UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2014
COMMISSION FILE NUMBER 000-10690
LATTICE INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware | 22-2011859 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
7150 N. Park Drive, Pennsauken, New Jersey | 08109 | |
(Address of principal executive offices) | (Zip code) |
Issuer's telephone number: (856) 910-1166
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company x |
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes o No o
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of November 15, 2014, there were 51,431,265 outstanding shares of the Registrant's Common Stock, $0.01 par value.
LATTICE INCORPORATED
September 30, 2014 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page | |
PART I – FINANCIAL INFORMATION | |
Item 1. Financial Statements | 3 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 |
Item 3. Quantitative and Qualitative Disclosure About Market Risks | 23 |
Item 4T. Controls and Procedures | 23 |
PART II – OTHER INFORMATION | |
Item 1. Legal Proceedings | 23 |
Item 1A. Risk Factors | 24 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 24 |
Item 3. Defaults Upon Senior Securities | 24 |
Item 4. Reserved | 24 |
Item 5. Other Information | 24 |
Item 6. Exhibits | 25 |
SIGNATURES | 30 |
2 |
LATTICE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
ASSETS: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 370,082 | $ | 312,703 | ||||
Accounts receivable | 2,399,285 | 1,897,856 | ||||||
Inventories | 1,297 | 9,330 | ||||||
Note receivable - current | 525,000 | 350,000 | ||||||
Costs and gross profit in excess of billings | 173,213 | – | ||||||
Other current assets | 520,003 | 73,940 | ||||||
Total current assets | 3,988,880 | 2,643,829 | ||||||
Property and equipment, net | 711,836 | 861,712 | ||||||
Other intangibles, net | 682,515 | 895,439 | ||||||
Note receivable - long term | 175,000 | 350,000 | ||||||
Other assets | 12,812 | 12,812 | ||||||
Total assets | $ | 5,571,043 | $ | 4,763,792 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,347,637 | $ | 1,075,651 | ||||
Accrued expenses | 2,399,974 | 2,264,260 | ||||||
Customer advances | 1,212,774 | 1,023,966 | ||||||
Notes payable - current, net of debt discount | 1,418,067 | 2,601,724 | ||||||
Derivative liability | – | 122,698 | ||||||
Deferred revenue | 12,213 | 45,797 | ||||||
Total current liabilities | 6,390,665 | 7,134,096 | ||||||
Long-term liabilities: | ||||||||
Derivative liability | 757,407 | – | ||||||
Notes payable - long-term, net of debt discount | 341,605 | 100,000 | ||||||
Total long-term liabilities | 1,099,012 | 100,000 | ||||||
Total liabilities | 7,489,677 | 7,234,096 | ||||||
Shareholders' equity | ||||||||
Preferred stock - $0.01 par value | ||||||||
Series A 9,000,000 shares authorized 5,405,815 and 6,575,815 issued and outstanding, respectively | 54,058 | 65,758 | ||||||
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 - $0.01 par value, 200,000,000 authorized, 51,421,014 and 35,304,714 issued and outstanding respectively | 514,211 | 353,047 | ||||||
Common stock subscribed - 500,000 shares | 5,000 | – | ||||||
Additional paid in capital | 45,224,289 | 43,714,377 | ||||||
Accumulated deficit | (47,179,205 | ) | (46,066,499 | ) | ||||
(1,360,538 | ) | (1,912,208 | ) | |||||
Stock held in treasury, at cost | (558,096 | ) | (558,096 | ) | ||||
Total shareholders's equity | (1,918,634 | ) | (2,470,304 | ) | ||||
Total liabilities and shareholders' equity | $ | 5,571,043 | $ | 4,763,792 |
See accompanying notes to the condensed consolidated financial statements.
3 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenue | $ | 2,030,599 | $ | 2,173,780 | $ | 6,618,049 | $ | 6,270,674 | ||||||||
Cost of revenue | 1,182,797 | 1,270,869 | 3,973,486 | 4,041,154 | ||||||||||||
Gross profit | 847,802 | 902,911 | 2,644,563 | 2,229,520 | ||||||||||||
41.8% | 41.5% | 40.0% | 35.6% | |||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | 1,111,590 | 633,704 | 3,126,536 | 1,817,814 | ||||||||||||
Research and development | 228,838 | 167,839 | 660,075 | 481,221 | ||||||||||||
Total operating expenses | 1,340,428 | 801,543 | 3,786,611 | 2,299,035 | ||||||||||||
Income (loss) from operations | (492,626 | ) | 101,368 | (1,142,048 | ) | (69,515 | ) | |||||||||
Other income (expense): | ||||||||||||||||
Derivative income | 311,527 | (21,233 | ) | 589,214 | (35,641 | ) | ||||||||||
Financing fees | (25,833 | ) | – | (49,185 | ) | – | ||||||||||
Other income | – | 46,713 | – | 46,713 | ||||||||||||
Interest expense | (107,859 | ) | (66,130 | ) | (491,856 | ) | (308,848 | ) | ||||||||
Total other income (expense) | 177,835 | (40,650 | ) | 48,173 | (297,776 | ) | ||||||||||
Income (loss) before taxes | (314,791 | ) | 60,718 | (1,093,875 | ) | (367,291 | ) | |||||||||
Income taxes | – | – | – | – | ||||||||||||
Net income (loss) from continuing operations | (314,791 | ) | 60,718 | (1,093,875 | ) | (367,291 | ) | |||||||||
Net income (loss) from operations of discontinued component (Note 6) | – | (11,273 | ) | – | 351,069 | |||||||||||
Net income (loss) | (314,791 | ) | 49,445 | (1,093,875 | ) | (16,222 | ) | |||||||||
Preferred stock dividends | (6,277 | ) | – | (18,831 | ) | – | ||||||||||
Net income (loss) attributable to common shareholders | $ | (321,068 | ) | $ | 49,445 | $ | (1,112,706 | ) | $ | (16,222 | ) | |||||
Basic net income (loss) per common share | ||||||||||||||||
From continuing operations | $ | (0.01 | ) | $ | 0.00 | $ | (0.03 | ) | $ | (0.01 | ) | |||||
From discontinued operations | $ | – | $ | 0.00 | $ | – | $ | 0.01 | ||||||||
Diluted net income (loss) per common share | ||||||||||||||||
From continuing operations | $ | (0.01 | ) | $ | 0.00 | $ | (0.03 | ) | $ | (0.01 | ) | |||||
From discontinued operations | $ | – | $ | 0.00 | $ | – | $ | 0.01 | ||||||||
Weighted average shares: | ||||||||||||||||
Basic | 48,612,617 | 33,902,907 | 44,172,926 | 33,321,502 | ||||||||||||
Diluted | 48,612,617 | 76,867,034 | 44,172,926 | 33,321,502 |
See accompanying notes to the condensed consolidated financial statements.
