10-Q/A

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Amendment No. 1 to

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 JUNE 30, 2012.

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  o 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 August 13, 2012, there were 31,164,033outstanding shares of the Registrant's Common Stock, $.01 par value.

EXPLANATORY NOTE

This Amendment No. 1 to the Quarterly Report on Form 10-Q is being filed solely to furnish the Interactive Data files as Exhibit 101, in accordance with Rule 405 of Regulation S-T. No other changes have been made to the Form 10-Q, as originally filed on August 14, 2012.

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Item 6. Exhibits

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

* Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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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: September 13, 2012

LATTICE INCORPORATED
By:	/s/ Paul Burgess
	PAUL BURGESS CHIEF EXECUTIVE OFFICER    (PRINCIPAL EXECUTIVE OFFICER),    SECRETARY AND DIRECTOR

DATE: September 13, 2012

By:	/s/Joe Noto
	JOE NOTO CHIEF FINANCIAL OFFICER    (PRINCIPAL ACCOUNTING OFFICER)

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Note 3 - Notes payable (Details Narrative 2) (Note Payable Stockholder 1, USD $)	Jun. 30, 2012	Dec. 31, 2011
Note Payable Stockholder 1
Note payable stockholder balance	$ 99,113	$ 123,551
Note payable stockholder loan 2 balance	$ 168,000

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Note 4 - Derivative financial instruments

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

Derivative financial instruments

The balance sheet caption derivative liabilities consist of Warrants, issued in connection with the 2005 Laurus Financing Arrangement, and the 2006 Omnibus Amendment and Waiver Agreement with Laurus. These derivative financial instruments are indexed to an aggregate of 1,658,333 shares of the Company’s common stock as of March 31, 2012 and December 31, 2011 and are carried at fair value. The balance at June 30, 2012 and December 31, 2011 was $66,117 and $96,367 respectively.

The valuation of the derivative warrant liabilities is determined using a Black Scholes Merton Model. Freestanding derivative instruments, consisting of warrants and options that arose from the Laurus financing are valued using the Black-Scholes-Merton valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in the Black Scholes models as of December 31, 2011 and 2010 included conversion or strike prices ranging from $0.10 - $1.10; historical volatility factors ranging from 123.01% - 183.73% based upon forward terms of instruments; and a risk free rate ranging from 0.27% - 3.36%.

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Note 3 - Notes payable

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

Notes payable

Notes payable consists of the following as of June 30, 2012 and December 31, 2011:

	June 30,  2012			December 31, 2011
Bank line-of-credit (a)	$	345,049		$	412,770
Notes payable to Stockholder/director (b)		271,937			291,551
Capital lease payable (c)		36,681			47,679
Notes Payable (d)		1,933,460			1,815,460
Notes payable Cummings Creek/CLR  (e)		395,161			507,868
					–
Total notes payable		2,982,287			3,075,326
Less current maturities		(2,043,162	)		(1,869,043	)
Long-term debt	$	939,125		$	1,206,283

Interest expense including amortization of deferred finance fees associated with the above notes for the three months ended June 30, 2012 and 2011 was $122,000 and $99,000 respectively and interest for the six months ended June 30, 2012 and 2011 was $230,000 and $237,000, respectively.

(a) Bank Line-of-Credit

On July 17, 2009, the Company and its wholly-owned subsidiary, Lattice Government Services (formally “RTI”), entered into a Financing and Security Agreement (the “Action Agreement”) with Action Capital Corporation (“Action Capital”). 

Pursuant to the terms of the Action Agreement, Action Capital agreed to provide the Company with advances of up to 90% of the net amount of certain acceptable account receivables of the Company (the “Acceptable Accounts”).  The maximum amount eligible to be advanced to the Company by Action Capital under the Action Agreement is $3,000,000.  The Company will pay Action Capital interest on the advances outstanding under the Action Agreement equal to the prime rate of Wachovia Bank, N.A. in effect on the last business day of the prior month plus 1%.  In addition, the Company will pay a monthly fee to Action Capital equal to 0.75% of the total outstanding balance at the end of each month.

