average remaining amortization | ||||||||||||||
Amount | Amortization | charge | Amount | period | ||||||||||||||
December 31, 2012 | ||||||||||||||||||
Amortizable intangible assets: | ||||||||||||||||||
IP Rights Agreement | 1,300,000 | (389,992 | ) | – | 910,008 | 4.86 years |
Total intangible amortization expense was $162,979 and $130,000 for the year ended December 31, 2013 and 2012, respectively.
Estimated annual intangibles amortization expense as of December 31, 2013 is as follows:
2014 | 245,427 | |||
2015 | 130,000 | |||
2016 | 130,000 | |||
2017 | 130,000 | |||
2018 | 130,000 | |||
Thereafter | 130,012 | |||
Total | $ | 895,439 |
F-21 |
Note 8 - Recurring Fair Value Measurements
On a recurring basis, we measure certain financial assets and financial liabilities at fair value based upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value. Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:
● | Level 1 – Inputs to the valuation methodology are quoted market prices for identical assets or liabilities. |
● | Level 2 – Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs. |
● | Level 3 – Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk. |
|
Fair Value at |
|
|
Quoted Prices In Active Markets for Identical Assets | |
|
Significant Other Observable Inputs |
|
|
Significant Unobservable Inputs |
|
|||||
December 31, 2013 | ( Level 1) | ( Level 2) | ( Level 3) | |||||||||||||
Liabilities | ||||||||||||||||
Derivative liabilities | $ | 122,698 | – | – | $ | 122,698 |
Fair Value at | ||||||||||||||||
December 31, 2012 | ||||||||||||||||
Liabilities | ||||||||||||||||
Derivative liabilities | $ | 57,634 | – | – | $ | 57,634 |
Note 9 - Derivative financial instruments:
The balance sheet caption derivative liabilities consist of Warrants, issued in connection with the 2005 Laurus Financing Arrangement, and the 2006 Omnibus Amendment and Waiver Agreement with Laurus. These derivative financial instruments are indexed to an aggregate of 758,333 shares of the Company’s common stock as of December 31, 2013 and December 31, 2012 and are carried at fair value. The balance at December 31, 2013 of $122,698 compared to $57,634 at December 31, 2012.
The valuation of the derivative warrant liabilities is determined using a Black Scholes Merton Model. Freestanding derivative instruments, consisting of warrants and options that arose from the Laurus financing are valued using the Black-Scholes-Merton valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in the Black Scholes models as of December 31, 2013 included conversion or strike price of $0.10; historical volatility factor of 181% based upon forward terms of instruments, and a risk free rate of 2.8% and remaining life 8.72 years.
Note 10 - Dividends
The Company accrued and recorded dividends payable on the 520,160 shares of 5% Series B Preferred Stock for the period ended December 31, 2013 and 2012. Dividends have not been declared and cannot be paid as long as the Company has an outstanding balance on its revolving line of credit.
F-22 |
Note 11 - Income Taxes
The tax provision (benefit) for the years ended December 31, 2013 and 2012 consists of the following:
December 31, | ||||||||
2013 | 2012 | |||||||
Current | – | – | ||||||
Deferred | – | (129,588 | ) | |||||
The components of the deferred tax assets (liability) as of: | ||||||||
Net operating loss carryforward | $ | 7,721,735 | $ | 7,486,772 | ||||
Stock base compensation | 455,984 | 430,305 | ||||||
Executive compensation | 40,200 | 40,200 | ||||||
Total Deferred tax Asset | 8,217,919 | 7,957,277 | ||||||
Valuation allowance for Deferred tax asset | (8,217,919 | ) | (7,957,277 | ) | ||||
Deferred tax asset | – | – | ||||||
Deferred tax liability: | ||||||||
Intangible Assets | – | (94,184 | ) | |||||
Sec 481c | – | – | ||||||
Net deferred tax long term | (94,184 | ) | ||||||
Net deferred tax | $ | – | $ | (94,184 | ) |
As of December 31, 2013 and 2012, the Company generated a net operating loss carry forwards of approximately $23,000,000 available expiring 2013-2030.
The provision for income taxes reported for the year ended December 31, 2013 and 2012.
December 31, | ||||||||
2013 | 2012 | |||||||
Provision (benefit) for taxes using statutory rate | $ | (340,791 | ) | $ | (235,236 | ) | ||
State taxes, net of federal tax benefit | 102,543 | 12,838 | ||||||
Permanent differences: | ||||||||
Non-deductible expense | 236,248 | 92,810 | ||||||
Provision (Benefit) for income taxes | $ | 2,000 | $ | (129,588 | )* |
_______________
* included in Discontinued operations
F-23 |
Note 12 - Commitments
a) Operating Leases
The Company leases its office, sales and manufacturing facilities under non-cancelable operating leases with varying terms expiring in 2013 to 2015. The leases generally provide that the Company pay the taxes, maintenance and insurance expenses related to the leased assets.