4 |
LATTICE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH'S ENDED SEPTEMBER 30, 2014 AND 2013
2014 | 2013 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (1,093,875 | ) | $ | (16,222 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Operating activities discontinued operations | – | 48,050 | ||||||
Gain on disposition of discontinued government segment assets | – | (521,443 | ) | |||||
Derivative (income) expense | (589,214 | ) | 35,641 | |||||
Stock issued for services | 90,000 | – | ||||||
Amortization of intangible assets | 212,924 | 97,485 | ||||||
Amortization of debt discount | 292,779 | 64,547 | ||||||
Gain on extinguishment of debt | – | (46,713 | ) | |||||
Financing fees | 34,444 | 19,600 | ||||||
Share-based compensation | 174,117 | 32,604 | ||||||
Depreciation | 268,372 | 180,017 | ||||||
Bad debt expense | 18,044 | – | ||||||
Changes in operating assets and liabilities: | ||||||||
(Increase) decrease in: | ||||||||
Accounts receivable | (519,473 | ) | 142,500 | |||||
Inventories | 8,033 | – | ||||||
Costs in excess of billings | (173,213 | ) | – | |||||
Other current assets | (140,507 | ) | 71,871 | |||||
Increase (decrease) in: | ||||||||
Accounts payable and accrued liabilities | 453,415 | (186,537 | ) | |||||
Deferred revenue | (33,584 | ) | – | |||||
Customer advances | 188,808 | 535,969 | ||||||
Total adjustments | 284,945 | 473,591 | ||||||
Net cash provided by (used in) operating activities | (808,930 | ) | 457,369 | |||||
Cash flows from investing activities: | ||||||||
Proceeds from sale of government services segment | – | – | ||||||
Cash received sale of discontinued operations | – | 231,670 | ||||||
Purchase of equipment | (118,496 | ) | (222,202 | ) | ||||
Net cash provided by (used in) investing activities | (118,496 | ) | 9,468 | |||||
Cash flows from financing activities: | ||||||||
Revolving credit facility (payments) borrowings, net | – | (232,807 | ) | |||||
Cash paid for financing fees | (148,000 | ) | – | |||||
Payments on capital equipment lease | – | (18,846 | ) | |||||
Payments on notes payable - discontinued operations | – | (56,352 | ) | |||||
Payments on notes payable | (1,223,636 | ) | (600,000 | ) | ||||
Proceeds from the issuance of common stock, net | 796,441 | 580,400 | ||||||
Proceeds from common stock subscribed | 60,000 | – | ||||||
Proceeds from notes payable | 1,500,000 | – | ||||||
Payments on director loans | – | (44,984 | ) | |||||
Net cash provided by (used in) financing activities | 984,805 | (372,589 | ) | |||||
Net increase in cash and cash equivalents | 57,379 | 94,248 | ||||||
Cash and cash equivalents - beginning of period | 312,703 | 30,368 | ||||||
Cash and cash equivalents - end of period | $ | 370,082 | $ | 124,616 | ||||
Supplemental cash flow information | ||||||||
Interest paid in cash | $ | 186,108 | $ | 270,614 | ||||
Summary of non-cash investing and financing activities | ||||||||
Conversion of notes payable into common stock | $ | 227,272 | $ | – | ||||
Conversion of accrued interest into common stock | $ | 39,546 | $ | – | ||||
Dividends declared but not paid | $ | 18,831 | $ | 18,831 | ||||
Common stock issued for principle payment on note payable | $ | 60,000 | $ | – |
See accompanying notes to the condensed consolidated financial statements.
5 |
Lattice Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2014
(Unaudited)
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 2013 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 Department 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 Department 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 period ended September 30, 2013 the financial results of the government services business are being reported as discontinued operations.
On November 1, 2013 we purchased certain assets of Innovisit, LLC. The assets 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 were 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 September 30, 2014, our working capital deficiency was approximately $2,402,000 which improved from a working capital deficiency of approximately $4,490,000 at December 31, 2013. 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 past due on promissory notes with investors and 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 additional financing. Management was able raise $1,500,000 of convertible debt financing during the quarter ended June 30, 2014 which resulted in net proceeds of $1,352,000 which was used to improve our working capital, strengthen our balance sheet and provide liquidity for growth. Securing sufficient capital for our growth strategy may also reduce doubts about our ability to operate as a going concern. During the quarter ended March 31, 2014, we closed on approximately $1,063,000 of equity financing by issuing restricted common stock to various accredited investors for cash proceeds of $796,441 and $266,818 resulting from the conversion of notes payable and accrued interest. There is no assurance, however, that we will succeed in raising additional financing and obtain the capital needed 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.
6 |
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 dependent on obtaining the additional financing needed for which we have 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 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”).
(c) Interim Condensed Consolidated Financial Statements
The condensed consolidated financial statements for the three and nine months ended September 30, 2014 are unaudited. In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair representation of the consolidated financial position and the consolidated results of operations. The consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2013 appearing in Form 10-K filed on March 31, 2014.