In addition, pursuant to the Action Agreement, the Company granted Action Capital a security interest in certain assets of the Company including all, accounts receivable, contract rights, rebates and books and records pertaining to the foregoing (the “Action Lien”). On June 11, 2010, Action Capital and an accredited investor entered into an agreement under which $1,250,000 of the collateral otherwise securing advances covered by the Action Agreement are subordinated to a new security interest securing an additional loan from the accredited investor. During November 2011, $268,345 of the collateral was collected by Action, escrowed and paid directly to the accredited investor reducing the collateral and outstanding balance on the loan to $981,655 at June 30, 2012 and December 31, 2011.

The outstanding balance owed on the line at June 30, 2012 and December 31, 2011 was $345,049 and $412,770 respectively.  At June 30, 2012 our interest rate was approximately 13.25%.

(b) Notes Payable Stockholders/Director

The first note bears interest at 21.5% per annum. During December 2010, the note was amended to flat monthly payments of $6,000 until maturity, December 31, 2013, at which time any remaining interest and or principal will be paid. This note has an outstanding balance of $99,113 and $123,551 as of June 30, 2012 and December 31, 2011, respectively.

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.

(c) Capital Lease Payable

On June 16, 2009 Lattice entered an equipment lease financing agreement with Royal Bank America Leasing to purchase approximately $130,000 in equipment for our communication services. The terms of which included monthly payments of $5,196 per month over 32 months and a  $1.00 buy-out at end of the lease term. On July 15, 2011 we signed an addendum to this lease and received additional equipment financing for $58,122 payable over 30 months at $2,211 per month. As of June 30, 2012 and December 31, 2011, the outstanding balance was $36,681 and $47,679, respectively.

(d) Note Payable

On June 11, 2010, Lattice closed on a Note Payable for $1,250,000.  The net proceeds to the Company were $1,100,000. The $150,000 is being 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 June 30, 2012 totaling $1,019,155 including the final interest payment. On 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 June 30, 2012. As of the date of this filing, the Company is current with all interest payments.

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 will be due along with any unpaid and accrued interest.

During the quarter ended September 30, 2011, we issued a two year promissory note payable for $227,272 to an investor.  The Note bears interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on September 30, 2011. On August 3, 2013 the maturity date, the principal amount of the note will be due along with any unpaid and accrued interest.

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, 2012 of $45,000, June 30, 2012 of $55,000, September 30, 2012 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 June 30, 2012, the outstanding balance of the note is $326,533.

On January 23, 2012, we issued a several promissory notes to private investors with face values totaling $198,000. The proceeds from the notes totaled $175,000 used for working capital. The discount of $23,000 has been recorded as a deferred financing fee and amortized over the life of the note. The Notes bear interest of 12% per year. The Company is required to pay interest quarterly on a calendar basis starting with a pro-rata interest payment on March 31, 2012. On January 23, 2014 the maturity date, the principal amount of the notes will be due along with any unpaid and accrued interest.