We currently have two leases for office facilities located in the United States with lease expirations occurring December 31, 2013 to March 31, 2015. The total average monthly rent for these leases in 2013 is approximately $9,000 per month.
Future minimum lease commitments as of December 31, 2013 as follows:
Operating | ||||
Leases | ||||
2014 | $ | 67,413 | ||
2015 | 51,211 | |||
2016 | – | |||
Total minimum lease payments | $ | 118,624 |
Total rent expense was $110,826 and $117,517 for the year ended December 31, 2013 and 2012 respectively.
b) Capital Lease Payable
On July 15, 2011 the Company entered an equipment lease financing agreement with Royal Bank America Leasing to purchase approximately $58,122 in equipment for our communication services. The terms of which included monthly payments of $2,211 per month over 30 months and a $1.00 buy-out at end of the lease term. As of December 31, 2013, the outstanding balance was $0 and accumulated depreciation associated with the assets under capital lease was $28,248.
F-24 |
Note 13 - Share-Based Payments
a) 2002 Employee Stock Option Plan
On November 6, 2002 the stockholders approved the adoption of The Company’s 2002 Employee Stock Option Plan. Under the Plan, options may be granted which are intended to qualify as Incentive Stock Options (“ISOs”) under Section 422 of the Internal Revenue Code of 1986 (the “Code”) or which are not (“Non-ISOs”) intended to qualify as Incentive Stock Options thereunder. The maximum number of options made available for issuance under the Plan are two million (2,000,000) options. The options may be granted to officers, directors, employees or consultants of the Company and its subsidiaries at not less than 100% of the fair market value of the date on which options are granted. The term of each Option granted under the Plan shall be contained in a stock option agreement between the Optionee and the Company.
b) 2008 Employee Stock Option Plan
The Company’s board of directors approved the adoption of the Company’s 2008 Incentive Stock Option Plan. The maximum number of shares available for issuance under the Plan is 10,000,000. The options may be granted to officers, directors, employees or consultants of the Company and its subsidiaries at not less than 100% of the fair market value of the date on which options are granted. The term of each Option granted under the Plan shall be contained in a stock option agreement between the optionee and the Company.
The board approved the issuance of options to purchase an aggregate 9,670,000 shares of the Company’s common stock to various employees, officers and directors of the company during December 31, 2013. No options were approved or issued in 2012. The Company recorded stock base compensation expense of $77,877 and $5,684 for the year ended December 31, 2013 and 2012, respectively under both plans.
We use the Black-Scholes option pricing model to estimate on the grant date the fair value of share-based awards in determining our share-base compensation. The following weighted-average assumptions were used for grants made under the stock options plans for the years ended December 31, 2013. No options issued in 2012.
2013 | ||||
Expected Volatility | 174% | |||
Expected term | 10 years | |||
Fisk-Free interest rate | 2.86% | |||
Dividend yield | 0% | |||
Annual forfeiture rate | 10% | |||
Weighted-average estimated fair value of options granted | $ | 0.1094 |
F-25 |
Transactions involving stock options awarded under the Plan described above during the years ended December 31, 2013 and 2012
Number of shares | Weighted Average Exercise price | Weighted Average Remaining Contractual term in Years | Aggregate Intrinsic Value | |||||||||||
Outstanding at December 31, 2011 | 7,436,500 | $ | 0.08 | 5.6 | $ | 282,000 | ||||||||
Granted | ||||||||||||||
Exercised | ||||||||||||||
Cancelled/expired | (70,000 | ) | $ | 0.08 | ||||||||||
Outstanding at December 31, 2012 | 7,366,500 | $ | 0.08 | 4.7 | $ | – | ||||||||
Granted | 9,670,000 | $ | 0.12 | 10.0 | ||||||||||
Exercised | – | |||||||||||||
Cancelled/expired | (92,000 | ) | $ | 0.10 | ||||||||||
Outstanding at December 31, 2013 | 16,944,500 | $ | 0.10 | 2.1 | $ | – | ||||||||
Vested and exercisable at December 31, 2013 | 7,994,500 | |||||||||||||
Vested and exercisable at December 31, 2012 | 7,193,167 |
c) Employee Stock Purchase Plan
In 2002 the Company established an Employee Stock Purchase Plan. The Plan is to provide eligible Employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions and to enhance such Employees ’ sense of participation in the affairs of the Company and its Designated Subsidiaries. It is the intention of the Company to have the Plan qualify as an “ Employee Stock Purchase Plan ” under Section 423 of the Internal Revenue Code of 1986. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. The maximum number of shares of the Company ’ s Common Stock which shall be made available for sale under the Plan shall be two million (2,000,000) shares. There were no shares issued under the plan in 2013 or 2012.