(d) Principles of Consolidation
The condensed 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.
(e) 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.
(f) 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 nine months ended September 30, 2014 and twelve months ended December 31, 2013, there was approximately $511,000 and $706,000 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 $511,000 will be amortized over the weighted average remaining service period.
7 |
(g) Revenue Recognition
Telecommunication Services:
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 accounts receivable totaled approximately $1,244,000 as of September 30, 2014 and December 31, 2013, respectively. 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.
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. Amounts are billed based on contractual terms. Billings in excess of costs and estimated earnings represent billings in excess of revenues recognized.
Service Revenues:
Service revenues are recorded when the service is provided and when collection can be reasonably assured.
8 |
(h) 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 had operated in two segments prior to 2013 but with the decision to focus on the communications business and exit the federal government services business, the Company now operates in one segment.
(i) Depreciation, Amortization and Long-Lived Assets:
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.
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.
(j) 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 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.
(k) Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligations. ASU 2014-09 is effective for public business entities, certain not-for-profit entities and certain employee benefit plans, for annual periods beginning after December 15, 2016, including interim periods within that period. Early adoption is not permitted under GAAP. We are currently evaluating the impact of ASU 2014-09 on our financial statements and disclosures.
In July 2013, the FASB issued ASU 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 did not have a material impact on our condensed consolidated financial statements.
Note 2 – Notes Payable
Notes payable consists of the following as of September 30, 2014 and December 31, 2013:
September 30, 2014 | December 31, 2013 | |||||||
Bank line-of-credit (a) | $ | – | $ | – | ||||
Notes payable to shareholder/director (b) | 192,048 | 192,048 | ||||||
Notes payable (c) | 2,566,019 | 1,999,676 | ||||||
Note payable, Innovisit (d) | 160,000 | 510,000 | ||||||
Total notes payable | 2,918,067 | 2,701,724 | ||||||
Less current maturities | (1,418,067 | ) | (2,601,724 | ) | ||||
Long-term debt | $ | 1,500,000 | $ | 100,000 |
9 |
(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 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 (c) below.
The outstanding balance owed on the line at September 30, 2014 and December 31, 2013 was $0 and $0 respectively. At September 30, 2014 and December 31, 2013 our interest rate was approximately 13.25%.
(b) Notes Payable Shareholder/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 September 30, 2014 and December 31, 2013, 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 principal and interest payments.
(c) Notes 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. During quarter ended September 30, 2014 we paid $100,000 reducing the principal on this note to $781,655. As of September 30, 2014, there is $781,655 of unpaid principal remaining on this note. 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.
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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. As of September 30, 2014, there is $200,000 of unpaid principal remaining on this note
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. In conjunction with the Company’s private placement of common stock during the quarter ended March 31, 2014, the Company issued 2,223,484 common shares thereby paying the principal of $227,272 and accrued interest of $39,546.
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 was $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 January and February payments totaling $20,000 were paid as of March 31, 2014 leaving a remaining balance of $0 under the settlement arrangement at March 31, 2014. During the quarter ended June 30, 2014 the note holder contended that the Company was not in compliance with the timing of payments of the settlement arrangement. As a result, the Company agreed to settle the note in full for a payment of $32,500 during the quarter ended June 30, 2014. This note was paid in full with cash during June 2014.
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. During the quarter ended March 31, 2014, the Company paid in cash the principal owed on two of the notes totaling $113,636 leaving a remaining balance owed of $84,364 at June 30, 2014. On January 23, 2014 the maturity date, the principal amount of the notes were due along with any unpaid and accrued interest. As a result, Company is not in compliance with the terms of the note. We are current with interest payments; no default provision has been invoked.
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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. No interest is payable if the $600,000 of principal is paid within three months from the date of this note. If the principal is not paid within that time frame, the note will bear 12% annual interest which accrues on the principal sum beginning March 30, 2014, with interest paid monthly, in arrears, on the last day of the month. Monthly payments of $6,000 per month will be due 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 shareholders, exercisable for 4 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; dividend yield of 0%, expected volatility of 176.04%, a risk free rate of 1.72% and an expected life of 4 years. The Company also recorded deferred financing fees of $19,600 representing agency fees which has been fully amortized to expense. The carrying values at September 30, 2014 and December 31, 2013 were $0 and $377,907 respectively. This note was paid in full with the proceeds of the May 30, 2014 financing discussed below.
On May 30, 2014, the Company entered into a Note Purchase and Security Agreement with Lattice Funding, LLC (“Lender”), a Pennsylvania limited liability company affiliated with Cantone Asset Management, LLC as a placement agent. The Company delivered a secured promissory note in the principal sum of $1,500,000, bearing interest at 8% per annum plus a 2% monitoring fee and maturing on May 15, 2017. Interest and fees on the note are payable quarterly. Outstanding principal may be converted into restricted common stock. The Company also executed UCC financing statements, securing the note with proceeds of certain agreements. In addition to cash fees and reimbursed expenses to placement agent which totaled $148,000, the Company delivered 1,350,000 shares of restricted common stock to Cantone Asset Management, LLC as placement agent fees. The 1,350,000 shares were valued at the closing share price $0.12 per share and resulted in deferred financing of $162,000. The deferred financing fees recorded during the second quarter including the cash fees paid totaled $310,000. This is being amortized ratably over the term of the note. The Company used $600,000 of gross proceeds to repay an existing bridge loan with an affiliate of Lender. Each $10,000 of note principal is convertible into 75,000 common shares at an exercise price of $0.133333 per share any time after November 30, 2014, to be adjusted for splits, reorganizations, stock dividends and similar corporate events (anti-dilution provisions). The outstanding balance on the note was $1,500,000 at September 30, 2014. (See Note 3)
(d) Note 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 issued 500,000 common shares in lieu of the January 31, 2014 $60,000 installment payment under the note, and paid installments totaling $120,000 in cash, leaving a balance outstanding of $160,000 at September 30, 2014.