(e)  Notes payable Cummings Creek / CLR

In conjunction with the Cumming Creek Capital / CLR acquisition, Lattice assumed notes totaling $676,925 comprised of three notes each with the former principles of CLR Group.   The notes bear interest on the unpaid principal amount until paid in full, at a rate of four percent (4.0%) per annum payable quarterly. The Company will pay the unpaid principal amount as follows: beginning on May 31, 2011, the Company will make equal payments of principal on the first day of each calendar quarter  totaling $58,275 (i.e., February 28, May 31, August 30 and November 30), until February 15, 2014. The unpaid balance of the notes totaled $395,161 at June 30, 2012. 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATION (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Income Statement [Abstract]
Revenue	$ 2,488,203	$ 3,194,686	$ 5,883,684	$ 6,461,437
Cost of Revenue	1,503,618	1,994,506	3,541,806	4,095,874
Gross Profit	984,585	1,200,180	2,341,878	2,365,563
Gross profit percent	0.396	0.376	0.398	0.366
Operating expenses:
Selling, general and administrative	810,516	1,563,005	1,820,182	2,690,087
Research and development	178,608	167,969	353,190	320,230
Impairment loss	0	1,575,000	0	1,575,000
Amortization expense	80,448	104,728	160,896	209,455
Total operating expenses	1,069,572	3,410,702	2,334,268	4,794,772
Income (loss) from operations	(84,987)	(2,210,522)	7,610	(2,429,209)
Other income (expense):
Derivative income (loss)	18,467	254,708	30,250	(18,209)
Other income (expense)	255,613	0	255,613	0
Interest expense	(121,949)	(98,689)	(229,958)	(237,118)
Total other income	152,131	156,019	55,905	(255,327)
Noncontrolling interest	0	3,147	0	6,294
Income (Loss) before taxes	67,144	(2,051,356)	63,516	(2,678,242)
Income taxes (benefit)	(32,397)	(85,504)	(64,786)	(171,008)
Net income (loss)	99,541	(1,965,852)	128,301	(2,507,234)
Net income (loss)	99,541	(1,965,852)	128,301	(2,507,234)
Preferred stock dividends	(6,277)	(6,277)	(12,554)	(12,554)
Income (loss) applicable to common stockholders	$ 93,264	$ (1,972,129)	$ 115,747	$ (2,519,788)
Income (loss) per common share
Basic	$ 0	$ (0.08)	$ 0	$ (0.10)
Diluted	$ 0	$ (0.08)	$ 0	$ (0.10)
Weighted average shares:
Basic	29,548,522	25,459,225	29,548,522	24,211,686
Diluted	74,708,287	25,459,225	74,292,934	24,211,686

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Note 1 - Organization and summary of significant accounting policies

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

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 a government contractor compliments our Government Services business by expanding markets and service offerings.

b) Basis of Presentation going concern

At June 30, 2012 the Company had a working capital deficiency of $2,639,000. This compared to a working capital deficiency of $2,643,000 at December 31. 2011. The Company’s working capital deficiency and constrained liquidity raises doubt regarding the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is highly dependent upon (i) management’s ability to achieve its planned operating cashflows (ii), maintain continued availability on its line of credit and the ability to obtain alternative financing to fund capital requirements and/or debt obligations coming due. The accompanying financial statements do not include any adjustments that may result from the outcome of this uncertainty. 

c) Interim Condensed Consolidated Financial Statements

The condensed consolidated financial statements as of June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 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 end December 31, 2011 appearing in Form 10-K filed on April 2, 2012.

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. At June 30, 2012, there is $13,090 of unrecognized compensation cost related to unvested share-based compensation awards granted. For the six months ended June 30, 2012 share-based compensation was $2,842 compared to $194,750 in the prior year period.

g) Revenue Recognition

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. Unapproved claims included as a component of our Accounts Receivable totaled approximately $1,555,000 as of June 30, 2012. Consistent with industry practice, we classify assets and liabilities related to these claims as current, even though some of these amounts are not expected to be realized within one year.

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 operates in two segments for the six months ended June 30, 2012 and 2011 (see Note 2 for details).

i)  Depreciation, amortization and long-lived assets:

Long-lived assets include:

Property, plant and equipment - These assets are recorded at original cost. The Company depreciates the cost evenly over the assets’ estimated useful lives. For tax purposes, accelerated depreciation methods are used as allowed by tax laws.

Goodwill - Goodwill represents the difference between the purchase price of an acquired business and the fair value of the net assets acquired and the liabilities assumed at the date of acquisition. Goodwill is not amortized. The Company tests goodwill for impairment annually (or in interim periods if events or changes in circumstances indicate that its carrying amount may not be recoverable) by comparing the fair value of each reporting unit, as measured by discounted cash flows, to the carrying value to determine if there is an indication that potential impairment may exist. Absent an indication of fair value from a potential buyer or similar specific transactions, the Company believes that the use of this income approach method provides reasonable estimates of the reporting unit’s fair value. Fair value computed by this method is arrived at using a number of factors, including projected future operating results, economic projections and anticipated future cash flows. The Company reviews its assumptions each time goodwill is tested for impairment and makes appropriate adjustments, if any, based on facts and circumstances available at that time. There are inherent uncertainties, however, related to these factors and to management’s judgment in applying them to this analysis. Nonetheless, management believes that this method provides a reasonable approach to estimate the fair value of the Company’s reporting units.