Note 14 - Benefit Plan
The Company has 401K plan which covers all eligible employees. The Company has a discretionary match of employee contributions. Pension expense for the years ended December 31, 2013 and 2012 was $0 and $86,953, respectively.
Note 15 - Major Customers and Concentrations
The company’s telecom service revenues for 2013 include approximately $1.6 million or 19% of total revenues derived from a wholesale contractual relationship with a large Tier 1 telecom provider serving several end-user correctional facilities. The underlying facility contracts are up for renewal during the 2nd quarter of 2014 and there is no assurance that Lattice will renew the contracts with the end user facilities as a direct provider or that the wholesale customer will renew its contract(s) with Lattice. In the event that these revenues terminate the approximate impact to annual revenues and operating cashflows would be negative $1.6 million revenues and $300,000 in operating cashflows. In 2012, the revenues and operating cashflows derived from this contract were also approximately $1.6 million and $300,000 respectively.
F-26 |
Note 16 - Patent Licensing Agreement
On January 4, 2010 the Company entered into a Patent Licensing agreement supporting its communication services products. In conjunction with the agreement the Company paid $1,300,000 as follows; $50,000 on the first of each month starting on January 1, 2010 and ending June 1, 2010 and a lump sum payment due of $1,000,000 on June 30, 2010. The $1,300,000 was paid in full pursuant to the licensing agreement as of June 30, 2010. The $1,300,000 was accounted for as intangible property and is being amortized over 120 months. Accordingly $130,000 of amortization expense was included as a component of the communication segment’s cost of sales for the years ended December 31, 2013 and December 31, 2012 respectively.
Note 17 - Litigation
From time to time, lawsuits are threatened or filed against us in the ordinary course of business. Such lawsuits typically involve claims from customers, former or current employees, and vendors related to issues common to our industry. Such threatened or pending litigation also can involve claims by third-parties, either against customers or ourselves, involving intellectual property, including patents. A number of such claims may exist at any given time. In certain cases, derivative claims may be asserted against us for indemnification or contribution in lawsuits alleging use of our intellectual property, as licensed to customers, infringes upon intellectual property of a third-party. Per FASB ASC 450-20-25; recognition of a contingency loss may only be made if the event is (1) probable and (2) the amount of the loss can be reasonably estimated. There were no liabilities of this type at December 31, 2013. In June 2013, the Company was served a writ of Garnishment with respect to our note receivable from the sale of our Governmental services segment due to a default on the December 13, 2011 note payable (see footnote 2(d). In October 2013, the Company reached a settlement arrangement whereby the holder agreed to forbear any further collection actions against the Company in exchange for $280,000 payable as follows; $240,000 on October 10 2013 and then $10,000 payable monthly over four months starting November 10, 2013. $280,000 was paid by the Company as of the date of this filing. However, the holder has asserted that the payments were late, and that the holder is entitled to an additional $80,000 payment. The Company is defending.
Note 18 - Sale of Assets of Discontinued Operations:
As part of the Company’s strategy to focus on its higher growth potential communications business, the Company decided during the first quarter to exit the Government services segment which derived its revenues mainly from contracts with federal government Dept of Defense agencies either as prime contractor or as a subcontractor to another prime contractor. On April 2, 2013, we entered an Asset Purchase Agreement (“Purchase Agreement”) with Blackwatch International, Inc. (“Blackwatch”), a Virginia corporation, pursuant to which we primarily sold our government Dept. of Defense (DoD) contract vehicles for approximately $1.2 million. These assets essentially comprised our Government services segment operations. The Company retained the residual assets and liabilities of Lattice Government services, Inc. The Company recorded a gain of to $521,443 on the sale of these assets during the quarter ended June 30 2013, which represents the excess of the sales price over the book or carrying value of the assets sold detailed in tabular form below:
F-27 |
On April 2, 2013 Company entered into an Asset Purchase agreement With Blackwatch International, Inc as follows :
Consideration received from sale of Government assets: | ||||
Cash | $ | 200,000 | ||
Seller notes assumed by buyer | 282,456 | |||
Note receivable from buyer** | 700,000 | |||
Total consideration | $ | 1,182,456 | ||
Other Contingencies considerations: | ||||
3% of gross revenues on Phase II of an SBIR contract for 24 months if awarded. | – | |||
Pay up to $100,000 for each of the next two years in the event that certain contract are rebid and funded | – | |||
Total consideration received on sale of assets | 1,182,456 | |||
Carrying value of Lattice Government assets sold (see below) | 661,013 | |||
Gain (loss) on sale of Government segment assets | $ | 521,443 | ||
Carrying value of assets disposed of: | ||||
Goodwill and intangibles | $ | 842,933 | ||
Non-controlling interest | (120,133 | ) | ||
Deferred tax liability | (61,787 | ) | ||
$ | 661,013 |
** 3% annum interest rate, 12 equal quarterly installments payments of $61,216.03 over a 3 year period first installment being 7/31/2013 with each successive payment being on the 15th day of the month following close each calendar quarter.