Note 3 – Convertible Note
On May 30, 2014, the Company entered into a Note Purchase and Security Agreement with Lattice Funding, LLC (“Lender”), a Pennsylvania limited liability company affiliated with Cantone Asset Management, LLC. The Company delivered a secured promissory note (the “Note”) in the principal sum of $1,500,000, bearing interest at 8% per annum and maturing on May 15, 2017. Interest on the Note is payable quarterly. Outstanding principal may be converted into restricted common stock. The Company also executed UCC financing statements, securing the Note with proceeds of certain agreements.
Each $10,000 of note principal is convertible into 75,000 common shares at an exercise price of $0.133333 per share any time after November 30, 2014, to be adjusted for splits, reorganizations, stock dividends and similar corporate events (anti-dilution provisions). If the market price of Lattice common equals or exceeds twice the exercise price and certain other conditions are met, the Company may call the Note at face value for the purpose of forcing conversion of the balance of the Note into common stock.
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The Convertible Note contains a provision whereby the conversion price is adjustable upon the occurrence of certain events, including the issuance of common stock or common stock equivalents at a price which is lower than the current conversion price. Under FASB ASC 815-40-15-5, the embedded conversion feature is not considered indexed to the Company’s own stock and, therefore does not meet the scope exception in FASB ASC 815-10-15 and thus needs to be accounted for as a derivative liability. The initial fair value at May 30, 2014 of the embedded conversion feature was estimated at $1,223,923 and recorded as a derivative liability, resulting in a net carrying value of the note at May 30, 2014 of $276,077 ($1,500,000 face value less $1,223,923 debt discount). On September 30, 2014 the derivative was valued at $694,694 which resulted in derivative income of $296,360 for the quarter ended September 30, 2014 and $529,229 for the nine months ended September 30, 2014. The debt discount was amortized using the effective interest method and was $1,158,395 at September 30, 2014 resulting in a finance charge of $31,530 for the quarter ended September 30, 2014 included in the statement of operations. The fair value of the embedded conversion feature is estimated at the end of each quarterly reporting period using the Monte Carlo model.
The debt discount is being amortized over the life of the convertible note using the effective interest method.
Inherent in the Monte Carlo Valuation model are assumptions related to expected volatility, remaining life, risk-free rate and expected dividend yield. For the Convertible Notes using a Monte Carlo model, we estimate the probability and timing of potential future financing and fundamental transactions as applicable. The assumptions used by the Company are summarized below:
Convertible Notes
September 30, 2014 | Inception | |||||||
Closing stock price | $ | 0.09 | $ | 0.13 | ||||
Conversion price | $ | 0.13 | $ | 0.13 | ||||
Expected volatility | 124% | 135% | ||||||
Remaining term (years) | 2.63 | 2.96 | ||||||
Risk-free rate | 0.88% | 0.77% | ||||||
Expected dividend yield | 0% | 0% |
Convertible notes consist of the following at September 30, 2014 and December 31, 2013:
September 30, 2014 | December 31, 2013 | |||||||
Convertible notes | $ | 1,500,000 | $ | – | ||||
Discount on convertible notes | (1,223,923 | ) | – | |||||
Accumulated amortization of discount | 65,528 | – | ||||||
Total convertible notes | $ | 341,605 | $ | – |
Note 4 – Fair Value
Warrants:
The balance sheet caption derivative liabilities includes 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 September 30, 2014 and December 31, 2013 and are carried at fair value. The balance at September 30, 2014 was $62,714 compared to $122,698 at December 31, 2013.
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 September 30, 2014 included conversion or strike price of $0.09; historical volatility factor of 177% based upon forward terms of instruments, and a risk free rate of 2.22% and remaining life 7.98 years.
In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, the following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013:
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Convertible Notes:
Level 3 | Total | |||||||
September 30, 2014: | ||||||||
Derivative Instrument | $ | 694,694 | $ | 694,694 |
Level 3 | Total | |||||||
December 31, 2013: | ||||||||
Derivative Instrument | $ | – | $ | – |
Level 3 financial instruments consist of certain embedded conversion features. The fair value of these embedded conversion features that have exercise reset features are estimated using a Monte Carlo valuation model. The Company adopted the disclosure requirements of ASU 2011-04, “Fair Value Measurements,” during the quarter ended September 30, 2014. The unobservable input used by the Company was the estimation of the likelihood of a reset occurring on the embedded conversion feature of the Convertible Notes. These estimates of the likelihood of completing an equity raise that would meet the criteria to trigger the reset provisions are based on numerous factors, including the remaining term of the financial instruments and the Company’s overall financial condition.
The following table summarizes the changes in fair value of the Company’s Level 3 financial instruments for the period ended September 30, 2014.
September 30, 2014 | ||||
Beginning Balance | $ | 122,698 | ||
Initial recognition - Derivative liability of embedded conversion feature of the Convertible Notes | 1,223,923 | |||
Change in fair value | (589,214 | ) | ||
Ending Balance | $ | 757,407 |
Changes in the unobservable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable input used in the fair value measurement is the estimation of the likelihood of the occurrence of a change to the conversion price based on the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood would result in a higher (lower) fair value measurement.
Note 5 – 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 September 30, 2014 and 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(c)). 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 had asserted that the payments were late, and that the holder is entitled to an additional $80,000 payment. The Company settled this matter in full during the quarter ended June 30, 2014 for $32,500 paid in cash. The Note is now fully satisfied and the Note holder has released all related claims.