The income approach, which is used for the goodwill impairment testing, is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. Management believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating and cash flow performance. This approach also mitigates most of the impact of cyclical downturns that occur in the reporting unit’s industry. The income approach is based on a reporting unit’s five year projection of operating results and cash flows that is discounted using a build up approach. The projection is based upon management’s best estimates of projected economic and market conditions over the related period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future capital expenditures and changes in future working capital requirements based on management projections.

Identifiable intangible assets - The Company amortizes the cost of other intangibles over their useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are not amortized; however, they are tested annually for impairment and written down to fair value as required.

j) Recent accounting pronouncements

No new accounting pronouncements issued or effective during the period has had or is expected to have a material impact on the financial statements.

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Note 6 - Goodwill and other intangible assets (Details 1) (USD $)	6 Months Ended
	Jun. 30, 2012
Goodwill [Line Items]
Accumulated Carry amount	$ 2,059,000
Net Amortization	690,588
Carry amount	1,368,412
CLR Intangible [Member]
Goodwill [Line Items]
Accumulated Carry amount	759,000
Net Amortization	365,594
Carry amount	393,406
Weighted average remaining amortization period	2.04 years
IP Rights Agreement [Member]
Goodwill [Line Items]
Accumulated Carry amount	1,300,000
Net Amortization	324,994
Carry amount	$ 975,006
Weighted average remaining amortization period	5.13 years

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3. Notes payable (Details Narrative) (USD $)

3 Months Ended

6 Months Ended

6 Months Ended

1 Months Ended

6 Months Ended

Jun. 30, 2012

Jun. 30, 2011

Jun. 30, 2012

Jun. 30, 2011

Dec. 31, 2011

Jun. 30, 2012

Bank Line-of-Credit

Dec. 31, 2011

Bank Line-of-Credit

Jun. 30, 2012

Note Payable Stockholder 1

Oct. 31, 2011

Note Payable Stockholder 2

Jun. 30, 2012

Note Payable Stockholder 2

Jun. 30, 2012

Capital Lease

Interest expense including amortization of deferred finance fees

$ 122,000

$ 99,000

$ 230,000

$ 237,000

Action Agreement loan balance

981,655

981,655

Line of credit outstanding balance

345,049

345,049

412,770

345,049

412,770

Line of credit interest rate

13.25%

Note payable description

The note carries an annual interest rate of 10% payable quarterly at the rate of $4,200 per quarter.

The terms of which included monthly payments of $5,196 per month over 32 months and a  $1.00 buy-out at end of the lease term. On July 15, 2011 we signed an addendum to this lease and received additional equipment financing for $58,122 payable over 30 months at $2,211 per month.

Note payable stockholder maturity date

Oct. 14, 2014

Dec. 31, 2013

Proceeds from stockholder loan 2

151,200

Liability converted into promissory note, amount

416,533

416,533

Principal payments quarterly due amount

20,000

10,000

Outstanding balance of note

326,533

326,533

Promissory notes to private investors

198,000

198,000

Proceeds from notes, total

175,000

Deferred financing fee and amortized over life of note

23,000

23,000

Unpaid balance of notes, total

$ 395,161

$ 395,161

$ 507,868

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Note 2 - Segment reporting

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

Segment reporting

Management views its business as two reportable segments: Government services and Telecommunications. The Company evaluates performance based on profit or loss before intercompany charges.

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Revenues:
Government Services	$	648,971	$	1,997,406	$	1,961,019	$	4,253,232
Communication Services		1,839,232		1,197,280		3,922,666		2,208,205
Total Consolidated Revenues	$	2,488,203	$	3,194,686	$	5,883,684	$	6,461,437
Gross Profit:
Government Services	$	302,381	$	748,604	$	818,860	$	1,551,050
Communication Services		682,204		451,576		1,523,018		814,513
Total Consolidated	$	984,585	$	1,200,180	$	2,341,878	$	2,365,563

	June 30,  2012		December 31, 2011
Total Assets:
Government Services	$	3,421,053	$	3,845,776
Communication Services		2,094,311		2,097,919
Total Consolidated Assets	$	5,515,364	$	5,943,695