With the Company’s decision to exit the Government services business, the results of operations and cash flows from this business have been classified as discontinued operations.
The following table shows the results of operations of Lattice Government Services segment for the twelve months ended December 31, 2013 and 2012 which are included in the net income (loss) from discontinued operations:
Twelve Months Ended December 31, | ||||||||
2013 | 2012 | |||||||
Revenue | $ | 603,616 | $ | 3,243,377 | ||||
Cost of Revenue | 300,033 | 1,901,592 | ||||||
Gross Profit | 303,583 | 1,341,785 | ||||||
50.3% | 41.5% | |||||||
Selling, general and administrative expenses | 749,086 | 1,107,967 | ||||||
Amortization expense | 80,448 | 321,792 | ||||||
Income (loss) from operations | (525,951 | ) | (87,974 | ) | ||||
Interest expense | (10,179 | ) | (134,073 | ) | ||||
Gain on sale of discontinue operation | 521,443 | – | ||||||
Income (Loss) before taxes | (14,687 | ) | (222,047 | ) | ||||
Income taxes (benefit) | (32,397 | ) | (129,587 | ) | ||||
Net income (loss) from Discontinued operations | $ | 17,710 | $ | (92,460 | ) |
F-28 |
As a result of the decision to exit the Government services business, the assets and liabilities to be disposed of are comprised of the following:
December 31, | December 31, | |||||||
2013 | 2012 | |||||||
Goodwill | – | 690,871 | ||||||
Intangible assets, net | – | 232,510 | ||||||
Note payable | – | 281,456 | ||||||
Deferred tax liability | – | 94,184 | ||||||
Non-controlling interest | – | 120,133 |
Note 19 - Note Receivable
As part of sale of Lattice Government assets on April 2, 2013, the Company received a promissory note from purchaser for $700,000 which carries 3% annum interest rate payable in 12 equal quarterly installments payments of $61,216.03 over a 3 year period first installment being 7/31/2013 with each successive payment being on the 15th day of the month following close each calendar quarter. The note is secured by personal guarantee by the principal owner of Purchaser. As of the filing date, note, see note 4(d). the Company has not received the initial three installments due to the writ of garnishment issued with regards to the default on the December 13, 2011 note, See note 4(d).
Note20 - Subsequent events
Management is currently engaged in financing activities to properly capitalize and position the Company to execute its strategic growth plans. As a part of these activities, to date, during February and March, 2014, the Company issued 8,860,489 restricted common shares at a price of $0.12 per share in a series of private placements for a gross financing amount of $1,063,259. Of which, net cash proceeds of $794,441 were received and $268,818 was derived from the conversion of principal and accrued interest on existing notes with several investors.
F-29 |
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Paul Burgess, certify that:
1. I have reviewed this annual report on Form 10-K of Lattice, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Dated: March 31, 2014 | By: | /s/ Paul Burgess | |
Paul Burgess | |||
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Joe Noto, certify that:
1. I have reviewed this annual report on Form 10-K of Lattice, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Dated: March 31, 2014 | By: | /s/ Joseph Noto | |
Joseph Noto | |||
Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Lattice, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul Burgess, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 31, 2014 | By: | /s/ Paul Burgess | |
Paul Burgess | |||
Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Lattice, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joe Noto, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 31, 2014 | By: | /s/ Joe Noto | |
Joe Noto | |||
Chief Financial Officer | |||
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2 - Accounts Receivable (Details Narrative) (Unapproved claims, USD $)
|
Dec. 31, 2013
|
Dec. 31, 2012
|
---|---|---|
Unapproved claims
|
||
Accounts Receivable | $ 1,244,000 | $ 1,555,000 |
Reserve allowance | $ 311,000 |
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