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Note 6 – Discontinued Operations:
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 following table shows the results of operations of Lattice Government Services segment for the nine months ended September 30, 2014 and 2013 which are included in the net income (loss) from discontinued operations:
Nine Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Revenue | $ | – | $ | 603,616 | ||||
Cost of revenue | – | 300,033 | ||||||
Gross profit | – | 303,583 | ||||||
– | 50.3% | |||||||
Selling, general and administrative expenses | – | 414,010 | ||||||
Amortization expense | – | 80,448 | ||||||
Loss from operations | – | (190,875 | ) | |||||
Interest expense | – | (11,897 | ) | |||||
Gain on sale of discontinued operations | – | 521,443 | ||||||
Income before taxes | – | 318,671 | ||||||
Income tax (benefit) | – | (32,397 | ) | |||||
Net income from discontinued operations | $ | – | $ | 351,068 |
Note 7 – 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 over a 3 year period first installment being July 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. Previously, the Company had not received any of the installments due to the writ of garnishment issued with regards to the default on the December 13, 2011 note (see footnote 2(c)). The writ of garnishment has been released as a result of settling the default during the quarter (see Note 4). We have not received any payments as of September 30, 2014. The Company is currently in the process of collecting the past due installments.
Note 8 – Conversion of Preferred Stock
On January 14, 2014, we issued 1,178,562 common shares to Barron Partners L.P. Such shares were issuable upon the exercise of conversion rights associated with 330,000 shares of Series A Preferred Stock owned by Barron Partners.
On March 18, 2014, we issued 1,321,418 common shares to Barron Partners L.P. Such shares were issuable upon the exercise of conversion rights associated with 370,000 shares of Series A Preferred Stock owned by Barron Partners.
On August 28, 2014, we issued 1,678,558 common shares to Barron Partners L.P. Such shares were issuable upon the exercise of conversion rights associated with 470,000 shares of Series A Preferred Stock owned by Barron Partners.
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Note 9 – Issuance of Common Stock
During the quarter ended March 31, 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 $796,441 were received and $266,818 was derived from the conversion of principal and accrued interest on existing notes with several investors.
During the quarter ended June 30, 2014, the Company sold 500,000 shares restricted common shares at a price of $0.12 per share in a private placement with an investor for a gross financing amount of $60,000. As of September 30, 2014, the shares had not been issued.
During the quarter ended September 30, 2014, the Company issued 1,000,000 restricted common shares as compensation to a service provider. The shares were valued at $0.12 per share resulting in total compensation expense of $120,000. This expense is being amortized ratably over the service period ending December 31, 2014.
During the quarter ended September 30, 2014, the Company issued 1,350,000 shares as fees to the placement agent for the convertible note issued in May 2014. The shares were valued at $012 per share or a total fee of $162,000 which is included as a component of deferred financing fees and is being amortized over the term of the note.
During the quarter ended September 30, 2014, the Company issued 227,272 common shares to Paul Burgess, CEO previously carried as a liability (Shares to be issued) pursuant to a common stock subscription for an investment of $25,000 or $0.11 per share.
We did not issue any employee options or warrants during the three and nine months ended September 30, 2014.
Note 10 – Commitments
(a) Operating Leases
The Company leases its office, sales and manufacturing facilities under non-cancelable operating leases with varying terms expiring through 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 through March 31, 2015. The total average monthly rent for these leases during the quarter ended September 30 2014 is approximately $9,000 per month.
Future minimum lease commitments as of September 30, 2014 as follows:
Operating | ||||
Leases | ||||
2014 (remaining) | $ | 25,256 | ||
2015 | 43,278 | |||
Total minimum lease payments | $ | 68,534 |
Total rent expense was $25,755 for the quarter ended September 30, 2014 and $76,684 for the nine months ended September 30, 2014.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in this 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 financial statements and notes thereto included elsewhere in this report and with our annual report on Form 10-K for the fiscal year ended December 31, 2013. 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.
GENERAL OVERVIEW
Business Overview:
Currently the Company derives its revenue from direct service, and technology sales. Moving forward the Company will focus on direct service and technology sales as most of our legacy wholesale contracts have expired during this quarter. In 2014 the Company has started to invest in product development and expanding sales and marketing efforts that we anticipate will increase revenue growth in both direct service and technology sales. To date we have begun to see an increase in our sales pipeline and we have a number of technology projects under way that we anticipate being completed during the 4th quarter of 2014. The revenue contribution from these projects will be reflected in the 4th quarter results under accounting rules for recognition of revenue.
In 2009, the Company began selling services directly to correctional facilities with a focus on small and midsized prisons in Oklahoma. To date the company is servicing 32 prisons in Oklahoma with an additional 9 prison contracts pending installation for a total of 41 facilities. This represents 59% of our target market in the state of Oklahoma. With the success the company has demonstrated with our direct service model in Oklahoma we have expanded our sales and marketing infrastructure to address additional markets. We are currently providing services in 8 additional states and are certified in a total of 16. With the additional investment in sales and marketing this quarter we have already seen an additional 15 contract wins that we have begun to install. We anticipate this growth in our contract backlog to continue throughout the remainder of the year and into 2015 as we expand our sales and market efforts throughout the additional 8 states we have targeted. The addressable market for Lattice is approximately 3,500 facilities throughout the U.S. as we begin to replicate the model we used in Oklahoma, we anticipate growing our market share from the approximately 2% we currently hold nationwide. It is our goal to become the predominant service provider to small and midsized correction facilities in U.S.
In 2013 we introduced the first version of 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. |
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As we continually improve on our service and product mix we believe we can build on our revenue per inmate by effectively deploying a product mix that maximizes revenue opportunity. We have begun to upgrade a number of our sites. Currently our average annual revenue per inmate is approximately $830 compared to an industry average of $515 per inmate. We attribute the better revenue performance to our quality of service, accessibility of service, and an innovative product mix. We believe we can further enhance our revenue per inmate as we continue to deploy a full suite of services across our installation base.
We have had a number of inquiries and installations in the international market in the past years with little marketing effort from the company. This combined with an unknown potential in the international market, the Company hired Communication Media Advisors (CMA) to evaluate the potential of the international market and develop a business plan that will enable the company to effectively capitalize on any international market opportunities. The first phase of the project was completed in the second quarter with the entire project being completed in the early third quarter.