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 165,117	$ 192,286
Accounts receivable	2,509,196	2,700,859
Inventories	7,350	7,350
Other current assets	165,850	142,500
Total current assets	2,847,513	3,042,995
Property and equipment, net	605,756	612,710
Goodwill	690,871	690,871
Other intangibles, net	1,368,412	1,594,306
Other assets	2,812	2,813
Total assets	5,515,364	5,943,695
Current liabilities:
Accounts payable	1,854,605	1,769,896
Accrued expenses	1,194,550	1,698,617
Deferred revenues	25,000	50,000
Customer advances	209,785	124,266
Notes payable - current	2,043,162	1,869,043
Contingent Consideration	77,700	77,700
Derivative liability	66,117	96,366
Total current liabilities	5,470,919	5,685,888
Long term liabilities:
Notes Payable - long term	939,125	1,206,283
Deferred tax liabilities	158,978	223,771
Total long term liabilities	1,098,103	1,430,054
Total liabilities	6,569,022	7,115,942
Shareholders' equity
Common stock - .01 par value, 200,000,000 authorized, 29,851,509 and 22,942,437 issued and outstanding respectively	298,516	298,516
Additional paid-in capital	43,316,811	43,313,969
Accumulated deficit	(44,327,438)	(44,443,185)
Stockholders' Equity before Treasury Stock	(615,695)	(734,284)
Stock held in treasury, at cost	(558,096)	(558,096)
Equity Attributable to shareowners of Lattice Incorporated	(1,173,791)	(1,292,380)
Equity Attributable to noncontrolling interest	120,133	120,133
Total liabilities and shareholders' equity	5,515,364	5,943,695
SeriesAPreferredStockMember
Shareholders' equity
Preferred Stock, Value, Issued	75,307	75,307
SeriesBPreferredStockMember
Shareholders' equity
Preferred Stock, Value, Issued	10,000	10,000
SeriesCPreferredStockMember
Shareholders' equity
Preferred Stock, Value, Issued	5,200	5,200
SeriesDPreferredStockMember
Shareholders' equity
Preferred Stock, Value, Issued	$ 5,909	$ 5,909

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Note 1 - Organization and summary of significant accounting policies (Details Narrative) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Notes to Financial Statements
Working capital deficiency	$ 2,623,000		$ 2,623,000		$ 2,643,000
Unrecognized compensation cost related to unvested share-based compensation awards granted	13,090		13,090
Share-based compensation	2,842	194,750	2,842	194,750
Accounts Receivable	$ 1,555,000		$ 1,555,000

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Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Aug. 13, 2012
Document And Entity Information
Entity Registrant Name	Lattice INC
Entity Central Index Key	0000350644
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		31,164,033
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2012

XML

Note 2 - Segment reporting (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Accounts, Notes, Loans and Financing Receivable [Line Items]
Revenues	$ 2,488,203	$ 3,194,686	$ 5,883,684	$ 6,461,437
Gross Profit	984,585	1,200,180	2,341,878	2,365,563
Government Services [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Revenues	648,971	1,997,406	1,961,019	4,253,232
Gross Profit	302,381	748,604	818,860	1,551,050
CommunicationServicesMember
Accounts, Notes, Loans and Financing Receivable [Line Items]
Revenues	1,839,232		3,922,666	2,208,205
Gross Profit	682,204		1,523,018	814,513
Communication Serivices [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Revenues		1,197,280
Gross Profit		$ 451,576

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Shareholders' equity
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	29,851,509	29,851,509
Common stock, shares outstanding	22,942,437	22,942,437
SeriesAPreferredStockMember
Shareholders' equity
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	9,000,000	9,000,000
Preferred stock, shares issued	7,530,681	7,530,681
Preferred stock, shares outstanding	7,530,681	7,530,681
SeriesBPreferredStockMember
Shareholders' equity
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	1,000,000	1,000,000
Preferred stock, shares outstanding	502,160	502,160
SeriesCPreferredStockMember
Shareholders' equity
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	520,000	520,000
Preferred stock, shares issued	520,000	520,000
Preferred stock, shares outstanding	520,000	520,000
SeriesDPreferredStockMember
Shareholders' equity
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	636,400	636,400
Preferred stock, shares issued	520,000	520,000
Preferred stock, shares outstanding	520,000	520,000

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7. Subsequent Event

6 Months Ended

Jun. 30, 2012

Subsequent Events [Abstract]

7. Subsequent Event

On July 5, 2012, Barron Partners L.P. converted 371,003 shares of Series A Preferred Stock into 1,325,000 Common Shares. Subsequent to this conversion event, Barrons Partners owned 5,707,068 shares of Series A Preferred Stock and 1,478,753 Common Shares.