In the third quarter revenues decreased by 7% compared to the prior year period. Included in the overall growth our recurring revenue or call processing component accounted for approximately 53% of total revenues. Increases in our direct service revenue for the quarter of 8% and an increase in technology revenues of 42% were offset by a decrease in wholesale revenue as we transition away from our wholesale accounts. We anticipate a seasonal pickup in direct service revenue in the 4th quarter and a solid technology revenue result as we are able to recognize revenue on software development projects. In the third quarter and for the remainder of the year the Company will continue to invest in upgrading our sales and marketing efforts. We also incurred non-recurring expenses of approximately $200,000 as we repositioned our domestic business plan and invested in sales, marketing and product development. As mentioned, we have a number of projects that were in process in the third quarter that will not be recognized as revenue until later in the year.
In the fourth quarter of 2013 we successfully completed an asset purchase agreement of Innovisit, an industry leader in video visitation technology. With the acquisition we now operate in 26 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 have continued to see success from the acquisition as we have expanded our product portfolio and have seen an increase in our sales pipeline as a direct result of the acquisition.
With the Company turning back EBITDA positive in 2013 and continuing the growth of the communications business the company has taken on a number of initiatives to improve the balance sheet. The Company has successfully completed one round of equity financing and is in the process pursuing additional financing to improve our liquidity and help accelerate our growth with additional investments in product development, sales and marketing.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2013
The following tables set forth income and certain expense items as a percentage of total revenue:
For the Three Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
Revenue | $ | 2,030,599 | $ | 2,173,780 | ||||
Net income (loss) | $ | (314,791 | ) | $ | 49,445 | |||
Net (loss) per common share – Basic & Diluted | $ | (0.01 | ) | $ | 0.00 |
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OPERATING EXPENSES | PERCENT OF SALES | |||||||||||||||
THREE MONTHS ENDED September 30, 2014 | THREE MONTHS ENDED September 30, 2013 | THREE MONTHS ENDED September 30, 2014 | THREE MONTHS ENDED September 30, 2013 | |||||||||||||
Research & Development | 228,838 | 167,839 | 11% | 8% | ||||||||||||
Selling, General & Administrative | 1,111,590 | 633,704 | 55% | 29% |
REVENUES:
Total revenues for the three months ended September 30, 2014 decreased by approximately $143,000 or 7% to approximately $2,031,000 compared to approximately $2,174,000 for the three months ended September 30, 2013. Our direct call provisioning service revenue where we provide services direct to correctional facilities increased 8% from prior year levels. Recurring revenues as a component of total revenues accounted for $1,074,000 or 53% for the quarter. The recurring services increase is mainly attributable to volume growth from the continuing addition to the number of customer contracts where we provide direct telecom service provisioning to end-user correctional facilities. Our technology sales where we provide wholesaled technology systems and software to other service providers increased by 42% to approximately $957,000 from approximately $676,000 in the year ago quarter. The increases in direct provisioning and technology sales were offset by a decrease in our wholesale service revenue as a result of a wholesale arrangements terminating during the quarter where we provided call provisioning services to end-user facilities on a wholesale basis. The revenue associated with the wholesale arrangements were approximately $1.5 million on an annual basis. As we transition away from wholesaled services, we expect the continued growth in both our direct services and technology revenue for the full fiscal year ended December 31, 2014 and into 2015 to offset the revenue loss from the loss of revenue from wholesale.
GROSS MARGIN:
Gross profit for the three months ended September 30, 2014 was approximately $848,000 compared to approximately $903,000 for three months ended September 30, 2013. Gross margin, as a percentage of revenues, increased to 41.8% from 41.5% for the same period in 2013. The increase in margin percentage was primarily due to an increase in higher margin wholesaled technology revenue as a component of total revenues. Margins in both lines of our business; technology sales and recurring service revenue remained consistent with prior year levels. We expect the technology margin prospectively to be in the 60% range on average. Margin from the recurring revenue service component of revenues were consistent with the prior year period in the mid 20% range.
RESEARCH AND DEVELOPMENT EXPENSES:
Research and development expenses consist primarily of salaries and related personnel costs, and consulting fees associated with product development in our Technology Products segment. For the three months ended September 30, 2014, research and development expenses increased to approximately $229,000 as compared to approximately $168,000 for the three months ended September 30, 2013. The increase is due to an increase in engineering staffing compared to prior year levels. Management believes that continual enhancements of the Company's existing products are required to enable the Company to maintain its current competitive position.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, General and Administrative ("SG&A") expenses consist primarily of expenses for management, finance, administrative personnel, legal, accounting, consulting fees, sales commissions, marketing, facilities costs, corporate overhead and depreciation expense. For the three months ended September 30, 2014, SG&A expenses increased to approximately $1,112,000 from approximately $634,000 in the comparable period prior year. As a percentage of revenues, SG&A was 55% for the three months ended September 30, 2014 versus 29% in the comparable period a year ago. The increase driven by higher selling and marketing costs as the Company continues to expand its foot print into new geographic markets. Also included in the current quarter were non-recurring expenses totaling approximately $200,000 for legal fees, business development and investor relations costs.
INTEREST EXPENSE:
Interest expense increased to approximately $108,000 for the three months ended September 30, 2014 compared to approximately $66,000 for the three months ended September 30, 2013. The increase in the quarter was mainly attributable to debt discount being amortized related to the $1,500,000 convertible note.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS:
The Company’s net loss from continuing operations for the three months ended September 30, 2014 was approximately $315,000 compared to net income of approximately $49,000 for the three months ended September 30, 2013
NINE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2013
The following tables set forth income and certain expense items as a percentage of total revenue:
For the Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
Revenue | $ | 6,618,049 | $ | 6,270,674 | ||||
Net income (loss) | $ | (1,093,875 | ) | $ | (16,222 | ) | ||
Net (loss) per common share – Basic & Diluted | $ | (0.02 | ) | $ | (0.00 | ) |
OPERATING EXPENSES | PERCENT OF SALES | |||||||||||||||
NINE MONTHS ENDED SEPTEMEBR 30, 2014 | NINE MONTHS ENDED SEPTEMBER 30, 2013 | NINE MONTHS ENDED SEPTEMBER 30, 2014 | NINE MONTHS ENDED SEPTEMBER 30, 2013 | |||||||||||||
Research & Development | 660,075 | 481,221 | 9.9% | 7.7% | ||||||||||||
Selling, General & Administrative | 3,126,536 | 1,817,814 | 47.2% | 29.0% |
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REVENUES:
Total revenues for the nine months ended September 30, 2014 increased by approximately $347,000 or 5.5% to approximately $6,618,000 compared to approximately $6,271,000 for the nine months ended September 30, 2013. Our direct call provisioning service revenue where we provide services direct to correctional facilities increased 8% from prior year levels. Recurring revenues as a component of total revenues accounted for $4,234,000 or 64% for the quarter. The recurring services increase is mainly attributable to volume growth from the continuing addition to the number of customer contracts where we provide direct telecom service provisioning to end-user correctional facilities. Our technology sales where we provide wholesaled technology systems and software to other service providers increased by $607,000 or 34% from $1,777,000 in the year ago period. The increases in direct provisioning and technology sales were offset by a decrease in our wholesale service revenue as a result of wholesale arrangements terminating during the quarter where we provided call provisioning services to end-user facilities on a wholesale basis. The revenue associated with the wholesale arrangement was approximately $1.5 million on an annual basis. As we transition away from wholesaled services, we expect the continued growth in both our direct services and technology revenue for the full fiscal year ended December 31, 2014 and into 2015 to offset the revenue loss from the wholesale accounts.
GROSS MARGIN:
Gross profit for the nine months ended September 30, 2014 was $2,645,000 compared to $2,230,000 for nine months ended September 30, 2013. Gross margin, as a percentage of revenues, increased to 40% from 35.6% for the same period in 2013. Gross margin as a percentage of revenues for recurring revenues was mainly consistent in the mid 20% range with prior year levels. The gross margin percentage on our wholesaled technology revenues was consistent in the mid 60% range with prior year levels. The increase in overall margin percentage was primarily due to a shift towards a higher component of total revenues being attributed to higher margin wholesaled technology. The gross margin for wholesaled technology revenues will vary with larger sales orders but we expect the margins to be in the 60% range on average.
RESEARCH AND DEVELOPMENT EXPENSES:
Research and development expenses consist primarily of salaries and related personnel costs, and consulting fees associated with product development in our Technology Products segment. For the nine months ended September 30, 2013, research and development expenses increased to $660,000 as compared to $481,000 for the nine months ended September 30, 2013. The increase is due to an increase in engineering staffing compared to prior year levels. Management believes that continual enhancements of the Company's existing products are required to enable the Company to maintain its current competitive position.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, General and Administrative ("SG&A") expenses consist primarily of expenses for management, finance, administrative personnel, legal, accounting, consulting fees, sales commissions, marketing, facilities costs, corporate overhead and depreciation expense. For the nine months ended September 30, 2014, SG&A expenses increased to $3,127,000 from $1,818,000 in the comparable period prior year. As a percentage of revenues, SG&A was 47.2% for the nine months ended September 30, 2014 versus 29.0% in the comparable period a year ago. The increase was driven by higher selling and marketing costs as the Company continues to expand its foot print into new geographic markets.
INTEREST EXPENSE:
Interest expense increased to $492,000 for the nine months ended September 30, 2014 compared to $309,000 for the nine months ended September 30, 2013. Included in the current period interest was $259,000 of the amortized debt discount.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS:
The Company’s net loss from continuing operations for the nine months ended September 30, 2014 was $1,094,000 compared to a net loss of $16,000 for the nine months ended September 30, 2013. The increase in loss was mainly attributable to higher operating expenses due to an increase in engineering staffing and selling and marketing expenses. The increase in expenses was partially offset by an increase in gross profit contribution on higher revenues.
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LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents increased to $370,082 at September 30, 2014 from $312,703 at December 31, 2013.
Net cash used by operating activities was $809,000 for the nine months ended September 30, 2014 compared to net cash provided by operating activities of $457,000 in the corresponding period ended September 30, 2013. The items comprising net cash used in the current period included; a net loss of $592,000 (after adding back non-cash items totaling $501,000), an increase in accounts receivable of $519,000 which is related to increase in technology shipments towards the end of current quarter; an increase in costs in excess of billings and estimated gross profit of $173,000 on projects accounted for using the percentage of completion accounting method, an increase in other current assets of $141,000 a decrease in deferred revenue of $34,000; partially offset by a decrease in inventory of $8,000, and an increase of $642,000 in accrued liabilities and customer advances . The increase in accrued liabilities and customer advances was mainly due to extending payments under wholesale agreements where we have been providing telecom services to several end-user facilities which have ended. The aggregate amount of accrued liabilities owed under the wholesale arrangements totaled approximately $2.5 million at September 30, 2014 which increased from approximately $1.7 million at December 31, 2013. Management is in current negotiations to restructure this liability.
Net cash used in investing activities was $118,000 for the nine months ended September 30, 2014 compared to net cash provided of $9,000 in the corresponding period ended September 30, 2013. The prior period included cash proceeds of $222,000 from the sale of the government services segment. The investments were the purchase of property, plant and equipment supporting our direct services telecom installations. We expect to continue to have a requirement for capital on a project by project basis as we are awarded direct service contracts. To date, we have financed these equipment purchases with equipment based financing, debt and equity financings.