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Note 6 - Goodwill and other intangible assets

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

Goodwill and other intangible assets :

In accordance with the Goodwill and Other Intangibles Topic of the ASC, goodwill and indefinite-lived intangible assets are tested for impairment annually, and interim impairment tests are performed whenever an event occurs or circumstances change that indicate that it is more likely than not that an impairment has occurred. Goodwill is tested for impairment at the reporting unit level. As of June 30, 2012 and December 31, 2011, all goodwill was allocated to the Government Services Sector which was considered one reporting unit. As of June 30, 2012 there were no significant events that would indicate that there was an impairment to our goodwill.

A summary of the changes in the carrying amount of goodwill for the years in the period ended December 31, 2011, is shown below:

Balance as of January 1, 2011	$	3,599,386
Addition due to Cummings Creek acquisition		402,795
Goodwill impairment charges		(3,396,310	)
Balance as of December 31, 2011	$	690,871
Goodwill impairment charges		–
Balance as of June 30, 2012	$	690,871

The table below present amortizable assets as of June 30, 2012: 

	Gross Carry amount		Accumulated Amortization		Net Carry amount		Weighted Average Remaining Amortization Period
Purchase intangible associated with CLR purchase	$	759,000	$	365,594	$	393,406	2.04 years
IP Rights Agreement		1,300,000		324,994		975,006	5.13 years
	$	2,059,000	$	690,588	$	1,368,412

2012	$	225,900
2013		320,525
2014		171,987
2015		130,000
2016		130,000
Thereafter		390,000
Total	$	1,368,412

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Note 6 - Goodwill and other intangible assets (Details 2) (USD $)	Jun. 30, 2012
Notes to Financial Statements
2012	$ 338,847
2013	320,525
2014	171,987
2015	130,000
2016	130,000
Thereafter	390,000
Total	$ 1,481,359

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Note 2 - Segment reporting (Details 1) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Consolidated Assets	$ 5,515,364	$ 5,943,695
Government Services [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Consolidated Assets	3,421,053	3,845,776
CommunicationServicesMember
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Consolidated Assets	$ 2,094,311	$ 2,097,919

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Note 3 - Notes payable (Tables)

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

Notes payable

Notes payable consists of the following as of June 30, 2012 and December 31, 2011:

	June 30,  2012			December 31, 2011
Bank line-of-credit (a)	$	345,049		$	412,770
Notes payable to Stockholder/director (b)		271,937			291,551
Capital lease payable (c)		36,681			47,679
Notes Payable (d)		1,933,460			1,815,460
Notes payable Cummings Creek/CLR  (e)		395,161			507,868
					–
Total notes payable		2,982,287			3,075,326
Less current maturities		(2,043,162	)		(1,869,043	)
Long-term debt	$	939,125		$	1,206,283

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Note 1 - Organization and summary of significant accounting policies (Policies)

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

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 a government contractor compliments our Government Services business by expanding markets and service offerings.

Basis of Presentation going concern

At June 30, 2012 the Company had a working capital deficiency of $2,639,000.This compared to a working capital deficiency of $2,643,000 at December 31. 2011. The Company’s working capital deficiency and constrained liquidity raises doubt regarding the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is highly dependent upon (i) management’s ability to achieve its planned operating cashflows (ii), maintain continued availability on its line of credit and the ability to obtain alternative financing to fund capital requirements and/or debt obligations coming due. The accompanying financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Interim Condensed Consolidated Financial Statements

The condensed consolidated financial statements as of June 30, 2012 and for the three  months ended June 30, 2012 and 2011 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 end December 31, 2011 appearing in Form 10-K filed on April 2, 2012.

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.

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.  

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 payments , 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. At June 30, 2012, there is $13,090 of  unrecognized compensation cost related to unvested share-based compensation awards granted. For the three months ended June 30, 2012 share-based compensation was $1,421 compared to $74,917 in the prior year period.

Revenue Recognition

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. Unapproved claims included as a component of our Accounts Receivable totaled approximately $1,555,000 as of June 30, 2012. Consistent with industry practice, we classify assets and liabilities related to these claims as current, even though some of these amounts are not expected to be realized within one year.

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 operates in two segments for the three months ended June 30, 2012 and 2011 (see Note 2 for details).

Depreciation, amortization and long-lived assets

Long-lived assets include:

Property, plant and equipment - These assets are recorded at original cost. The Company depreciates the cost evenly over the assets’ estimated useful lives. For tax purposes, accelerated depreciation methods are used as allowed by tax laws.

Goodwill - Goodwill represents the difference between the purchase price of an acquired business and the fair value of the net assets acquired and the liabilities assumed at the date of acquisition. Goodwill is not amortized. The Company tests goodwill for impairment annually (or in interim periods if events or changes in circumstances indicate that its carrying amount may not be recoverable) by comparing the fair value of each reporting unit, as measured by discounted cash flows, to the carrying value to determine if there is an indication that potential impairment may exist. Absent an indication of fair value from a potential buyer or similar specific transactions, the Company believes that the use of this income approach method provides reasonable estimates of the reporting unit’s fair value. Fair value computed by this method is arrived at using a number of factors, including projected future operating results, economic projections and anticipated future cash flows. The Company reviews its assumptions each time goodwill is tested for impairment and makes appropriate adjustments, if any, based on facts and circumstances available at that time. There are inherent uncertainties, however, related to these factors and to management’s judgment in applying them to this analysis. Nonetheless, management believes that this method provides a reasonable approach to estimate the fair value of the Company’s reporting units.

The income approach, which is used for the goodwill impairment testing, is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. Management believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating and cash flow performance. This approach also mitigates most of the impact of cyclical downturns that occur in the reporting unit’s industry. The income approach is based on a reporting unit’s five year projection of operating results and cash flows that is discounted using a build up approach. The projection is based upon management’s best estimates of projected economic and market conditions over the related period including growth rates, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future capital expenditures and changes in future working capital requirements based on management projections.

Identifiable intangible assets - The Company amortizes the cost of other intangibles over their useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are not amortized; however, they are tested annually for impairment and written down to fair value as required.

Recent accounting pronouncements

No new accounting pronouncements issued or effective during the period has had or is expected to have a material impact on the financial statements.

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Note 2 - Segment reporting (Tables)

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

Evaluation of performance based on profit or loss before intercompany charges

Management views its business as two reportable segments: Government services and Telecommunications. The Company evaluates performance based on profit or loss before intercompany charges.

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Revenues:
Government Services	$	648,971	$	1,997,406	$	1,961,019	$	4,253,232
Communication Services		1,839,232		1,197,280		3,922,666		2,208,205
Total Consolidated Revenues	$	2,488,203	$	3,194,686	$	5,883,684	$	6,461,437
Gross Profit:
Government Services	$	302,381	$	748,604	$	818,860	$	1,551,050
Communication Services		682,204		451,576		1,523,018		814,513
Total Consolidated	$	984,585	$	1,200,180	$	2,341,878	$	2,365,563

	June 30,  2012		December 31, 2011
Total Assets:
Government Services	$	3,421,053	$	3,845,776
Communication Services		2,094,311		2,097,919
Total Consolidated Assets	$	5,515,364	$	5,943,695

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Note 6 - Goodwill and other intangible assets : (Tables)

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

Summary of changes in carrying amount of goodwill for the years

A summary of the changes in the carrying amount of goodwill for the  years in the period ended December 31, 2011, is shown below:

Balance as of January 1, 2011	$	3,599,386
Addition due to Cummings Creek acquisition		402,795
Goodwill impairment charges		(3,396,310	)
Balance as of December 31, 2011	$	690,871
Goodwill impairment charges		–
Balance as of June 30, 2012	$	690,871