Net cash provided by financing activities was $985,000 for the nine months ended September 30, 2014 compared to net cash used by financing activities of $373,000 in the corresponding period ended September 30, 2013. The $985,000 was comprised of net cash proceeds of $2,208,000 from the issuance of common stock and notes payable partially offset by the repayment of debt totaling $1,224,000.
GOING CONCERN CONSIDERATIONS:
At September 30, 2014, our working capital deficiency was $2,402,000 which compared to a working capital deficiency of $4,490,000 at December 31, 2013. We have approximately $1.4 million in principal due on notes which are either past due or are coming due in the next twelve months. Our current cash position and projected operating cash flows are inadequate to cover these payments coming due. Additionally, the cash flows from the wholesale arrangements which have terminated during the quarter have ended. The decline in wholesale revenue and cash flows is expected to be made up by an increase in direct service contracts and growth in technology sales. As direct sites are added to our network corresponding revenue and cash flow will increase accordingly.
The working capital deficiency combined with the debt service due in the next twelve months 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 achieve planned operating cash flows, maintain availability under our line of credit financing, and the ability to raise additional alternative financing. Management continues to be engaged in securing the additional capital required to support the Company’s liquidity and operating needs. However, there is no assurance that we will be able to raise additional alternative financing needed and/or restructure our existing debt to provide the necessary liquidity to continue operations.
Our current cash position, availability on our line of credit and current level of operating cash flows in aggregate is not adequate to; (i) support our current working capital requirements (ii) support the interest costs and principal payments coming due on debt and (iii) support the increased capital requirements for equipment purchases supporting the growth planned in our telecommunications segment. The source of additional financing needed over what was raised in the nine months ended September 30, 2014 has not been identified at the time of this filing. The Company’s projected operating cash flows alone will not generate adequate liquidity to service our current indebtedness or to fund other liquidity needs over the next twelve months. In this regard, we are highly dependent on obtaining the alternative financing needed.
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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, revenue, results of operations, liquidity or capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud if any, within a company have been detected.
Changes in internal control
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the 2014 quarter ended September 30, 2014. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that no change occurred in the Company’s internal controls over financial reporting during the 2014 quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
While we are a party to certain legal proceedings, such 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, except to the extent discussed in the financial footnote 4. We expect to resolve current litigation and creditor liabilities 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.
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ITEM 1A - RISK FACTORS
There have been no material changes from the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Common Stock Issuance:
During the quarter ended March 31, 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 $796,441 were received and $266,818 was derived from the conversion of principal and accrued interest on existing notes with several investors.
During the quarter ended June 30, 2014, the Company sold 500,000 shares restricted common shares at a price of $0.12 per share in a private placement with an investor for a gross financing amount of $60,000. As of June 30, 2014, the shares had not been issued.
During the quarter ended September 30, 2014, the Company issued 1,000,000 restricted common shares as compensation to a service provider. The shares were valued at $0.12 per share resulting in total compensation expense of $120,000. This expense is being amortized ratably over the service period ending December 31, 2014.
During the quarter ended September 30, 2014, the Company issued 1,350,000 shares as fees to the placement agent for the convertible note issued in May 2014. The shares were valued at $012 per share or a total fee of $162,000 which is included as a component of deferred financing fees and is being amortized over the term of the note.
During the quarter ended September 30, 2014, the Company issued 227,272 common shares to Paul Burgess, CEO previously carried as a liability (Shares to be issued) pursuant to a common stock subscription for an investment of 25,000 or $0.11 per share.
Conversion of Preferred Stock:
On January 14, 2014, we issued 1,178,562 common shares to Barron Partners L.P. Such shares were issuable upon the exercise of conversion rights associated with 330,000 shares of Series A Preferred Stock owned by Barron Partners.
On March 18, 2014, we issued 1,321,418 common shares to Barron Partners L.P. Such shares were issuable upon the exercise of conversion rights associated with 370,000 shares of Series A Preferred Stock owned by Barron Partners.
On August 28, 2014, we issued 1,678,558 common shares to Barron Partners L.P. Such shares were issuable upon the exercise of conversion rights associated with 470,000 shares of Series A Preferred Stock owned by Barron Partners.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - RESERVED
ITEM 5 - OTHER INFORMATION
None.
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ITEM 6. EXHIBITS.
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) |
25 |
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) |
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) |
26 |
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) |
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) |
27 |
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) |
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) |
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). |
28 |
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) |
99.4 | Temporary Hardship Exemption |
101.INS | XBRL Instance Document* |
101.SCH | XBRL Schema Document * |
101.CAL | XBRL Calculation Linkbase Document* |
101.DEF | XBRL Definition Linkbase Document* |
101.LAB | XBRL Label Linkbase Document * |
101.PRE | XBRL Presentation Linkbase Document* |
(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 |
* | To be filed by amendment |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATE: November 14, 2014
LATTICE INCORPORATED | ||
BY: | /S/ PAUL BURGESS | |
PAUL BURGESS | ||
CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER), SECRETARY AND DIRECTOR |
DATE: November 14, 2014
BY: | /S/ JOE NOTO | |
JOE NOTO | ||
CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER) |
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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 quarterly report on Form 10-Q of Lattice, Inc., for the three months ended September 30, 2014;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 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; and |
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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; 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: November 14, 2014 | By: | /s/ Paul Burgess |
Paul Burgess President (principal executive officer) |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Joe Noto, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lattice, Inc., for the three months ended September 30, 2014;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 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; and |
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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; 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: November 14, 2014 | By: | /s/ Joe Noto |
Joe Noto Chief Financial Officer (principal accounting 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 Quarterly Report of Lattice, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014 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: November 14, 2014 | By: | /s/ Paul Burgess |
Paul Burgess President (principal 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 Quarterly Report of Lattice, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014 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: November 14, 2014 | By: | /s/ Joe Noto |
Joe Noto Chief Financial Officer (principal accounting officer) |
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