Amortizable assets

The table below present amortizable assets as of June 30, 2012:

	Gross Carry amount		Accumulated Amortization		Net Carry amount		Weighted Average Remaining Amortization Period
Purchase intangible associated with CLR purchase	$	759,000	$	365,594	$	393,406	2.04 years
IP Rights Agreement		1,300,000		324,994		975,006	5.13 years
	$	2,059,000	$	690,588	$	1,368,412

2012	$	225,900
2013		320,525
2014		171,987
2015		130,000
2016		130,000
Thereafter		390,000
Total	$	1,368,412

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Note 6 - Goodwill and other intangible assets (Details) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Notes to Financial Statements
Beginning balance	$ 690,871	$ 3,599,386
Addition due to Cummings Creek acquisition		402,795
Goodwill impairment charges		(3,396,310)
Balance as of December 31, 2011	$ 690,871	$ 690,871

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Note 4 - Derivative financial instruments (Details Narrative) (USD $)	6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Notes to Financial Statements
Derivative financial instruments indexed shares	1,658,333
Fair value of stock issued	$ 66,117	$ 96,367
Conversion/strike prices Minimum		$ 0.10
Conversion/strike prices Maximum		$ 1.1
Volatility rate, Minimum	123.01%
Volatility rate, Maximum	183.73%
Risk free rate upper limit	0.27%
Risk free rate lower limit	3.36%

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash flow from operating activities:
Net Income (loss)	$ 128,301	$ (2,507,234)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Derivative income	(30,250)	18,209
Impairment Loss	0	1,575,000
Amortization of intangible assets	225,896	274,456
Deferred income taxes	(64,786)	(171,008)
Minority interest	0	(6,294)
Share-based compensation	2,842	194,750
Depreciation	116,004	72,554
(Increase) decrease in:
Accounts receivable	191,664	158,657
Other current assets	(23,350)	7,172
Increase (decrease) in:
Accounts payable and accrued liabilities	(408,919)	(603,452)
Deferred revenues	(25,000)	(67,879)
Customer advances	85,519	125,267
Total adjustments	69,619	1,577,432
Net cash provided by (used for) operating activities	197,920	(929,802)
Cash Used in investing activities:
Purchase of equipment	(109,049)	(263,582)
Acquired cash - CLR	0	59,518
Net cash used for investing activities	(109,049)	(204,064)
Cash flows from financing activities:
Revolving credit facility (payments) borrowings, net	(67,721)	(103,612)
Payments on capital lease	(10,998)	(25,658)
Payments on Notes Payable	(192,707)	(589,275)
Proceeds from the issuance of Notes Payable	175,000	1,937,461
Payments on Director Loans	(19,614)	(13,746)
Net cash provided by (used in) financing activities	(116,040)	1,205,170
Net increase (decrease) in cash and cash equivalents	(27,169)	71,304
Cash and cash equivalents - beginning of period	192,286	324,149
Cash and cash equivalents - end of period	165,117	395,453
Supplemental cash flow information
Interest paid in cash	220,959	218,618
Common Stock	0	1,231
Derivative liabilities	0	(31,999)
Additional paid in Capital	$ 0	$ 30,768

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Note 5 - Litigation

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

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. Although there can be no assurance as to the ultimate disposition of these matters, it is our management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the results of operations, liquidity or financial condition of our company. There were no liabilities of this type at June 30, 2012.

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7. Subsequent Event (Details Narrative)	Jul. 05, 2012
Notes to Financial Statements
Preferred stock owned by Barrons Partners	5,707,068
Common Stock owned by Barron Partners	1,478,753

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Note 3 - Notes payable (Details) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Notes to Financial Statements
Bank line-of-credit	$ 345,049	$ 412,770
Notes payable to Stockholder/director	271,937	291,551
Capital lease payable	36,681	47,679
Notes Payable	1,933,460	1,815,460
Notes payable Cummings Creek/CLR	395,161	507,868
Total notes payable	2,982,287	3,075,326
Less current maturities	(2,043,162)	(1,869,043)
Long-term debt	$ 939,125	$ 1,206,283